Agricultural businesses are looking to expand their facilities today for many reasons, including demands for faster service in the industry, safety considerations when using older bins and other equipment, and a desire to automate facilities due to labor constraints and ever-increasing labor costs. This article explores some general considerations to keep in mind when thinking about facility expansion projects.
Location, Location, Location
Where is the greatest need within your business? What markets will be available to your business now and in the future with this location? Are there synergies that will add to your other nearby business locations, and is there land available at this location? In today’s marketplace, agricultural land has been steadily increasing in value, and today’s producers can be reluctant to part with their farmland for emotional reasons such as family history with the land, resistance to change, or the taxes they could incur by selling the property instead of passing it at death. Another major concern with location is whether there are utility services (and the cost of those services) available to cover this location now and in the future.
Should You Go It Alone or Partner with Another Business?
There are advantages and disadvantages to each of these options. With the capital investment of two businesses, you can often increase the size of the expansion project, provide faster service with the facility, and have better leverage to acquire and store product when market conditions are favorable. Another distinct advantage is that your business gets an opportunity to familiarize itself more with the governing structure, working relationships, and philosophies of the neighboring business to determine if future opportunities or a merger would be a good step forward without fully committing.
One of the disadvantages is that departures and terminations of the new business can be complicated and expensive. It is imperative for your business to have legal documents and agreements specifically identifying the terms under which both parties can exit the relationship without significantly impacting their underlying business. Also, competition is a major concern. If you are competing for the same customers, and now also investing in a facility with your competitor, you need to have a clear understanding on the ramifications of how this new facility will impact competition and business.
Consider Various Funding Options
When interest rates were lower, cooperatives and other businesses turned to internal investments from their members because the rates in the marketplace from outside resources were significantly higher. Interest rates have climbed, so many projects are funded elsewhere today, but that may be changing. Also, do not overlook the option of grants because there seems to be an ever-increasing amount of grants available to fund transportation and infrastructure projects throughout the United States, and many of them are designated specifically to rural areas.
To General or Not to General
Sometimes agribusinesses choose to take on the role of general contractor themselves, and more often if the project is smaller in size. This decision is often intertwined with whether the business will be hiring a project consultant or attempting to oversee the entire project themselves. It is often the best practice, especially if there is any size to your expansion project, to retain one construction partner as the general contractor so that they have complete responsibility for all the actions of the subcontractors. It is also a good practice to hire a project consultant to assist with logistics and administration of the project.
Solid Building Construction Contract
No expansion project should be performed without a solid building construction contract. The contract should fully describe the scope of work, integrate the various requirements of the project, detail when payments will be made, indicate how long the work will be warrantied, establish deadlines, and specify when contractors will be eligible for progress payments. Paying all or a significant amount of the project upfront leaves building owners in a more precarious position with limited leverage if the project is not completed on time or if there are defects with the project.
These and other considerations often drive the decision of whether an expansion project makes sense. As always, it is best to bring in your trusted advisors early and involve them in the process to increase your chances of a favorable outcome. If you would like to discuss a potential expansion in your future, or any other questions or issues you are seeing with your agricultural business, please contact Attorney Jared Peterson and the Agriculture Practice Group at FMJ.
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