Association of Food Industries

M&A Activity Continues in Pandemic

AFI Staff Report

For Brian Briggs, 2020 was a year of many interesting deals. Over the years, the mergers & acquisitions guru has been on both sides of the negotiating table. This year has been no different, and as CEO of National Foods, he helped the company through several impactful deals. “Good deals can always get done,” he said during a presentation at an October 2020 event.

Briggs said 6.3% of transactions in the food and beverage sector are in the ingredient or flavor space and more than 80% of those are acquisitions done by strategics. Another 12% are done by private equity firms that have been increasingly interested in the food and beverage industry. 

Briggs said ingredients firms often achieve a higher multiple than other companies in F&B, though many things must be present to drive higher-end multiples. First, he said, is scale – the pure number of dollars in revenue. Second is the market segment expertise, especially if the segment is on-trend. Third is whether organic growth is higher than the market. Next is the on-trend solutions, technology and capabilities of the business. Trends such as lower-sugar, better-for-you foods or convenience items are attractive. And finally, the customer base. If it’s disruptive or growing, it will achieve a higher multiple, he said.

Perhaps of equal importance, Briggs noted, was that the lack of these factors will naturally lead to a lower-end multiple. The impact the CEO/owner of the company has had on the success of the business is critical factor as well. It’s important, he said, to identify if relationships with key contacts are tied to the owner in particular? If so, the business may not be likely to operate at the same level without that person, he said. 

Briggs said today’s deal environment is different than in years past. COVID-19 slowed everything down for a time but he’s optimistic about the return to pre-COVID levels, both in new deals and the renewed progress in those that were under way before COVID hit. He said there were more generational change opportunities and some “true, strong-volume, high-quality deals in the flavor and ingredients segment.”

Briggs said although COVID-19 certainly impacted the acquisition arena, performance can still be reviewed, as well as revenue. Businesses, he said, can rely on EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) perhaps more easily in the F&B market than in others. He said the flavor and ingredients sector can offer real assets and revenue that are easy to measure. Because of COVID, he said “calculations are more in-depth.” Due diligence, he said, “is always a critical part of the deal but figuring in the effects of COVID increases this factor.” He said deals during COVID seem to be taking longer, as the time for permits and other governmental requirements are among things slowing the process for all. 

On whichever side of the deal one may be, Briggs advised preparation. “F&B deals are more sophisticated and as a seller, you have to have your information, data and reports in order. The more you have prepared, the more control you have over the narrative, making you stronger as a seller,” he said. 

After more than 30 deals during his career, from every angle of a negotiation table, Briggs is well-versed in all aspects of taking a business public or taking it private. He shared his “10 Lessons Learned” from this experience.

1. Really Understand What the Market Values
If the market values revenue growth, EBITDA or a specific customer base, that’s what the focus should be. Recognizing the importance of technology or geographic reach is vital and measuring one’s business model against what is valued is the equation to be sought. A self-assessment or one with the assistance of an investment banker will identify what gaps exist between where a firm is and where it wants to be in two-to-three years – plus the added steps to take to get there. 

2. Understand the Likely Exit Strategy
Who is buying this business? Will it be a strategic, as 80% of them are? And if so, what happens to the business value if the deal doesn’t go through? Is it a private equity firm or a public exit? An auction or a controlled event? 

3. Develop your Message
Briggs feels strongly that a seller must believe in its message. He said three to four points of value differentiation are important and they must be “clear and concise” in the offering book, without offering too many hypothetical possibilities. “Be open to the flaws in the business model and address them,” he said. “After all, they’re all going to come out in the due diligence process anyway.” 

4. Assemble the “A” Team!
Briggs stressed that this business deal is likely to be the major wealth event for the owner. “This is a time to rely on the experts,” he said, “including lawyers, advisers, accountants and tax and investment bankers.” He added that a deal such as this requires the key people to remain on board pre- and post-deal, so establishing some kind of reward for doing so is key.

5. Understand What the Business May Look Like Post-Deal
The post-deal environment should be identified in the agreement. Is the owner staying? If so, in what role? If not, is there other senior leadership in place to carry forward once the owner leaves? Briggs said to keep the expectations and post-deal deliverables clear.

6. Where Possible, Agree on a Value Range Up Front
Briggs said one of his pre-deal strategies is to ask the sellers to write down what they think their business is worth; what they would be willing to take for it? He then has them put it in a sealed envelope and references it only when the deal terms are threatening closure. He says this helps keep the emotions out of it and keeps some people from giving away their business or from getting greedy when the negotiations get steep.

7. Know Your Numbers
Historical financial data going back five years is a minimum, according to Briggs. He would also like to see three to five years in go-forward projections. If the numbers seem inflated, be prepared to give or seek reasons to believe they are accurate. Briggs added that it’s important to “clear the noise out of your numbers”, something he said included removing any revenue or expenses unique to current ownership. He said to “be prepared for tons of scrutiny”, especially on COVID-related claims. If numbers and models don’t hold up, it will be “tougher to recover from a big issue in financial due diligence. If there are warts, talk about the warts,” he cautioned. 

8. Realize You May Not be 100% Aligned with the Owner
Recognizing conflict between fiduciary duties and post-deal responsibilities is important, Briggs said. The buyer will hold the seller accountable to all that’s in that offering book, so be clear.

9. Post-Deal is When the Real Work Begins
Briggs is a believer in “real work.” He said once the deal closes “most of the help goes away.” Integration, planning and execution are more important to Briggs than the deal work. “To drive a successful integration, assign a senior executive to own the post-deal work, not a project manager,” Briggs said. Identify issues quickly and communicate them clearly, he added. 

10. Post-Deal Communication
For every employee of a business about to be sold, Briggs said, it comes down to the same thing: “What does this mean for me?” He recommended being consistent and communicative throughout. “Spending time with your people is the most important thing you can do” he said, “because ultimately, that’s what you just bought or just sold.”

Briggs said he has the battle scars to prove he’s made mistakes along the way. Although it can be difficult, he said, “there are a lot of great companies in the food and beverage space, combined with inexpensive money... there are some tremendous deals to be done out there.” But, as with every deal Briggs has worked on to date, he said, in order to find them, “there’s work to be done.”

Association of Food Industries: Serving the U.S. Food Import Trade Since 1906
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