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Sunday, 26 May 2013 22:00

SIDE BET: SW Mich. tribe targets manufacturers, other industries in diversification push

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Accu-Mold President Dave Martin, right, sold his manufacturing and engineering company to Mno-Bmadsen, the business development arm of the Pokagon Band of Potawatomi that’s led by Troy Clay, left. The tribe formed Mno-Bmadsen to start diversifying its economy from being so heavily tied to the gaming industry, Clay said. Accu-Mold President Dave Martin, right, sold his manufacturing and engineering company to Mno-Bmadsen, the business development arm of the Pokagon Band of Potawatomi that’s led by Troy Clay, left. The tribe formed Mno-Bmadsen to start diversifying its economy from being so heavily tied to the gaming industry, Clay said. PHOTO: JOHN LACKO

Borrowing a page from Warren Buffett’s playbook, the Pokagon Band of Potawatomi tribe is redirecting money from its highly successful Four Winds Casinos into brick-and-mortar businesses outside of gambling to build its sovereign nation into an economic powerhouse.

With fewer than 5,000 people spread throughout 10 counties in Southwest Michigan and northern Indiana, the Pokagon Band is looking ahead to the time when an oversaturation of casinos here could choke off the steady revenue it has been enjoying recently.

To make that transition, the Pokagon Band has created its Mno-Bmadsen development arm whose name aptly means “walking the good path” in the tribe’s language. The group’s mission is to “enhance the economic self-determination of our tribe through means which respect our heritage and values,” said Troy Clay, president and CEO of the organization and a member of the tribe.

The tribe plans to invest millions in business ventures by mimicking Buffett’s long-term hold strategy in investments. The goals of Mno-Bmadsen are clear: invest slowly and surely in companies that fit its investment criteria and that can offer its members good paying, skilled jobs.

William Largent, president of Farmington Hills, Mich.-based Tribal Resource Group, credits the Pokagon Band for thinking ahead. The sustainability argument is “not universally understood by tribal citizens” elsewhere in the U.S., Largent said.

“They need to diversify to be sustainable, but most are content to let the casino do it all,” Largent said. Some tribal members still think about casinos like their ancestors did when they thought that “the buffalo will always be here.”

First up in Mno-Bmadsen’s strategy was the acquisition of a Portage-based manufacturing and engineering firm Accu-Mold LLC. Now the tribe hopes to construct a landfill gas-to-energy project to power its casino in New Buffalo and to build a gas station/convenience store in Dowagiac to serve visitors to its newest Four Winds Casino, which opened earlier this year.

“We have a huge opportunity,” Clay said of the tribe’s diversification strategy. “Our biggest challenge, frankly, is keeping ourselves in check so that that excitement doesn’t turn into a hasty decision.”

The acquisition of Accu-Mold, a diversified plastics engineering and tooling company serving the medical device, oil and gas, automotive, and other industries, was the group’s first deal for a commercial business outside of the tribe.

“I’ve been waiting for a decade for tribes to get interested in non-gaming businesses,” said Fred Schubkegel, a partner at Varnum LLP in Kalamazoo specializing in American Indian law. “The Pokagons are having success because they’re set up to move at the speed of business.”

Acquiring Accu-Mold, which employs 18 people and had annual revenues around $4 million last year, was “a very intensive, 6-month process,” Clay said.

After 36 years, Dave Martin, 56, the founder and president of Accu-Mold, had just started succession planning and told Southwest Michigan First that he was looking for someone to take an ownership stake in the company and eventually buy him out.

“I was getting to the point where either I was going to have to add some staff to help me or add a partner,” Martin said. “When you start getting into that $4-5 million (range), it’s hard to have a family-run business. You need to have some infrastructure and organization.”

Last year, Southwest Michigan First connected Martin with Mno-Bmadsen about working on some of Martin’s undeveloped products. But when Mno-Bmadsen heard Martin was looking at long-term planning, the two parties started a discussion that led up to the acquisition in December.

“Quite honestly, it was a little sooner than I thought,” Martin said of selling his business. “It was one of those things: Do I take the bird in the hand now, or wait five years and decide what do I do with this business.

“But they didn’t have any of their own management staff, nor did they want to. They wanted and needed to keep me. So I sold them my stock, and it’s been a wonderful marriage. They really have a long-term view. They want to be a good community partner. They want to invest in the business and grow it organically and they want to do it with the management that’s in place now.”

Acquisition strategy

The acquisition of Accu-Mold fits within Mno-Bmadsen’s strategic plan it developed in 2010. Mno-Bmadsen is organized as a holding company that’s currently funded by the Pokagon Band’s tribal council, the chief governing body for the 4,700-member sovereign nation whose federal service area includes Berrien, Cass, Van Buren and Allegan counties in Southwest Michigan and six counties in northwest Indiana. The council approves acquisitions that are vetted by Mno-Bmadsen and its board of directors.

Mno-Bmadsen’s business model focuses on:

  • acquiring commercial companies.
  • capturing tribal spending by stopping the leakage of business activity to non-tribal entities. Clay said the tribe and its three casinos spends millions of dollars per year on products and services with non-tribally owned companies. “We can’t do everything … but we can find niches … and try to route that money back into the tribe,” he said. “We’re just starting to get into that analysis this year.”
  • maximizing the return on tribal lands set aside for commercial use. The tribe could look to move the companies it acquires to these lands, or open the lands up for commercial development. Non-tribally owned companies that locate on tribal lands can forego paying property taxes, for example.

“The best projects are ones where we’re aligning all (the criteria) together on the tribal property,” Clay said, noting that the tribe also prioritizes taking advantage of its tribal sovereignty. As a sovereign nation, the tribe is tax-exempt and has its own statutes and regulations, but must follow federal law. Tribally owned firms are also exempt from state and federal income taxes.

After developing investment criteria with the help of a Chicago-based private equity consultant, the tribe decided to look for profitable companies that have a strong management team willing to continue to run the company, like Martin at Accu-Mold.

“With Dave at Accu-Mold, he’s now the president. We want him there,” Clay said. “We don’t want to go in and unstabilize the company. There’s nothing worse than going in and changing a bunch of stuff, particularly the manager. That’s a good way to go broke.”

The group’s target industries include alternative and renewable energy, health care and medical devices, light manufacturing, green-related sectors, information technology, gaming supplies, food production, government contracting and real estate. It also planned to focus its efforts just on firms located in Michigan or contiguous states.

In identifying manufacturing as a strategic target, Mno-Bmadsen took into account the sector’s rebound in the last few years, Clay said. The surviving companies are generally the ones “doing manufacturing the right way” that have focused on quality and flexibility and are solutions-oriented, he said.

Mno-Bmadsen generally seeks to invest $2 million to $3 million per deal, with a $1 million floor and a $5 million maximum, including add-ons. Clay said the organization plans to self-finance its acquisitions, although it would consider bank financing and seller financing.

The budget for acquisitions is “in the low millions,” he said, noting he seeks funding from the tribal council on a case-by-case or project basis.

The tribe’s acquisition strategy also offers a new tool economic developers can use to help preserve the local ownership of companies and “to bring capital to projects,” said Tim Terrentine, a vice president at Southwest Michigan First.

“We hope to repeat (the Accu-Mold acquisition) several times over,” Terrentine said. “A lot of company owners are within decade of retirement, and we want to find ways to make those investments stay local.”

Stick to the plan

Mno-Bmadsen’s current portfolio includes Accu-Mold and Seven Generations Architecture & Engineering LLC (7GenAE) in Benton Harbor, a startup it launched last year. The organization also includes M-B Development LLC, a non-staffed real estate acquisition company.

After the Accu-Mold acquisition last year, Mno-Bmadsen hopes to do one or two deals per year, Clay said. However, the group will be busy this year with the gas station facility in Dowagiac and the Forest Lawn landfill gas-to-energy project near its New Buffalo casino.

The gas-to-energy project also fulfills the goal of leveraging tribal sovereignty because the tribe and its partners can operate in a more friendly business environment, Clay said. While it must always follow federal law, the tribe is not subject to state regulations and permitting.

“This minimizes the cost and time that goes into the project,” he said. “We don’t pay taxes, so those taxes that would otherwise go to the business income side we can drop right to the bottom line. We can route that into business development or pumping up that company.”

While Mno-Bmadsen started 7GenAE from scratch, the tribe does not want to get involved in funding startups.

“Looking at the tribal spend, we have a lot of projects going on continuously as the tribe grows,” Clay said. “We figured we could get our foot in the door (with the company).”

The architecture and engineering firm is also pursuing disadvantaged minority business certification through the U.S. Small Business Administration’s 8(a) Business Development Program, which offers access to federal set-aside contracts.

Apart from startups and pre-launch business ideas and companies outside of the targeted geographic areas, Mno-Bmadsen also avoids investing in unprofitable businesses in need of a turnaround; companies without management; research and development, capital-intensive or highly regulated firms; gaming, except in the supply chain; development deals such as real estate, movies or oil and gas exploration; high-tech firms in life sciences, bio-med or biotech fields; and syndicated deals in which the tribe has no control over the company.

Borrowing best practices

In creating Mno-Bmadsen, the Pokagon Band of Potawatomi pulled from tribal best practices across the country, especially those following the model outlined by the Harvard Project on American Indian Economic Development, Clay said.

The Harvard project came about as some forward-thinking tribal leaders realized that they needed to be proactive in securing their own economic futures outside of casinos, said Tribal Resource Group’s Largent, who previously served as national director of the SBA’s Office of Native American Affairs.

One key recommendation from the Harvard Project, started by two Harvard University professors in 1987, was for tribes to separate their tribal governments from their enterprise management.

The issue: Many tribes have fallen victim to the “politics of plenty,” Largent told MiBiz.

“There’s no business model in the world like the gaming industry,” he said. “It outstrips any other legal business you could be in. But when you go from nothing to excess, you see a changing of attitudes and opinions.”

That drastic change of fortune brings with it many cultural challenges for tribal governments. Some tribal citizens see the gaming revenues as their own and demand that their councils distribute the funds back to the members rather than invest all or a portion of that money into self-sufficiency measures such as business development, Largent said. The tribal councils are therefore often volatile organizations with a revolving door of leadership, he added.

“That prevents the tribes from developing strategic plans. It’s unfortunate,” Largent said.

Many of the tribes that have been able to do that planning, including the Pokagon Band, have emulated the example of the Winnebago, Neb.-based Ho-Chunk Inc.

About two decades ago, the Winnebago or Ho-Chunk Tribe saw that gaming competition from nearby riverboat gambling would reduce its balance sheet by 80 percent. In 1994, the tribe created Ho-Chunk Inc. as its economic development arm to help it diversify away from tribal gaming by developing a diversified portfolio of companies and providing opportunities for its tribal members. Today, Ho-Chunk generates more than $250 million in annual revenues from more than two-dozen subsidiaries that operate in 16 states and eight foreign countries.

The biggest driver toward a sustainable diversification strategy is increased competition and reduced revenue streams for the tribes, Largent said. A secondary driver is that they want to create broad-based employment opportunities for citizens of the tribes, whose members want more options than just a casino.

It’s also a model that Largent plans to pursue with the Sac & Fox Tribe in central Iowa. The tribe’s business development arm, Meskwaki Inc. of Tama, Iowa, hired Largent last year to serve as its president and CEO, although he’s a member of Michigan’s Keweenaw Bay Indian Community.

Largent commutes from Michigan to Iowa for the position.

A Warren Buffett culture

Michigan has also seen more competition for casino gaming. All 12 of the state’s federally recognized tribes currently offer gaming in Michigan, which has 23 tribal casinos with more than 23,000 slot machines. That compares to 17 casinos operated by seven tribes in 1996. In addition, three non-tribal casinos have since opened in Detroit.

That increased pressure has tribes like the Pokagon Band looking for other business development opportunities.

While the tribe’s finances are closely held, it generated a net win of more than $334 million from slot machines at its two casinos that were open in the 2012 fiscal year. The tribe pays out 2 percent of its net win on slot machines — defined as the total amount wagered minus the amount paid to players — to local revenue sharing boards. For 2012, the tribe contributed nearly $6.7 million in local revenue sharing.

The extent of the tribe’s overall profitability — through its gaming and non-gaming ventures — opens up new opportunities for diversification, Clay said.

“Everything we’re doing is about diversification. We’re doing things that have a short-term effect, but on a long-term basis, we’re going to have kids that are going to have access to job opportunities and career opportunities where the barriers of getting into those jobs would have been a lot different,” Clay said. “We want our kids and our people to start getting into the pipeline as someone retires and the company grows. We want our people trained and available.”

While Mno-Bmadsen doesn’t discourage business owners from reaching out to the organization, “it works better when we go out and seek deals,” Clay said. “It’s not that somebody can’t come to us. But it’s going to be much more successful when you put a plan together and you execute that and you have control over where you’re going. The dangerous situation is where people have some cash … and they sit back and wait for someone to come along and make them a good pitch. We’ve really tried to take the bull by the horns and get ahead of the game.”

In executing its plan to buy established companies like Accu-Mold, Mno-Bmadsen wants to position those opportunities for the long run, rather than take the much riskier investment of starting up its own businesses, Clay said.

“The next milestone is getting to a point where we are fully self-sufficient. The successful economic development program gets there. If you’re always subsidized, then you’re a government program and that’s not what we are,” Clay said.

Ideally, Mno-Bmadsen’s portfolio of companies is generating a return on the tribe’s investment and the organization can “continue to invest.”

That’s exactly the plan for Accu-Mold, where Martin said the tribe is willing to invest “10 times” the equity he had available as a private owner with limited resources.

“They don’t necessarily want to have income, they want to build the equity in the company. They’re at a tremendous advantage just from their equity position,” Martin said. “We’re putting together long-term plans now for technology improvements and human resource training — probably triple of what I would have been able to do.

“Mno also has (what) I call the Warren Buffett culture: invest and hold, do good things, invest in the right things, and grow slowly and methodically. That was the main thing that I liked about them. They were very real.”

Clay said the tribe’s diversification efforts like the investment in Accu-Mold are about planting the seeds for future economic benefit. As the company grows, it might need to outsource to other companies, perhaps one that could be located in Dowagiac and provide even more job opportunities for tribal members and the broader community, he said.

“But this also includes making capital work,” Clay said. “At some point, we see providing a stream of income back to the tribe as well.”

 

Sidebar: Targeted and avoided industries

Through its business development arm, the Pokagon Band of Potawatomi is executing an economic diversification strategy that includes acquiring companies in the following industries:

  • Light manufatcuring
  • Alternative and renewable energy
  • Health care and medical devices
  • Green-related sectors
  • Information technology
  • Gaming supplies and gaming hospitality
  • Food production
  • Government contracting
  • Real estate

The Pokagon Band and Mno-Bmadsen will not consider deals in the following industries:

  • Startups and pre-launch business ideas
  • Companies outside of Michigan and contiguous states
  • Unprofitable businesses in need of a turnaround
  • Companies without management
  • Research and development, capital-intensive or highly regulated firms
  • Gaming, except in the supply chain
  • Development deals such as real estate, movies or oil and gas exploration
  • High-tech firms in life sciences, bio-med or biotech fields
  • Syndicated deals in which the tribe has no control over the company

SOURCE: MNO-BMADSEN

Read 4118 times Last modified on Tuesday, 28 May 2013 08:32
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