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EXPANSION THROUGH merger or acquisition has been taking place in the ag retail industry for some time now. Some mergers and acquisitions have gone relatively smoothly while others have not. What helps most in making a smooth transition is thorough preparation and frequent and honest communication throughout the process.
Issues to consider
Riverland FS, Knoxville, IL, is a full-service agricultural cooperative serving producers in four western Illinois counties. The Growmark-affiliated cooperative acquired Monmouth Grain & Dryer, Monmouth, IL, in March 2005, primarily to increase revenue. The cooperative also saw the acquisition as a way to improve efficiencies because many of its accounts at the time were closer to the Monmouth Grain & Dryer location, explains Dave Farber, agronomy department manager.
“Obviously, the acquisition also removed a major competitor,” Farber says. In addition, the Monmouth operation was appealing in that it had a 4,000-ton liquid solution storage tank located on a rail site, Farber says.
Riverland's management developed the following checklist as it considered the acquisition:
Retention of volume from major known accounts
Customer base: What do we know about it?
Employee retention and their acceptance of our system
Image of their business (Does it fit with our plan?)
Gross margin and service income analysis: How do we compare?
Precision farming position
Major chemical programs
Excess assets
Condition of assets
Can we make a profit?
Riverland FS talked with the owners of Monmouth Grain & Dryer when it first learned the business was for sale. The son of one of the owners had been in charge of the plant for several years, and after talking with him and some key customers, Riverland determined that he would be an excellent choice to continue managing the plant under new ownership.
When Riverland FS was considering the acquisition of Monmouth Grain & Dryer, it asked Growmark to do an appraisal of equipment and facilities. “They did sales and income projections and we also utilized a Growmark attorney to finalize the transaction,” Farber says.
Clear communication
Workforce Management reports that about half of all corporate mergers result in culture clashes and therefore it is essential to establish strong communication up front. In fact, Farber offers this advice to others thinking about a merger or acquisition: “Get to know the owner personally and look for areas on which you can agree immediately.”
Roger Kienholz, general manager, Crystal Valley Cooperative, Lake Crystal, MN, adds that face-to-face meetings are critical and they need to be held as frequently as required. The acquiring company or merging companies must be clear about the company culture and leadership and set standards and expectations up front. “This must be done clearly, candidly, completely and immediately,” Kienholz stresses. Those who are not “on the bus” should be let off immediately, he adds.
Crystal Valley Cooperative merged with Southern Valley Cooperative (both mid-sized cooperatives) three years ago to eliminate overlapping trade areas and duplication of assets and to spread out fixed costs.
The Minnesota cooperative received assistance from the Member Services division of Cenex Harvest States/Land O'Lakes, with which it is affiliated. Together, they reviewed financial histories and determined where significant cost savings could be achieved, Kienholz says.
CHS/LOL's Member Services group facilitated discussions with the cooperatives' boards and helped determine the type of merger and board representation to pursue. An attorney drew up the bylaws and merger plan.
Today the full-service cooperative serves producers in four south-central Minnesota counties. It has seven locations and more than 85 employees.
Transitions are smoother when management clearly communicates the purpose of procedures and other facets of the business to employees, Kienholz says. He says that it helps to explain why the companies have merged or, in the case of an acquisition, why a company was bought or sold.
Sharing numbers gives employees a better understanding of why you are making personnel cuts or cutting other operating costs, Kienholz adds. If employees understand that the company has to reduce operating expenses by X amount of dollars to improve profitability and return dividends to members, they may accept change more readily.
Riverland FS also met with Monmouth Grain & Dryer staff to “fully understand their sales and operational philosophy,” Farber says. This required several meetings, but it helped meld a solid approach to business. “In some cases, it fit like a glove and in others we had to tweak things to start moving toward our goal,” he says.
The cooperative was fortunate in that all of the employees were open to its procedures and ideas. Transitioning the billing system, however, was a struggle because the acquisition took place in late March in the midst of the busy spring season. “A lot of things had to be done on the fly; there was no time for training,” Farber says.
When Riverland FS bought Monmouth Grain & Dryer, the latter company did not have a formal evaluation system in place. Therefore, management met with Monmouth's manager to give him a review and share with him what was covered in the evaluation. The manager then took this information to set up evaluations with his employees. Riverland FS managers also met with employees to review benefits and compensation.
The importance of communicating with employees affected by a merger or acquisition also holds true for communicating with customers. Riverland FS, for example, sent customers a letter announcing the purchase and assuring that all commitments would be honored.
Farber also shares this advice: “Know and keep records of your competitor so that you can compare them to the information you receive at the time of acquisition. Pay attention to detail, including inventory, policies and procedures.”
Ready to run
Before expanding, dealerships need to ask whether they have a sufficient number of experienced people to help manage and run additional locations. In Riverland's case, it helped that there was a manager who could already lead the business.
The Illinois cooperative has given all of its six service center managers a fair amount of autonomy. For example, the managers determine when overtime hours or part-time employees are needed for their particular locations. They prepare a budget for their locations and assist in determining margins and retail prices.
The local service center managers also are responsible for recruiting and interviewing full-time employees and for evaluating performance and compensation with employees. Finally, they are responsible for conflict resolution with customers.
Physical improvements
Dealerships that are exploring an expansion through merger or acquisition also should consider that they may need to make physical improvements and/or sell duplicate assets.
Riverland FS drew up a list of improvements to be made at the Monmouth location. These improvements included repainting and repairing toolbars, painting the 4,000-ton solution storage tank, demolishing two bins to gain parking area, cleaning the warehouse and converting one end of it to a shop, and installing a door to easily move toolbars in and out.
The cooperative also sold old center-fill NH3 tanks at auction and purchased front-fill tanks. It sold other excess equipment at auction as well. New purchases included a rail solution pump that cut railcar unloading time in half and new signage for the acquired facility. The cooperative involved service center managers and a maintenance supervisor in this decision making.
Crystal Valley Cooperative also made changes in facilities and equipment. “We either sold or dismantled what wasn't necessary,” Kienholz says.
Additional questions
While equipment dealer S.C. Hansen is not a crop input supplier, ag retailers might benefit from its expansion experience. The company is a Case IH agricultural equipment and Case construction equipment dealer and has four store locations in upstate New York. President Randy Hansen says, before expanding, his dealership asked itself these important questions:
Is there enough market potential to justify establishing a branch location?
What are the history and culture of the existing dealership?
Are suppliers “on board” with the new venture?
Do we have a sufficient number of experienced people available to assist with the development of an additional branch?
Do we have enough working capital to fund another location, especially if the volume grows more than anticipated? “You can only grow as fast as you can fund the growth with after-tax capital or you must increase your leverage by additional borrowing,” Hansen says.
Because all accounting functions are performed at the original store, do we have the infrastructure necessary to support an additional location (for example, computer capacity, communication lines, policies and procedures)?
How do we clone our operating philosophies and culture as quickly as possible?
Is our trade area contiguous with our existing stores?
When to say no
Although some dealerships would like to expand, there are times when they probably should not, says George Keen, partner, Currie Management Consultants, Worcester, MA.
“If, for example, you look at your current operation and you are adding just 1% to the bottom line and the benchmark performance is 5%, you should be cautious,” Keen says.
He offers these pieces of advice when considering whether or not to expand:
Get your house in order first. Make sure you have control. There will be chaos with any new acquisition and you need to plan for that in your own schedule as well as those of your employees.
Plan on spending a lot of time managing people. Expansion is not so much about buildings or inventory — it is about people.
Have a vision of what you are trying to accomplish.
Also realize that some dealerships do not know how to add stores or cannot manage more, Keen says. “Just because a three-store operation is doing well doesn't mean it necessarily has the talent to take on the next location.”
Finally, remember that one-store dealerships can do just fine if they have a good reputation in their community, represent and support products and services well, and have a sound succession strategy.
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