This article was updated in August 2019.
Private equity investors are increasingly investing in food, beverage, and agribusiness companies, and for good reason. With record fundraising levels and the need to deploy capital—combined with high levels of innovation and rising demand for quality food internationally—it’s an opportune time for investment in this space.
Food, beverage, and agribusiness company owners stand to benefit from this scenario. Investor interest has driven company valuations to record multiples, and companies could have their pick of many suitors. Whether looking to accomplish business goals or to find an economically advantageous exit, companies can make significant gains from the financial capital that private equity investors can provide.
How can business owners make use of this opportunity? We asked Moss Adams partners Jeff Fey, who advises food and beverage companies, and Jeff Dieleman, who advises agribusiness clients, for their thoughts.
What’s unique about private equity investments in food, beverage, and agribusiness compared to other industries?
Fey: Depending on the company, there can be relatively greater exposure to seasonal cash flows given the reliance on annual harvests, particularly in the agribusiness and seafood spaces. There can also be vulnerability due to volatility in commodity costs. One other unique factor is the inherent risk around food safety and ongoing regulatory changes.
Dieleman: We also see a more global perspective when it comes to investing in agribusiness. To handle supply seasonality, diversifying across geographic regions can provide for year-round supply of agricultural products while also helping to mitigate the crop production risks related to catastrophic weather.
Are clients inquiring about private equity as a growth strategy, an exit strategy, or both?
Fey: Both—it depends on the life-cycle stage of the company and its current needs. A key factor has to do with the specific ownership group and if it’s looking for a liquidity event. Or, in the case of a family business, maybe there’s an opportunity to take some equity off the table or do a majority transition if there isn’t a viable succession plan.
Dieleman: From a private equity perspective, the agribusiness sector has been an area of underinvestment. Now, with more private equity coming into the space, we’re seeing new channels for investment and exit opportunities. Traditional investment arrangements are being supplemented with new creative structures that can accommodate both sales and investments.
From a seller’s perspective, will a private equity firm be interested in investing in them if it’s a smaller company as opposed to one in the middle market?
Fey: There’s been an increasing level of interest in the lower middle market, especially if the company is a strategic fit with another platform company of the private equity firm. We’re also seeing earlier interest in companies with strong brands, high growth rates, and a scalable business model.
Dieleman: Private equity investors are interested in integration and value development. This often entails developing a vertical organization consisting of production, processing, and branded sales. This means investors buy companies at different links in the same supply chain and merge them together. Even a relatively small operation can be acquired if there’s strategic value in the roll-up to the vertical operation as a whole.
During the due diligence phase, what are some “deal killers” you’ve encountered?
Fey: Probably the most common challenge would be the company missing a forecast or a significant downward adjustment during the diligence phase. Discovering a high level of customer concentration and manufacturing or sourcing issues also presents complications. These issues might not kill the deal but will likely result in a renegotiation of the purchase price.
Dieleman: Surprises. The due diligence phase should be a confirmation of what you think you already know. Uncovering surprises during this this time means the seller wasn’t portraying the facts accurately, or they were merely unaware. Neither scenario is particularly beneficial to the seller and can cause the investor to reconsider the deal, compromising the whole transaction.
What steps can companies take to prepare and position themselves for a transaction with a private equity firm—for example, as a candidate for private equity ownership?
Fey: If a company is contemplating any sort of equity transaction—whether with a strategic or a private equity buyer, or even a recapitalization—it should make sure to have its internal house in order. This includes a deep-down internal assessment of not only its financial records but also IT systems, human resources practices, and manufacturing operations. Anticipate that all buyers will be highly sophisticated and will uncover any weaknesses in your operations. It’s best to get out in front of them ahead of time.
Dieleman: The opportunities for investment in food and agribusiness are often a little smaller and perhaps earlier stage than what private equity typically invests in. To draw an investor’s attention, a company must articulate how a small opportunity, combined with an infusion of capital or additional investments, can translate into a larger opportunity for the investor.
Once interest is obtained, be sure to understand the financial metrics that buyers are evaluating to gauge the health and fit of your company with their portfolio. What are the working capital needs? What’s the profile of the customer base and product margins? These are just a couple of the questions to ask. Consider hiring an investment banker to help you perform sell-side due diligence before a buyer comes in. This will help identify areas of weakness that could be used as negotiating points to reduce the company’s purchase price. To sum it up, understanding your company’s financials inside and out and being able to present and articulate that financial picture are important considerations for dealing with potential investors.
There are a lot of private equity firms out there. What advice would you give a business owner to find a good fit, beyond looking for a private equity firm with industry expertise?
Fey: I think it’s important to understand the private equity firm’s culture and how it aligns with your company’s. Do your own diligence and reach out to former owners or CEOs from the firm’s other portfolio companies to learn about their experience with the firm and what to expect after the transaction. Ask your trusted advisors, such as an attorney and CPA firm, to learn more about how the private equity firm operates.
Dieleman: As Fey mentions, culture alignment is critical. I also believe that you need to have a fundamental belief in the private equity firm’s strategy for your company’s growth and development. This is crucial as the new management team moves forward together.