Biodiesel Business Plan
Ampure Capital specializes in renewable energy and has worked with numerous biofuel, ethanol, and biodiesel businesses over the years. Projects have included biofuel refineries, reactors, glycerin refining, algae, jatropha, poultry fat, conversion of glycerin to methanol, genetically engineered high yield crops, DDG processors, and many others. Our industry specialization and reasonable prices makes our high quality investor-ready business plans the best value available today.
Here are my thoughts on how to write a good and fundable biodiesel business plan. The same issues are also true for other biofuel projects. This is not entirely inclusive but should give you a good start.
You need to address the following main areas:
- Feedstock agreement
- Off-take agreement
- Site Control
- Technology selection
Think long and hard about what feedstock you are going to refine into biodiesel or biofuel. Carefully consider these words from Lyle Estill of Piedmont Biofuels:
Be aware that feedstock is the only thing that matters.
If you draw a pie chart in your mind’s eye, fill in 85% of the circle with feedstock. Everything else fits into the 15% sliver which remains.
You have a new reactor technology? You can get a complete biodiesel reaction in a tenth of a second and it takes me a whole minute? Nobody cares. If my feedstock is cheaper, or more plentiful than yours, I can crush your brand new patent pending reactor with a 55 gallon drum and a canoe paddle . . . .
Let’s say you use PhD chemists and massive amounts of automation at your plant and I use interns at mine, so I have a lower labor cost so I win. Nope. Not if you have a tenth of a penny per pound feedstock advantage. You can take your tenth of a penny edge and roll it into brainpower and crush the competition with their all-volunteer staff. Feedstock is everything.
In light of the above, consider the following. According to The Jacobsen , a leading commodity consulting firm, in March biodiesel was selling for about $4.86 per gallon (including RINS with a value of about $2.19.) Soybean oil cost $4.46 and methanol, processing costs, and the glycerin credit all cost $.31. This leaves a profit of $.09. As the price of the inputs and products fluctuate, the end result is usually somewhere around $0. Zippo.
Now, breaking even on selling biodiesel is a good deal if you are a farmer who owns shares in a biodiesel co-op. In fact, you are making a killing selling high priced soybean oil to the refinery. If the biodiesel market didn’t exist soybean oil probably would be considerably less expensive and the farmer would be making less money overall.
You are well advised to choose as inexpensive a feedstock as possible. This is why some smart refineries are using old restaurant fry oil (yellow grease) or poultry fat. These feedstocks are more difficult to refine but the net impact to the bottom line makes the added complexity worthwhile. There are even some companies that are using trap grease (and even black grease scrapped out of the sewers) to make biodiesel.
One quick caveat is that your biodiesel business plan should also try to avoid using a feedstock that environmentalists blame for deforesting the rain forest. I think the argument that palm oil biodiesel is to blame for deforestation is misguided but I will address that issue on another day.
To sum up, for your biodiesel business plan you need to decide on a feedstock and get a signed feedstock supply agreement. I’m sure you have make a couple of phone calls and heard that feedstock suppliers won’t sign a supply agreement until you have a plant up and running. They will tell you they have gotten burned in the past by signing supply agreements only to have the plant’s funding fall through. This answer simply won’t fly with investors. You need to have agreement. And no, having a commodity consultant give his assurances that he will be able to secure the necessary volumes once the plant is up and running won’t cut it. This is a devilishly difficult issue to overcome and has meant the death of many well-meaning biodiesel plants.
Your biodiesel business plan should also address how you will sell your production of biodiesel and glycerin. Investors are really concerned about having an off-take agreement in place. Between you and me, these are pretty easy to secure. The pricing may not be the best but with a few phone calls you should be able to get a contract with a reputable firm. This is strait forward but have a lawyer look over the contract. You don’t want to get nailed by some clause you didn’t really understand.
You are going to need to have a site selected and agreement to either lease or an option to purchase. Key things to consider are:
- Proximity to Feedstock – Conventional wisdom is that you need to be close to either your feedstock supply or your end customer. Choose to be close to your feedstock.
- Access – Highway, rail, river, and/or pipeline. The more of these you have the better. Unless you are a very small supplier, you should have at least two.
- Tank farm – Best is existing tankage or acreage to build one if you don’t. You will need at least a month storage capacity each for feedstock, biodiesel, glycerin, methanol, etc.
- Fire suppression – Fires have wiped out several biodiesel plants in recent years. You are going to invest some real money in fire suppression equipment. It would be best if at least sprinklers are already provided. And make sure that the water pressure can power the sprinklers. Sprinklers require a tremendous amount of pressure.
- Incentives – Certain states and local areas have incentives to attract business – industrial revenue bonds, economic development zones, subsidized employee training, tax incentives, etc.. This stuff can really add up.
- Power, rail siding, loading docks, etc. – All this stuff costs money and you will be glad if it is already provided.
The technology you outline in your biodiesel business plan will also impact investors’ decisions. Make sure that the refining technology has successfully processed the feedstock you will use. Make sure that the equipment manufacturer has a strong warrantee and post sale support. Make sure that the warrantee is backed up by a strong balance sheet. Make sure that the refining technology is appropriate for your area. For instance, a water wash may not be the best choice in a drought prone area. There’s a million other things to think about when selecting a refining technology but most biodiesel entrepreneurs have a good handle on this.
The permitting process for a biodiesel plant can be expensive, arduous, and time consuming. Dealing with government bureaucrats can be one of the most thankless and frustrating experiences. But holy crikey, this process is awful. Outline your permitting strategy clearly in your business plan. It will probably take you at least a year to get all your permits in place. Also, the fire marshal will take time so get started with him ASAP. This list is a little old and out of date, but it should give you a good idea of the terrible you have in store for you. The good news is that once you have gotten the initial permits, renewals are mostly a breeze.
Once you have addressed the above issues, you are most of the way there. You will need someone on your team with biodiesel production experience. If you don’t have someone how, hire one before you start talking to investors. You may also want to recruit an advisory board to fill holes in your skill sets. For instance, you may want someone with commodity purchasing and hedging experience. You may want someone with plant construction/engineering experience. How about permitting? How about selling RINS? Industry outreach/evangelists? You can pay these people a small sum or give them some stock.
Last, you need to ask yourself the same questions that all business owners need to answer such as:
What size plant will you build? How much money do you need? How much debt and equity? Where will you get it? Can you get grants? Can you form partnerships? Can you collocate with a feedstock supplier? What are your 5-year projections? How will your investors get their money back? Do you have an exit strategy?
Ampure Capital can write your investor-ready biodiesel or biofuel business plan for you. Or you can purchase a customized template from us that includes a Word document template, business plan writing guide, user friendly Excel financial model, and template Powerpoint presentation.