The year 2016 was big for the sale of biodiesel plants in the U.S., with seven plants representing 256 million gallons changing hands. Most of this activity was the result of larger companies buying plants to expand their footprint. In 2015, five plants sold for much the same reasons. 

This year has been, and will continue to be, a year with increased uncertainty, given the political climate counterbalanced with increased blending requirements under the federal Renewable Fuel Standard and a California market under the low carbon fuel standard (LCFS) that continues to provide opportunities for biodiesel.

So, what should you do if a potential buyer comes knocking on your door? Even more importantly, what should you do if you want to be an attractive target for your friendly neighborhood buyer? Here are some tips to help you get ready.

1. Compare yourself to plants that have already sold. Most potential buyers rank all of the biodiesel plants by how desirable they are to be acquired. Take a look at the key metrics for each plant acquired before, including gallon capacity, RFS and LCFS fuel type, profitability, feedstock costs and more. Based on key metrics, you can likely guess how you rank vs. what you know were attractive plants, and then work to improve those metrics.

2. Realistically assess your weaknesses and strengths. Every business owner sees their business through rose-colored glasses, but you must be brutally honest about where your plant may be weak. Is your feedstock cost too high, your market access too limited, your plant’s energy cost too much? Find these weaknesses and improve them first. 

3. Consider technological, operational and supply chain improvements. Plants that have been acquired generally offer potential technological, operational or supply chain advantages. For instance, the ability to produce renewable diesel is a strong advantage, as is the ability to improve the plant to produce high-margin coproducts. Plants that have been debottlenecked and operational efficiencies increased are seen as more attractive. Likewise, improving costs and efficiencies in your supply chain, from inputs to outputs, will make a plant a better acquisition target.  

4. Cut the fat. This can be a touchy subject, but some plants retain workers or vendors who are less than efficient. Sometimes they have consultants getting paid for questionable work. A buyer will look at all of those expenses and will reduce the purchase price accordingly, and when the price is a multiple of your earnings or profits, any noncritical expense will cost you. 

5. Consider who your buyers might be and realize that having only one buyer is a bad idea. Investment bankers have a saying, “One is none.” One buyer has significant leverage with you as you have only one other option, which is to not sell. Once a seller starts down the process to sell, it is usually hard for them to break off negotiations, even if the deal isn’t the best. The buyer has little incentive to pay more, concede on important deal points or provide other accommodations to the sellers. Having another potential buyer adds urgency and competition, which usually increases price and gets the seller better terms. Many times, sellers think they cannot risk finding another potential buyer, or that no other potential buyer makes sense—especially in the case of a “strategic buyer.” However, there are almost always other options available if you are willing to look. 

Once you are approached by a potential buyer, it is almost always too late to improve your position. Buyers will want to move fast to get you to sign a letter of intent so that you are prevented from talking to other buyers and to get you committed. Don’t sign a letter of intent until you have discussed it with experienced legal counsel and other advisors. Also consider hiring an experienced licensed broker or investment banker to help you get ready and sell for the most money possible.

Author: Todd Taylor
Attorney, Jux Law Firm
612-584-3406
ttaylor@jux.law