By Carol Frank and Craig Lawson
As many of you know who have been reading my APPA columns over the years, it’s a great time to sell a high quality pet business. However, selling your company will require about six to nine months of intense effort, so it’s vital to have your house in order beforehand.
The pet industry is a fast-growing, $60 billion sector that is evolving rapidly. As consumer preferences and trends continue to evolve, the space has caught the attention of both private equity and strategic investors (many of whom have excess cash on their balance sheet) and deal volume has surged. While the companies and situations in the pet space are varied, I’m almost always asked the same question by shareholders and management: “What does it take to sell my company?” The answer is both simple and complex. In a nutshell, we like to think of the ingredients for a successful sale in five broad categories.
People
Companies are a reflection of the people who work there; the more good people at your firm, the better. A great team will also make it easier to sell your company. But if you have a problem, like a management void or a bad employee, you’ll need to deal with it in advance of going to market. Otherwise, the new owner might address it in a manner you don’t like, or they might pay you less than you had anticipated for their share of the business.
We recently sold an organic food company that, while innovative and growing rapidly, was unprofitable and will require millions in future investment. While this dynamic would normally limit a company’s appeal, the founding management team was appealing on an absolute basis and relative to their competition. So, the buyers paid a highly attractive revenue multiple to partner with them.
Processes
Much like a house needs a strong foundation, your company must have infrastructure in place in the form of processes, controls (financial, credit and quality) and precedent. Buyers (strategic and financial) are almost always interested in growth, and without the structure (or processes) in place, growth is unsustainable, if not impossible. Infrastructure is needed to scale a business. Again, you can sell your business without the proper infrastructure, but if significant investment or a bulked up SG&A is needed and you’re relying on your new partner for this, they’ll pay less.
Additionally, there is a multiplier effect. If you’re selling your $2 million EBITDA company for $20 million (10x multiple), but the buyer views your SG&A as $500,000 a year below what’s needed (perhaps for a VP of sales and a new IT system), then your EBITDA on a pro forma or adjusted basis just declined to $1.5 million, and the purchase price decreased from $20 million to $15 million, if all is else equal.
Several years ago, we sold a leading branded consumer company that operated on a bare-bones budget; its cost structure helped it generate industry leading EBITDA margins. We anticipated that interested buyers would factor in an additional $1 million or more in SG&A to account for a CFO, a VP of international sales and a much needed upgrade of IT. Indeed, the buyer made this adjustment, and the deal closed uneventfully, because our client was expecting this reaction.
Reporting
The report card of any business is its financial statements. If you can’t explain what has been happening to your business, produce a real-time view of what is happening and articulate a view of the future through a budget or projections, you are unlikely to sell your business. The importance of accurately reported numbers is of paramount importance to a host of parties in a transaction: Buyers require them for gauging strategic fit, valuation, management talent and accretion/dilution; lenders require them for determining acquisition leverage levels and working capital lines; attorneys will reference them in transaction documents.
Performance
The better your company has performed historically and the better it continues to perform throughout the selling process, the better the chances of a sale at an attractive multiple. Performance not only encompasses absolute revenue, profit and associated margins, but it also speaks to non-financial metrics. For example, customer concentration—not uncommon in early stage companies or in more mature companies with a presence in large-format retailers—can suppress buyer interest, valuation and, in rare cases, kill a deal. SKU, salesperson or supplier concentration also can dampen interest. A history of innovation and a pipeline of fresh products are critical. It is important to buyers that there be plenty of growth opportunity left on the table when they take over.
Selling your company (whether a majority or minority stake) will require intense effort for about six to nine months. Maintaining your company’s performance, while at the same time undertaking what can feel like a second job dealing with transaction details, can try even the best of management teams. It’s vital to have your house in order (people, process, reporting) beforehand and retain advisors who know how to shepherd you through the process and across the finish line.
Timing
Markets move on supply and demand. Understand where your market is from a customer/consumer perspective and a merger and acquisition perspective. If demand outstrips supply—as it does right now with too much money chasing too few quality deals—you’ve got a good situation as a seller. And while you know your day-to-day business, you may not know the landscape regarding financial and strategic M&A appetite, lender leverage levels and/or the Wall Street IPO pipeline. A good investment banker will. Understand this and the macro environment; use it to your advantage.
We recently dealt with a company that sold an organic product for which supply was massively lower than demand. Because of this, big box retailers were not able to exert the usual leverage on vendors, and the company enjoyed outsized growth and margins. Will this supply-demand imbalance last forever? No. Is it better to sell now into that dynamic than wait? Unambiguously, yes. A lot underlies these five points, but awareness of them and addressing them should lead to an easier, more enjoyable and more successful transaction.
Carol Frank of Boulder, CO, is the founder of four companies in the pet industry and a Managing Director with BirdsEye Advisory Group, where she advises pet companies in M&A transactions and Exit Planning. She is a former CPA, has an MBA, is a Certified Mergers and Acquisitions Advisory (CM&AA) and holds Series 79 and 63 licenses. She highly values and incentivizes referrals and can be reached at cfrank@birdseyeadvisory.com.
Craig Lawson is a Managing Director at MHT Midspan and has over 20 years of sell-side and buy-side experience. He brings deep experience with consumer products and leads MHT Midspan’s Consumer/Retail industry practice. He has a particular focus on the pet space, having closed several deals over the past few year. Prior to co-founding MHT Midspan Partners, Craig served as a senior banker in the San Francisco office of Harris Williams & Co. Craig holds an MBA from The Wharton School at the University of Pennsylvania and graduated with a BA from Tufts.