Transitioning a family farm to value-added nut and fruit processing

Promera Inc. - Business Expansion Plan

Recent trends in America focus on the importance of a healthy diet and exercise. Americans are becoming more conscious about what they eat and where it comes from. I was fortunate enough to be the sole heir of a farm that my grandfather started more than 50 years ago. The farm's primary area of production was fresh produce for the retail market centered around the Los Angeles and Bay areas. Long ago, my grandfather planted an orchard of fruit and nut trees, but he never developed that end of the business. Recent marketing trends focus on the value of fruit and nuts in the maintenance of a healthy diet.

A plan to continue operations of the produce portion of the business. However, in response to recent trends and recognition of the asset that mature fruit and nut trees represent, I wish to build a small processing facility to introduce high-end gourmet products to the local market. This processing facility would allow the business to tap into new marketing avenues and realize profit from what is currently an untapped and underutilized asset. Due to rising overhead costs of production, including fuel and utilities, the produce operation is not producing enough capital to accomplish this expansion. Profit margins are shrinking due to rising costs of production.

This new expansion would allow the business to not only realize an increase in profit, but would help it to grow in new direction in the future. This new direction has higher profit potential than current operations. The company already has enough established fruit and nut trees to being production on a small scale. Funds would be used to build a small packaging facility in an unused building, and to plant new trees for future expansion. The market potential is significant, especially as Americans continue to focus on a healthy lifestyle.

The company will transition from a sole proprietorship, owned and managed by my father, Charles Smith, to an S-Corporation managed by a board of directors. He four managers will also be board members. Each board member/manager will have their own division and will be responsible for that portion of the crop production and valued added packaging and marketing of the product. This transition from family-owned sole proprietorship to corporation will allow the business to operate more efficiently.

The company is already in existence as a sole proprietorship. A majority of the capital needed will fund the construction and inspection of a licensed packaging facility to turn standard crops into value-added products that will increase the profits per unit and will help to expand the market potential. These products will be able to be shipped to locations across the United States and across the globe in the future. This addition is expected to quadruple revenues from the current level and secure potentially larger markets in the future.

In order to succeed, the company needs to borrow $10,000 for refurbishing an existing building property on the site. The existing building must be upgraded with stainless steel equipment and packaging equipment in order meet the needs of the business expansion. This meager sum will mean increased profits and realize greater returns. Production will occur in a stepped progression until final production is realized. This amount of money will mean the beginning of future expansion and the potential to become a major producer of value-added fruit and nut products.

Introduction

Promera Inc. will represent a new structural change for the business started by my grandfather, Smith Family Farms. The addition of a production facility to produce value-added fruit and nut products represents a step that is in keeping with good sustainable practices and recent marketing trends. The reason for this expansion is in response to changes in the marketplace that represent preferences for locally grown produce. Transportation and other overhead costs are the primary reason for the needed business change. These costs have become detrimental to many businesses, and many must make similar changes in order to continue thrive.

Recent market trends that favor healthier choices for food is a primary reason for this change. This change will allow the company to keep up with trends in the marketplace, as well as to keep operating costs as low as possible by supplying a high-end product to a local clientele. Many businesses are in the position of needing to make changes so that they can operate more efficiently. Food is a basic commodity and the family farm must now think like a large corporation in order to continue to grow and remain profitable. The addition of the processing plant will allow Promera Inc., to make these changes, while continuing to branch out into new avenues.

Organizational Structure

Promera Inc. is an offshoot of the old family farm, which was a sole proprietorship. The new company will focus on value-added food products and will be an S-Corporation with my father, brother and I as primary shareholders. In addition, we will also add a production and packaging manager, who will also be a shareholder. These four entities will constitute the board of directors, and all decisions will have to meet the approval of these three persons. As a result, the company will divide into four major divisions. The company has plans in the future to expand into new product lines and this structure will allow the addition of these new branches of the company easily into the corporate structure.

The following chart represents the proposed structure of the new corporate entity.

Promera Inc. Organizational Chart

This corporate structure was chosen largely due to the experience and managerial capabilities of the key personnel. These entities will be paid a base salary, plus production and profit incentives. Charles Smith is a second generation farm manager with over 50 years of production experience in produce and marketing. He successfully inherited and managed the produce business for over 30 years and kept the legacy alive for future generations. He has seen many market changes over his career. His greatest asset to the team is his experience and extended years of success.

Mark Smith grew up working beside Charles on the family farm and gained much valuable insight over the years. Mark obtained a Bachelor's in Business Management from Los Angeles University and spent 10 years as the manager of an insurance company. He combines knowledge of the farm from a very early age and knowledge of management issues and risk. His insight into these issues will be valuable in these regards.

I am Brian Smith and grew up working on the family farm. I graduated from Berkley with a Bachelor's degree in Business Finance. For the past ten years, I worked my way up the ladder in a financial institution to become director of finance at Wachovia Bank. I will be primarily responsible for accounting and financial management areas of the business, in addition to fruit crop production.

The new business will entail a food processing plant. None of the three original family business members felt that they had sufficient expertise in the rules and regulations needed to run the production and packaging facility. Therefore, it was decided to hire in an outside specialist. We chose to hire John Bower as production manager of the food processing and packaging facility. Mr. Bower has a degree in production management and has over 15 years experience in this type of setting.

The above four entities will constitute key shareholders of the company. They have diverse experience in different areas that will be needed for management of the new entity. The company will also hire various laborers and an administrative assistant to run the daily operations. Marketing will be outsourced to a local marketing firm. The chosen entity will be chosen by competitive bid. The person chosen will have to have a demonstrated track record in new market development, as well as to be reasonably priced.

History of Business

Smith Family Farms has been in business for more than sixty years, with a brand and logo that are familiar on local grocery shelves. Although Promera Inc. will be a new business in a new business format, it will still keep many of the elements with which customers identify the brand. Promera Inc. recognizes the value of customer recognition and brand equity. It is essential that customers recognize the brand and the quality that has been associated with it in the past. Although, Promera Inc. is a new business from a technical standpoint, it will not be new to the customers. The advertising campaign will reflect this philosophy.

Formal Business Structure

The business expects to experience seasonal shifts in demand. During spring planting and harvest periods, the demand for labor will be high. The hours of operation will be 7AM to 4PM PDT all year round, but may increase with need during various times of the production year. The business will not have a retail division and will rely on internet sales, distribution to local retailers that are already familiar with the brand, and farmer's markets in the Los Angeles and Bay Areas.

The original farm was a seasonal operation with periods of no production in the winter months. The ability to dry and produce value-added products will allow the business to smooth its income and realize revenue all year round. The new production facility will change the nature of the business from seasonal to year-round. The business will be able to stockpile product during the busy season and sell it on a continual year round basis.

The owners of the business will be directly responsible for the daily operation of the business. They will make joint decision as a body of shareholders, but each will have their own division to manage and operate. Each of the owners will have a stake and a role in the ability to make this new enterprise a success. They will have knowledge of what is happening on the production floor and will have a view of the larger picture as well. The owners are passionate about making this operation a success. All of the owners wish to play a role in the daily operation of the business. They have a passion for what they do and do not wish to simply sit back and let someone else do the work. They are hands-on type people, making them the most valuable assets that the company has in its possession.

Playing an active role in the daily operations of the business will allow them to be in direct contact with the product at every stage of production. This will allow them to make better forecasting models and to take advantage of opportunities. It is foreseeable that at some time in the future, my father will retire, at which point he will have the option to sell his shares or to remain a silent partner in the business.

The new fruit and nuts packaging line that is being proposed is only one of many expansions in the future. However, it is felt that the best approach to the expansion is to accomplish one task at a time and to do that well before moving on to the next one. The best approach is to do what is familiar and attainable, using assets that are already on-hand before expanding into new realms. This has been the sustaining philosophy of the business from its early beginnings.

Marketing

Marketing will be the key to a successful business transition. It does little good to produce a product without the customer. Farm products marketing differs from packaged product marketing and represents a change in traditional lines of operation. In the past, marketing of fresh produce followed traditional commodity lines. The farm had a list of customers that carried farm produce and these clients placed weekly orders that were custom harvested and delivered to meet the client's needs. Any product that was left over would be taken to the local commodity auction and sold in this fashion.

This form of marketing and production will still be utilized by the fresh produce division of the company. However, rather than the mainstay of the operation, it will represent only 1/3 of the total revenue producing capabilities. It will help to defray operating costs in the other division through the first year. Production facilities will begin operations in late spring, as early berries come into production. It will shift product lines, as they become available. Established plantings of strawberries, blueberries, raspberries, apples, peaches, plums, and pears have been producing for many years and are managed to maintain peak production though proper pruning and fertilization techniques. This is a considerable advantage over a new operation that would have to wait for years until their plants began production.

The fresh produce market is used to seasonal shifts in production. However, the ability to dry, vacuum package and store produce will provide opportunities for sales beyond the production season. Packaged food represents a new market and a new way of marketing. Therefore, the bulk of the marketing research will concentrate on the sales of new product lines of packaged foods. The following outlines the plan for the marketing of new product lines.

What is your race?

Promera Inc. intends to offer a new line of packaged fruit and nut products that will be available in your local stores soon. The products will be organic, dried fruit and nut combinations in convenient snack packages. The products will be preservative free and will be grown according to nationally accepted organic standards. The following question are intended to explore your thoughts about these products and the likelihood that you would purchase them for you or your family.

How many days per week do you or your family consume fresh fruits and vegetables?

How many times per week do you or your family consume prepackaged dried fruit, or products containing dried fruit?

How important is it to you that your food contain no preservative and originates from the most natural source possible?

Would you like to see more healthy snack choices for your children?

What price would you be willing to pay for a product that is organic, made from premium quality dried fruits and nuts, and other natural ingredients?

How likely would you be to purchase a product such as has been described?

How many times per week do you foresee purchasing such as product?

All indications demonstrate a healthy and growing market for the newly proposed products. There are several competitor products on the market, made by national chains, such as Dole, Proctor and Gamble, and other companies that may pose potential competition. However, many of these products do not advertise as organic and contain preservatives and chemical used to grow the crops. This group of products is not considered to be competitive, as they are not considered to be the same market.

Promera products will be targeted towards a niche with in the general population, This niche market is adamant about the source of their food and their environment. They indicated that they would be willing to pay a slightly higher price than they would for similar products that were not organic. The targeted market emphasizes quality over cost.

The trends discovered during this market research are similar to those found by national survey results in the Journal of Nutrition Education and Behavior. This study was a follow up to a 2001 study conducted by the National Cancer Institute that found African male of 36 years and older were the worst consumers of daily requirements of fruits and vegetables. This study decided to use this sample population as the demographic against which to measure trends. The reasoning behind the study was that improvement in this group would be the best indicator of improved fruit and vegetable consumption in the remainder of the population.

The study found that African-American men had improved their consumption of fruits and vegetables, as compared to the same study conducted in 2001 (Moser et al., p. 313). This study indicated that increased consumption was due to successful communication of the benefits of eating them (Moser et al., p. 313). This study indicates strong market growth in the most difficult demographic group to convince. if, as these researchers surmise, this trend indicates even larger growth in other demographic groups, the market potential discovered during the preliminary market survey is large and getting larger.

Initial marketing efforts will be targeted towards an upper end demographic. However, there ar also indications that fruit and vegetable intake is increasing among low income Americans as well (Sisson, p.5). The role of public health officials is a key reason behind the trends found in many of the demographic groups explored in the course of this study (Richards & Patterson, p. 21). This study indicated that if consumers are given the choice of high quality produce over other cheaper alternatives, they will chose the high quality produce as a result of national campaigns promoting the health benefits of consumption (Richards & Patterson, p. 21).

The ultimate question of the marketing survey is whether the consumer would actually make a purchase of the product. The Potential market is over $1 million dollars nationally. However, Promera Inc., is a relatively small producer. However, the company is located near a major metropolitan area that is famous for healthy lifestyle and the demographic that is likely to make the final purchase. There is expansion potential in the future to different areas of the country, but for now the effort will remain local, concentrating the potential that lies in the Los Angels and Bay areas. It is expected that as production increases in the first several years that sales could total in the neighborhood of $500,000 with the business in its beginning stages.

Promera products will be distributed to customers through retail grocery shops in the local area. The grocery stores will purchase the products at a wholesale price and will offer them to customers at retail prices. In addition to the end retail customers, there are also potential customers in schools, public offices, and in vending machines as a healthy alternative to the normal non-nutritive choices in these areas. Promera snack sized products would make healthy additions to school lunches. There are many potential clients, aside from the retail customer base.

Competition Analysis

It is important to understand the segmentation in the fruit snacks market. The market grew from concerns that there were no healthy choices for snacks. There are several major corporations that have fruit snacks on the market, such as Kellogg's (Kellogg's.com). However, the first ingredient in these fruit snacks is high fructose corn syrup (Kellogg's.com). Consumers are savvy and understand that this is nothing more than the sugary snacks that they protested, leading to the development of Promera's production line. Although these products are mainstream, they are not targeted towards the same savvy demographic of educated, high-end consumers.

Welch's makes similar products, including dried fruit. They promote concern for environmental issues such as animal testing and a need for all natural products (Welch's.com). They are developing a line of products that are organic, which may pose potential competition. However, their marketing is targeted towards the mass supermarket consumer. Promera's products will be associated with specialty healthy shops and groceries, such as Erewhon Natural Food Market in Los Angeles (local.yahoo.som). There are 553 specialty health food stores in southern California with a majority located in the Los Angeles area (local.yahoo.com).

Major competitors, such as Welch's do not meet the criteria for gaining access to the specialty organic market in the California area. Competition is more likely to stem from local fruit snack producers that are similar in size to Promera. The existence of many small companies that have recently sprang up indicates that this market is growing and healthy. The key to success will be differentiate Promera's products from other local competition.

Promera's prime concern will be companies that are already established in the market. These companies will pose the greatest threat to success. However, the size of the market is enormous and there is room for overall market growth. There are new customers adopting a healthier lifestyle every day, particularly as the government continues to promote consumption of healthier snacks. Consumers are used to only a few similar specialty snacks on the shelf, and will be receptive to trying new flavor combinations. Promera's products will be taste tested extensively prior to market entrance. They will be perfected so that the general population of health food consumers thinks they are excellent in quality.

Promera will use already established brand equity and consumer trust from the fresh produce operation to leverage consumer trust in these new markets. Each product introduction will be test marketed to ensure consumer acceptance. The key will be to associate Promera products with excellence and taste, in addition to the healthy alternative that they represent.

Product promotion will begin with existing clients for the fresh market, perhaps offering them a few samples along with their regular orders. Wholesale prices will be comparable to other products, but the retailer will have the incentive of pricing the product on the high end to attract a more lucrative income base. Costs per unit will be precisely calculated to ensure that profit will be realized. Product promotion will begin as soon as test product is available to market, which is typically at the end of spring or early summer.

Location of the Facility

The facility will be located on the existing property and will be housed in an unused block building. Funds will be used for the renovation and equipping of this building. Products will be produce in this building and will be loaded into trucks for delivery. No customers will occupy the premises. The only occupants of the building will be employees and inspectors. The farm already has the necessary zoning classification and will not need to obtain variances to begin operations at the facility.

The facility has access to essential roads. Once constructed the building will not incur any additional rent or mortgage expenses, as it is already owned by the farm. The building is in need of paint and general repair in order to present the best image and pass inspection to begin operations. Funds from this loan will be used for this purpose. The building is within an 8' chain-link fenced area with a gravel area surrounding it for loading and unloading purposes. It was once a warehouse, and already has docks for loading. It is an excellent location for production operations, once the building has been properly renovated and revitalized for intended operations.

Sales Forecast Estimates

The follow represent conservative sales estimates for the first year of operation. The first part of the year will be used to get the building and production ready. Employees, contractors and others involved in the renovation will be compensated from the proceeds of the loan and profits retained from fresh produce operations in the previous years in anticipation of the expansion.

Sales Forecasts for the first year of operation

Jan

Feb

Mar

Apr

May

Jun

Total Revenues from Sales

No Production

10,000 in sales

20,000 in sales

Jul

Aug

Sep

Oct

Nov

Dec

Total Revenues from Sales

40,000 in sales

50,000 in sales

30,000 in sales

10,000 in sales

10, 000 in sales

As one can see, these estimates provide ample funds once it is operational. However, at the current time, there is not sufficient funds available to accomplish these tasks.

Accounting

Estimates of first year operations will take into account the seasonality of available crops for production. The most important factor in realizing the growth of Promera is the ability to obtain suitable financing. The new building is vital to the ability of the company to realize profit by the production of high-end products for a lucrative market. All estimates and accounting data are conservative and represent the worst case scenario.

Profits from current operations will be used to generate cash flow until production becomes fully operational. There are certain risks to any business that may not be foreseeable that could affect the accuracy of these estimates. Some of these events may include unusual weather fluctuations, downturns in the economy that hurt sales of high end products, and the entrance of competition into the marketplace. These estimates cannot take into account all circumstances, but they are considered to have a buffer to allow for unforeseeable events.

Pro- Forma Income Statement

Combined Division Sales

Direct Costs of Goods

Cost of Goods Sold

Gross Margin

Expenses

Payroll

Sales / Marketing

Depreciation (Building and Equipment)

Utilities

CA Payroll Taxes

Total Operating Expenses

Profit Before Interest and Taxes

EBITDA

Assumed Interest Expense

Taxes

Net Profit

Net Profit/Sales

Financial Analysis

The following tables represent the company's ability to maintain sufficient cash flow for operations during the start up phase and for the first three years of operations. These statements are estimates and are based on marketing research projections and the experience of the managers. There may be circumstances that may affect these figures, but it is expected that they are accurate representations of the abilities of this company.

Pro-Forma Cash Flow

Cash Receipts

Cash Sales

Subtotal Cash from Operations

Subtotal Cash Received

Expenditures

Expenditures from Operations

Cash Spending

Bill Payments

Subtotal Spent on Operations

Additional Cash Spent

Long-term Liabilities Principal Repayment

Current Assets

Purchase Long-term Assets

Subtotal Cash Spent

Net Cash Flow

Cash Balance

Pro-Forma Balance Sheet

Assets

Current Assets

Cash

Other Current Assets

Total Current Assets

Long-term Assets

Accumulated Depreciation

Total Long-term Assets

Total Assets

Liabilities

Current Liabilities

Accounts Payable

Current Borrowing

Other Current Liabilities

Subtotal Current Liabilities

Long-term Liabilities

Total Liabilities

Paid-in Capital

Retained Earnings

Earnings

Total Capital

Total Liabilities and Capital

Net Worth

Break-even Analysis

Break even analysis is based on average first year figures for total sales of units, units produced, unit costs and projected operating expenses. These are conservative assumptions that represents a realistic picture of risk. It is expected that Promera will break even in its first month of operations in the new facility.

Conclusion

Promera Inc., is a new business that is based on expansion of a nearly century old family business. The proposed changed are in response to market changes and market demand. The amount of money requested is small, as compared to the demonstrated potential of the new enterprise. The company intends to use underutilized assets that are already in its possession. The building and trees are already a part of the farm. All they need is revitalized in order to recognize their full earning potential.

The success of Promera Inc. depends on the ability to run a more efficient operation. Allowing assets to remain underutilized does not represent best business practices and results in waste, rather than efficiency. Developing the potential that lies in untapped resources is the key to overcoming the affects of rising operational costs, including transportation. This loan makes sense and the best long-term interests of the company.

The health foods market will continue to grow. Promera Inc. has an advantage over competitors entering the market, as customers are already familiar with the logo and the products that it represents. Promera Inc. is a family operation filled with pride in the products that are produced. This commitment to quality and answering the needs of the market will be the key to success in the future.