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Legal Perspective

The Business Plan: Underrated, But Critical
By Mark Hanson and Todd Guerrero | April 01, 2006
One of the most significant mistakes that project developers make is to assume that the business plan is being completed for someone else. They fail to see the business plan as an important tool and project guide that not only reflects how well the business strategy and its implementation have been thought out and developed, but also indicates whether the project developer is capitalizing on business opportunities.

Business plans can be consuming in terms of time and money, so start simple. The plan doesn't need to be elaborate but should address the basics: feedstock procurement, processing costs and product sales, and how difficult it will be to penetrate the market. Test the plan as the project is developed.

The business plan should identify production costs, as well as operating costs, including equipment, land, construction permitting, labor, inputs and financing, utilities, and financial projections. It is important that a third party verifies financial analyses contained within the business plan in order to ensure that assumptions reflect current market conditions. With biodiesel projects, projections should contain some contingency analysis projections that both include and exclude anticipated federal and state programs.

When it comes to financing, project developers should determine financing options-both debt and equity-based upon the business plan. Depending on the financing structure, most new biodiesel production facilities are likely to require 40 percent to 60 percent investor equity. Potential lenders, who will indicate the amount of equity needed to support the debt financing, will evaluate each project separately.

Projects must be organized as a legal entity to raise equity or obtain debt, and the business plan should address issues specific to the entity structure. Which entity is best: corporation, limited liability company or cooperative? For a pass-through entity like a limited liability company, for instance, the business plan should call for the capability of making tax distributions.

A feasibility study is not a substitute for a business plan. In general, feasibility studies identify business opportunities that can be implemented. Business plans use a strategy to optimize the opportunities presented by a feasibility study.

The business plan should be a living document that changes and grows with the project. Initially, the business plan may state the goals for the project. For example, it may state that the business will contract with a reputable design/build firm for a lump sum contract at a fixed amount. When the business has entered into a letter of intent, the dollar amount and design/builder will be known. It will also identify other costs and responsibilities that the design/builder will not be responsible for, such as site gradings and borings, costs of bringing utilities to the site, road and rail enhancements, and construction cost escalations. The business plan must then be modified to account for these changes.

A well-thought-out business plan can be one of the best time management tools for a biodiesel project developer. It can also significantly reduce legal costs. Lawyers rely on the business plan for a view of the overall strategy, and how and where the developers want to take the business. The big picture information and the unique aspects of the project, as well as the strategies to overcome business, feedstock procurement and product marketing challenges, help the attorneys in drafting and structuring organizational documents, prospectuses and disclosure statements to raise money from potential investors. This information also helps with reviewing and drafting contracts for all aspects of the business. For example, a well-written business plan may save 30 percent or more in terms of time and costs involved with drafting a prospectus or disclosure statement.
There are many points in project development when a well-executed business plan will save the project time and money. The business plan is often underrated but should be the key management tool for the project.

Mark Hanson and Todd Guerrero are members of the Agribusiness and Energy Practice Group of Lindquist & Vennum PLLP, a leading provider of legal assistance on renewable energy projects throughout the country. They can be reached at (612) 371-3211.
 

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