Irshad Ahmed, is president and CEO of Pure Energy Corp. in Paramus, N.J. and a member of the MIT EMBA class of 2012.
There are major changes happening in the biofuel industry. Public policy is aggressively attempting to shift our dependence away from nonrenewable energy sources. Our country’s goal is to produce and consume 36 billion gallons of biofuel by 2022 in order to decrease our usage of gasoline and diesel fuels. In other words, about 25% of our transportation liquid fuels need to come from renewable energy resources in the next 10 years.
While this is a huge and daunting challenge, it’s a great one to have and I’ve been applying my knowledge from MIT Sloan’s EMBA program to help my company lead the way in this area.
A New Business Model
I’m now looking at the biofuel industry through a new lens, and as a result have completely changed my company’s business model to focus on consolidation. The biofuel industry is currently made up of very small-capacity facilities, which are more like mom and pop operations so they are fragmented, don’t perform well without economies of scale, and lack the ability to do business with major oil companies like Exxon-Mobil, Shell and Chevron.
There is value in these small facilities, but they aren’t able to capture that value on their own. Consolidation is long overdue in this industry. We need to bundle these small plants together to instill management discipline and attract the large capital necessary to make them run efficiently and give them the leverage to deal with major oil companies.
Understand Systems dynamics
On its face, it looks like there is no way the biofuel industry could rise to the challenge of adding two-billion gallon capacity each year for the next 10 years. After all, it took 30 years just to build a 15-billion gallon capacity. But if you look at it through the lens of systems dynamics, you see that as adoption takes place, the amount of free capital that becomes relevant to the industry doubles each year. That is an important insight; without it, I would not have the confidence to pursue our consolidation plan.
Growing the Pieces of the Pie
So far, we have negotiated with 12 small biodiesel plant owners and have the option to acquire seven under our company’s umbrella. The amazing thing is that I didn’t have to raise more than $20 million to execute this because plant owners recognize the value we’re trying to create and capture by creating a larger platform. By merging their 8-million gallon plant with others to form a consolidated 160-million gallon capacity, they’ll be part of a larger company that has contracts with big customers like Shell and Exxon. We also can take our large platform to producers of raw materials and negotiate better prices. Plant owners see that their small part of the pie stands to significantly grow through an consolidation model, which will achieve economies of scale without building larger plants.
Maximizing Value at the Negotiating Table
Before coming to MIT, I would have entered a negotiation with the commonly held belief that I’m there to maximize value for myself and my team. This isn’t true, and you can actually cause a worse outcome with that philosophy.
Instead, the best deal you can cut is to maximize value for everyone at the table, and by doing that you will maximize your own value while simultaneously building relationships that will be beneficial for years to come. This concept, the Pareto Frontier, is taught by Prof. Jared Curhan in negotiation at MIT Sloan, and helps maximize your outcomes at the negotiating table.
An example of how this works can be seen in a recent negotiation I conducted with a plant on the West Coast. The 8-million gallon plant had been struggling and was in so much debt that it didn’t make sense for it to continue to operate. They were dead in the water so to speak. I could have walked into the room and said: You owe $7.5 million so here’s a check for $7.5 million. That probably would have completed the deal.
Instead, I saw that there was a different deal I could offer that would be more beneficial and will create more value to all parties. So instead, I offered to:
- take responsibility for their debt
- write them a check for $1.5 million
- let them earn back a percentage ownership up to 49% of the plant if they operate the plant at an acceptable capacity
My offer was based on one condition: Their entire team had to stay on to operate the plant.
Why did I do this? With this deal, I only had to write a check for $1.5 million (as opposed to $7.5 million) and take over their loan payments. In exchange, they felt like they got a second lease on life, and the equity option gives them a huge incentive to bring their plant back to health. And by keeping their team intact, we don’t have any costly down time from trying to find replacements and provide training. Everyone comes out feeling like a winner. If we apply that lesson with each plant going forward, not only will we make more money, but we’ll capture much more value. And that is not just for me, but also for my shareholders.
How do you find and capture value for your organization?