Finding financing for new bakeries
Oct. 1, 2015
by Dan Malovany
When the owners of AbiMar Foods decided to turn a former Sam’s Club into a state-of-the-art cracker plant, the project got by with a little help from their friends in Abilene, TX. Specifically, the Development Corp. of Abilene (DCOA) and the city council approved around $4.5 million in incentives for the $30 million-plus project in 2015. They also provided additional funds for improving its warehouses, which the DCOA leases to AbiMar below the market value. In return, AbiMar has added 65 jobs to the local economy so far. In all, 380 employees work in the two Abilene bakeries.
Patricia Canal, AbiMar’s CEO, noted the biscuit company will get support over the next three years based on the number of jobs it creates. A 16-year veteran of Grupo Nutresa, Ms. Canal has traveled the world as an executive in the Medellin, Colombia-based international business division before coming to Abilene last year.
Although common in the US, the idea of a community supporting a local business was something the Colombian company had never experienced before it purchased Fehr Foods in 2010. “When we bought this company, it was the first time we saw this kind of involvement from a government. It’s been amazing,” Ms. Canal said. “The fact that we get this kind of support from them allows us to think about making many more investments in this city.”
In 1989, Abilene became the first community in Texas to adopt a half-cent sales tax devoted specifically to economic development, noted Kent Sharp, DCOA’s CEO. Its mission is to use sales tax revenue to create jobs, provide training, diversify its business environment and increase its property tax base.
In all, the city’s half-cent sales tax generates between $10 and $10.5 million annually. Those funds can be used for grants, loans, constructing buildings, leasing them or selling them at fair market value or lower. “That’s the money we can use to have local industries grow and expand their operations,” Mr. Sharp explained.
Scouting out incentives
In determining where to start up or build a new production facility or distribution center, location remains the top priority. “You first need to quantify all costs, where ingredients are coming from and where you are shipping your products,” observed Frank Spano, managing director, Austin Consulting, Cleveland, OH. “Once you narrow it down to five or six communities in a region, that’s where the incentives can be a deciding factor on your final location.”
After finding a general location, bakers and snack producers should then look into government incentives that reduce initial operating costs as well as long-term overhead. The amount and type of incentives often are major factors in the final decision on where to locate.
That’s an observation not lost on the DCOA. “Businesses should ask, ‘How aggressive is the local community in dealing with incentives?’ ” Mr. Sharp suggested. “What breaks can we get if you put a new business within a 50-mile radius? It becomes towns competing against one another to win the business, and a lot of time that’s done with incentives.”
In the short run, Mr. Spano said, the goal might be to obtain free real estate or reduced costs for land or buildings in a community or industrial area — or to negotiate favorable leasing rates or a reduced purchase price. “Most bakeries have a lot of startup costs, so the key is to lighten the burden until the plant starts making money,” he explained. “Any way to lower or eliminate those costs in the beginning is a benefit to the company.”
Reducing infrastructure costs should also be a priority. “If a road needs to be improved or needs to be widened, get it done immediately,” Mr. Spano advised. “Have the community or state help you out with the project. That will obviously save a lot of headaches in the future.”
To alleviate ongoing costs, Mr. Spano noted exploring tax abatements that can provide long-term assistance. In the community, that may mean lower property taxes over the next 10 to 20 years with a depreciation schedule. The state may provide corporate tax assistance.
Many communities also may lower utility bills, such as water or sewer usage, up to 20% or more for several years. Others may lower or eliminate the cost of disposing effluents, such as suspended solids and other biological oxygen demand (BODs) materials, over a period of time.
A business-friendly community
The skills of the labor force should also be evaluated. Mr. Spano typically examines the “labor shed” within a 30-mile range of a potential new bakery location. Talking with existing businesses — especially food companies in the region — often will determine whether the current available workforce can absorb hiring an extra 100 skilled employees.
Additionally, local food processors can shed light on how proactively the community collaborates with local technical schools to train and recruit workers. “Many states have discretionary incentives or cash grants that are administered locally or at the state level to, in essence, provide assistance programs to train workers and encourage a business to locate in that state or community,” Mr. Spano said.
In Abilene, the DCOA worked with Fehr Foods to provide assistance in expanding the cookie facility and adding capital equipment, according to Kim Turrant, DCOA’s chief administration officer. In fact, Steve Fehr, the company’s owner, introduced officials at Grupo Nutresa to the DCOA when he sold the cookie operation.
To assist with the new cracker operation, the DCOA agreed to pay 15% of Grupo Nutresa’s investment. So far, Mr. Sharp said, the municipal economic development corporation has paid out $2.5 million with the agreement to pay up to $2 million more based on the number of jobs created and other performance criteria. To secure its investment for taxpayers, the DCOA has a lien on the cracker facility’s building that AbiMar owns.
In addition to incentives, companies need to gauge the temperature of the community’s and state’s regulatory climate. Mr. Spano recommended meeting with local officials, as well as existing businesses, to get a “good barometer” on how easy it is to get air, water and building permits. Additionally, he suggested evaluating the quality of industrial parks. “Are they up-to-date and modern?” Mr. Spano asked. “Is the community looking to expand in the future? Do they have the foresight for expansion? Did they purchase 500 acres for a new industrial part for the next five years? That will help you determine if the community is looking ahead to grow.”
After spending a day in the community, sometimes it just clicks. “You say to yourself, ‘These folks really get it.’ They’re not just giving you lip service,” Mr. Spano said.
Evaluating private financing
Often the determination to lease or buy comes down to cash flow management and the ability to run a business, according to Matt Carlisle, corporate account executive, United Leasing, Inc., Evansville, IN. “If you have a big contract, leasing can be an additional source of financing for equipment and vehicles needed to meet your customers’ demands,” he said. “If your business slows, leasing helps preserve your cash and bank lines. Having cash on hand can help your company overcome the sudden downturn in business.”
In addition to preserving capital, a lease can be structured to stretch payments over time, or even reduce payments during those periods when business is slow. That’s especially critical for seasonal operations such as frozen pie and dessert manufacturers that see revenue blossom near the end-of-the-year holiday season and slump afterward.
Typically, leases run from 18 to 84 months — many with an option to buy at the end of the term, Mr. Carlisle explained. Down payments are generally less for leasing — often just one month’s payment versus 20% or more for a conventional bank loan. “By not having a big payment upfront, it allows you to invest in other parts of your business that are more profitable,” he said.
Many leases come with a purchase option to buy the equipment when the term expires. “By paying over term, that new piece of equipment — whether it’s a new oven or a vehicle — is generating income for you,” he said.
United Leasing works with companies like BakeRite Systems, a Richmond, KY-based supplier of baking equipment. The finance company, which buys the equipment, then leases it to the bakery, makes money on interest and other fees. For the equipment vendor, leasing can facilitate sales to baking and snack businesses. “Unless [the vendor] provides a warranty or guarantee on the equipment, there isn’t any risk for them,” Mr. Carlisle explained. “Our obligation is between us and their customer.”
In today’s economy, a company needs to know how money talks — whether it’s coming from public or private institutions. Reducing overhead and preserving capital can allow companies to grow their businesses in good times or save that cash for a rainy day. Or as
Mr. Carlisle noted, “The objective is being able to weather the storm of a downturn and having the ability to take advantage of new opportunities when they present themselves.”