Buying, Selling Ethanol Facilities

When considering consolidation, a current trend in the ethanol industry, there are three key factors to keep in mind to avoid surprises or mistakes. For those unfamiliar with the process, it can mean avoiding delays and getting the best price.
By Andrew Anderson, Michael Abbott, and Adam Hertzke | November 24, 2013

It is no secret that consolidation has been and will continue to be a trend in the ethanol industry. Producers who have not already considered buying or selling a production facility will probably face that prospect in the near future. Those unfamiliar with the process might be surprised by some aspects of the process and, in hindsight, may have wished they would have done certain things differently or prepared otherwise. In the experience of Faegre Baker Daniels in buying and selling ethanol facilities, some general issues move to the forefront and may warrant consideration in advance of the buying or selling process.

Consensus among Stakeholders. During the decision to buy or sell, it is important that all (or a significant majority) of shareholders support the transaction. In some negotiations, items are eventually discovered that may warrant price or term adjustments. While internal debate among owners and operators may be healthy when facing that prospect, it is important that a unified front is always projected to the potential counterparty. The same holds true for the relationship between the company and its advisors. All parties should be on the same page with respect to messaging and strategy.

The seller’s lender may also be very important to the process, especially if the lender faces the prospect of not being paid in full. The lender will want to maximize return and will likely be very interested in the price, the appraised value and the sale process. The process of getting lender approval in this instance can be difficult and time consuming. It is not uncommon for a lender to need a number of months to approve a sale that does not result in its full payment. Sellers in that instance should consider communicating intentions to the lender early so as to avoid delay in closing the transaction.

Governmental Approvals. Obviously, ethanol producers must comply with numerous governmental regulations and programs, including state grain buyer regulations, state incentive programs, state and federal utilities permits and federal alcohol permitting. In many instances, the time required to get governmental approval to assign benefits and permits and the time necessary for buyers to get new approvals and permits can be significant. Buyers and sellers alike should keep this in mind when considering a transaction. It’s not necessarily an issue that prevents a deal from closing, but it can certainly affect timing. 

It is quite common for a buyer of production facilities to require state incentive packages be assigned to the buyer as an asset of the business. Determining whether such packages can, in fact, be assigned is an action that should be undertaken early in the transaction. The outcome of the analysis can have a dramatic effect on pricing and the parties’ willingness to move forward.

New Industry Participants.  Consolidation in the ethanol industry has garnered the attention of businesses and private equity funds that do not have significant history operating ethanol production assets. Whether these new entrants are ideal for the market is subject to some debate, an issue that is beyond the scope of this article. Relevant to this discussion is the fact that some transactions are slowed down while a buyer without operational experience learns the business. While there are certainly businesses and private equity funds familiar with the industry and its operation, some new operators are learning the business while trying to buy the business. Buyers in this instance often have much more detailed diligence requests. Again, this is not necessarily an issue that prevents a deal from closing, but sellers should keep in mind that their diligence burden may be higher and the deal could take longer to close. 

Also, certain entities may enter the pool of potential buyers for the sole purpose of looking at the assets and business, but have no serious intention of actually purchasing. It will be the role of the seller’s advisors to help separate those potential buyers from serious buyers. In this instance, sellers and their advisors should consider requiring proof of buyer financing and shorter exclusivity periods (i.e., the period of time that the seller must negotiate with this buyer and cannot consider other offers from third parties). These are just two protections that help protect sellers from less serious buyers.

Andrew Anderson
Partner, Faegre Baker Daniels

Michael AbbottPartner,
Faegre Baker Daniels

Adam HertzkeAttorney,
Faegre Baker Daniels