The client operates and maintains a pig fattening unit in Derbyshire and is in a contractual agreement with British Quality Pigs, which in turn supplies the entire Waitrose chain.
They contacted Alpha-Financials with the request to complete the feasibility study and prepare a business plan on how to increase the returns of their farm, through diversification, in the first instance via an on-farm Anaerobic Digestion (AD) plant. The planning was in place.
For those less in the know of what an AD plant entails, we have inserted this paragraph, which can be skipped if you are familiar with Anaerobic Digestion.
Anaerobic Digestion is primarily a waste management solution for all waste that has the natural characteristic of fermenting. In layman’s words this means all food that, when left to its own device would “rot”. In a 100% natural way, when food is left it will “rot” which means that bacteria, which are present in the food start to come to “digest the food” and in this process release a gas which is called methane. In order to speed up this process, the food is put in an anaerobic environment (meaning “without oxygen” ). This environment is achieved by enclosing the food either in a large concrete circular construction with a lid on or in a tightly closed container for very small quantities.
To further enhance the process, it is heated. Think of how much faster a banana rots when left in a plastic lunchbox in the sun as against when it is stored in a large cooled fridge. The process has two output products (i) the methane, a potent gas, produced by the bacteria which when captured has several usages such as put through an engine to produce electricity or cleaned and put in the gas grid, amongst others (ii) the digestate or the remainder of the food which is a highly valued fertiliser. To give the visual compassion, AD is like a perfectly functioning cow which eats grass (feedstock input), digests it (fermentation) and which at the other end ‘farts’ (methane/gas production) andexcretes solids (digestate/fertiliser production).
As a totally independent party, we started the journey together by evaluating all different technologies and searching for the options which best suited the client’s specific needs, followed by an in-depthanalysis of the financial viability of theseshortlisted alternatives.
This required visiting different plants and pieces of equipment. It was of high importance to understand the feedstock requirements and highlighting the implications of different kinds of contracts, in particular the embedded pitfalls.
There were structural concerns, distance obstacles and frequency of deliveries to consider. Due to the high motivation of the client, the operational needs were well understood and met from an early start. For instance, agreeing to take out and to budget for a full-service maintenance agreement in the first year of operation acted as an important risk reducing factor.
Between the myriad technology suppliers, it was ultimately the one who understood the specific feedstock for the size of plant presumed most appropriate, a 250kW, being Marches Biogas, which became the provider of choice. Creating the mass balance proved a very cumbersome exercise but the time dedicated to this ensured overall coherence and robustness. Predicting the correct amount and composition of one of the major outputs, the digestate, was crucial for the financial analysis later.
Besides being a waste management solution, one of the aims of the AD process is to capture the methane production and put it through an engine to produce energy. In this business case,after the parasitic load, it would be sold to a neighbouring chicken farmer who requires heat all year round, by means of a private wire.
Of course, it is an iterative process, but ultimately all assumptions used in the financial analysis have to be explained and backed up by the story above.
The business plan was successful because it addressed all the assumptions and thereby de-risked the entire project. When the receiving parties, here the client themselves and a funder, feel that all risks have been acknowledged and mitigated to the extent possible, it creates an environment of trust and credibility. Here we budgeted for extra expenses from the outset, such as extra training for staff, additional fire protection and an initial full-service contract. Also by remaining realistic about the future income streams, such as allowing a gradual uptake of digestate to local farmers over a period of years, we were able to construct a conservative financial projection with a number of opportunities to improve those returns in practice.
Each item in the financial model has to be justified to potential investors and its important to strike the right balance between optimism and pessimism for the estimates used and therefore also the associated risks and opportunities.
In addition, the suggested kind of financial structure needed to be well explained to the client to avoid future disappointment whilst maintaining the motivation required to undertake such a project. We guided the client through the impacts of varies financial structures. As an example, not everyone is familiar with what the word equity means whilst debt is a much better understood concept. The way these two concepts and the value of both interact with each other must be understood and explained clearly.
So overall the financial analysis part of the business plan contains the following parts and characteristics:
Whilst the detailed content sections are case-specific, we practice what we preach when it comes to the length of a good business plan:
Whilst the detailed content sections are case-specific, we practice what we preach when it comes to the length of a good business plan.