Opinion: getting it right when changing hands

August 28 , 2012

By Golden Sun Marketing president and owner Don Goodwin

Many produce companies are family-owned businesses. Their growth has been driven by responding to the market place with little consideration for the eventual sale of the business. Their focus is usually on passing the company to the next generation more so than an outright sale.

Eventually, every family-owned produce company will sell to an outside company or cease operating. The survival rate of a business passed from the second to the third generation is less than 5%. With this in mind, all family-owned produce companies should spend some time planning for the eventual sale of their company.

Model business

I have the pleasure of working with many family-owned produce companies. Eventually, we have a conversation about the transition plan for their company. One of our initial topics is the company’s business model.

Produce companies make money three ways; growing, packing and selling. Often times, these three functions are separate entities giving each its own profit and loss objective.

The growing side consists of land owned by the company. Profits are created when the return to the grower exceeds the cost to grow.

The packing company packs product grown by the company as well as outside growers.  The packing company optimizes profits by packing the most units, thus driving down the incremental cost to pack.

The selling company will sell product packed by the packing company, but may also sell product from outside packing companies. The selling company makes money two ways. First, they make a commission on selling products packed in the company facility. Second, they make margin on the difference between outside purchases and the selling price. Often times, the margin on outside purchases will exceed the sales commission on internal sales.

Price it right

So, how does this impact the ultimate price of your company?  First, the business with three distinct profit streams provides the diversification potential buyers covet. This model will likely attract more high-quality potential buyers. Secondly, investors are showing the most interest and paying greater prices for companies that ‘own” the most customers. So, it is beneficial for you to focus on building the sales organization aggressively. Land and buildings are much easier to acquire than a quality customer base. Building a sales team that can drive sales of both inside and outside products will prove valuable.

Buyer options

Once  you are ready to sell your business, it is critical to think through the selling process. Many companies exchange hands because of personal relationships between the buyer and seller. While this may sound logical it will likely result in a lower selling price for your company. You should embrace a process that will bring in the most potential buyers. This would include strategic buyers (those in the industry) and financial buyers (venture capital).

The  interest from financial buyers in agriculture is at an all-time high. There are billions of dollars waiting to be invested in agriculture with investors just looking for the right deal. It will be to your advantage to seek out a professional organization to represent the sale of your company. They should be skilled at bringing in both strategic and financial buyers. The commission you pay should be more than offset by a higher selling price.

In summary, I encourage you to spend some time thinking through your business model. If you can effectively diversify and focus on building your customer base, you will gain a better selling price for your company. When the time comes to sell, utilize a business firm that specializes in mergers and acquisitions in agriculture. The combination of the right business model and an experienced business broker will make you the most money.

www.freshfruitportal.com

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