Volume 9, No. 2, Summer 2004

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Market Transaction: Business Valuation

Creative Solutions to Complex Corporate Problems

PROBLEM: COMPANY UNDER THREAT OF CONDEMNATION

Established Rendering Plant
123 Main Street
Any City, Your State

After more than 50 years in business, the subject company found itself under the threat of condemnation by the city on which it was located. The plant was very old, but clearly functional. The equipment was constantly in need of updating and repair leading to large expenditures for capital improvements. The rendering industry was in the worst economic position ever, resulting in significant revenue declines and a loss of profitability never before experienced. On the positive side, the company was in excellent health from a balance sheet perspective. The subject company had equity of over $1.2 million, accumulated over many years of profitability. This enabled them to weather downturns in the industry and make whatever capital expenditures were necessary. To make matters even more complex, the industry was rebounding and the owners were approaching retirement age.

In order to assess the potential damage caused by condemnation of the property, the business owners proceeded as follows:

[*Hired a good attorney.
1. Hired a relocation expert.
2. Hired Shenehon Company to assess the value of the business and the real estate.
3. Enlisted Shenehon Company’s expertise to guide them through the condemnation process.

In addition to the uncertainty of when, or if, a condemnation of the property would occur, other issues remained unclear. The following list of questions was developed to aid in the analysis of the company:

• If our property is condemned, what will we get paid?
• Should the company relocate its facility?
• If relocation is advisable, how much will it cost?
• Will the company be able to find relocation opportunities within its trade area?
• Will the city compensate the company for the building, the plant, new equipment, and/or moving expenses?
• Will the city reimburse the company for the loss of going concern, in addition to the real estate and equipment, if so, how much?

Business Description

The subject company operated as a rendering plant. Rendering operations perform the necessary service of disposing of restaurant grease and animal waste carcasses. At the present time, waste of this nature cannot be legally disposed of in landfills. Therefore, without rendering plants, restaurants, grocery stores, and meat processors would have no legal way of disposing of their organic wastes. This rendering company employed a process known as "batch processing". The raw material is fed into specialized machines that mix bone and other waste materials on a measured basis. The mixture then travels through a magnetic separator in order to remove any metallic substances. From there, it is placed in cookers which separate the tallow from the meal. Both the tallow and the meal are dried thoroughly in pressurized separators. The tallow and meal can now be re-used as ingredients in animal feeds of various grades.

Revenues are generated in two ways: by charging a service fee for pick-up of the waste materials and by selling the end products, tallow and meal, in the marketplace as animal feed.

The plant and office of the subject business operate on 6 acres of land. The business owns the real estate and the plant includes highly specialized equipment.

Owners’ Decision

After an in depth analysis of all relevant factors, the decision was made to sell the business intangibles, i.e. goodwill (customer list), and approach the city to purchase the land, building and fixed equipment. This approach was taken for the following reasons:

• The law is not clear on the compensation of goodwill.
• The equipment was old and appeared ready to collapse, to the uneducated observer; it would be difficult to persuade the condemning of authority that the equipment was functional and valuable to the operation.
• It was clear that the property would be condemned, but it could take as long as five years before this officially took place. The prospect of a long legal battle over many years, with an outcome that could not be estimated, was very unsettling to the owners: there were too many unknowns. Based on the appraisals and other expert opinions, the owners did have a clear understanding of the worth of their assets, but it was also clear that the city could not afford to pay the owners what was proper and would, therefore, fight on all fronts to reduce what the owners thought was fair.
• Overall, it was felt that we could control more of the money issues by pursuing a sale.

General Comments

By being pro-active, the owners were able to maximize value. The sale was a combination of hard assets and goodwill. Due to the complex nature of the transaction, it took over 18 months to close on both the business and the real estate. Even though it took 18 months from start to finish, if the owners had, instead, waited for condemnation to occur, they might still be waiting to be condemned and would face a great deal of uncertainty with regard to the notification of the date of the condemnation as well as the continued operation of their business. By hiring qualified experts at the front end, the owners were able to minimize their risks and maximize their sale price.