7 top tips for Food and Beverage brands preparing for Private Equity investment
Having survived the pandemic, many companies in the Food & Beverage (F&B) sector, including those that have been able to adapt their business models and focus to the new landscape, are now focusing on further growth opportunities. Specifically, they are looking for private equity (PE) investment to support this growth, often with the benefit of investors contributing their expertise and contacts, as well as providing capital. In this article we explore 7 top tips for F&B brands who are preparing for a private equity investment.
Private equity activity has been increasing year on year since 2009 in the F&B sector, and in 2021 made up 42% of all F&B deals that year. The trend of year-on-year growth in PE investment in this sector is likely to continue.
There are a number of factors that make the F&B sector attractive to PE investors.These include decreased competition from trade buyers who may be waiting for the dust to settle from the pandemic’s turbulence; the increase in consumer demand for a wider variety of F&B products following the re-shaping of consumer behaviour and advances in food tech in the recent years; and the ubiquity of emerging brands and early-stage disruptors in this sector.
As is often said, the “three Ps” are key: prior preparation and planning. Planning and preparing for investment into your F&B business in advance of entertaining discussions with private equity houses will stand you in good stead, by helping you to make an informed choice and avoiding some of the key pitfalls in this process.
Know what you want.
Not all PE houses are the same – whilst some of the larger PE houses invest across a range of sectors, a number of PE houses are sector-specific. Some are more involved in key decisions around the management of the business whilst others have a more hands-off approach. Consider your business – what does it need? This could be either operational or strategic advice and support or connections in a particular market – or both. Before seeking PE investment, it is sensible to think about your business’s objectives and how a PE investor can help you to achieve those objectives. Consider whether you are seeking a PE house that specialises in investing in the F&B sector and is therefore more likely to know this space well, or whether you are open to investment from PE houses which are sector agnostic and therefore may focus on a variety of sectors, rather than primarily on F&B.
Get to know the investor.
In our opinion, taking PE investment is more than just an injection of cash into your business. It is also about their skills and ability to work alongside you in a non-executive manner that can help develop your business and achieve the growth objectives that will be mutually agreed with the PE house. In our experience, there needs to be chemistry in the relationship and your goals and culture should ideally be aligned to ensure a good working relationship. Therefore, it is important to consider the PE house’s ethos and culture, and approach to their portfolio company management. For instance, perhaps it would be of benefit to see whether the PE house is open to you speaking to other management teams that they have invested in, allowing you to get a sense of their experience.
Implement a clearly defined management structure...
...in which each person in your management team knows their roles and responsibilities and carries them out well. PE houses are investing in management as much as the business proposition, since it is management that runs the day-to-day of the business, and who will implement the growth plan. Having a strong and credible management team will help to give the PE house the confidence it needs to commit to the investment in the business. Part of the process will be for management to present to the PE house, and later in the process the PE house will conduct management due diligence/interviews. Ensuring you are well prepared for these will be key, and seeking external support in advance can be invaluable; helping you to hone your presentation and communication skills and ensuring that you are focusing on the right metrics that the PE house will be interested in.
Understand your financials.
The bottom line is that this is a numbers game, and PE houses are motivated by the opportunity to make a decent return and realise their investment in your business. They need to be able to rely on your numbers and forecasts, so be prepared for management presentations – and to be quizzed on these. If there are any discrepancies or areas where information is simply missing, seek to address these as soon as possible. Having a corporate finance adviser who is experienced in raising PE investment will also be helpful, as they can help present your business plan, information memorandum and forecasts in the best format, and will also stress test your numbers, assumptions, and potential weaknesses well in advance.
Ensure you are compliant.
Ensure you are running a tight ship.
Areas that may not have been a top priority when starting your business should be tidied up in preparation for PE investment. For example, employment contracts and policies, written trading contracts, distribution licences, and the company statutory registers. Do you have properly signed and dated/complete copies of these documents? Are these all up to date with the latest requirements, and do they reflect the latest arrangements you have with your employees, suppliers, customers, and shareholders? As mentioned above, a PE house will conduct due diligence into all these arrangements and documents. Collating this information and responding to queries where the information is not full and complete can be extremely time consuming. Preparing a data room in advance with the bulk of this information presented in a comprehensive and orderly fashion can help to alleviate the pressure of juggling an intensive and time-pressured due diligence exercise whilst having to run your business. In our experience, particularly where there is a small team tending to the due diligence exercise, we see a drop in the financial performance that is directly correlated to the management team’s time and attention being redirected to the due diligence exercise. This can, in turn, result in the PE house reconsidering and reducing the valuation for the investment.
Plan ahead for completion.
Typically, a special purpose acquisition vehicle (SPAV) will be set up to purchase your business, with the PE investor funding the SPAV and management rolling over/being issued with equity in the SPAV, though sometimes a direct investment may be made without a SPAV. We recommend considering prior to this whether there are any consents you might need to sell to the SPAV, or to receive the investment from the PE house. These could be shareholder consents or third-party consents (for example, if your supplier is entitled to terminate their arrangement with you on a change of control, or if you have an existing shareholders’ agreement that requires consent to issue shares). Should consents be required, or if co-operation of 3rd parties is needed, then you should ensure early in the process that these will be forthcoming, so that obtaining these consents does not cause a delay. If you have any debt funding security registered over your business, you ought to consider how this is going to be dealt with, particularly if the PE investment is likely to form a blend of debt and equity.
In summary, ensuring both your business and the management team are well prepared, with particular focus on these areas, will help the PE investment process run as smoothly and successfully as possible. If you would like to discuss preparing your business for investment in more detail, or if you would like legal assistance with an investment, please contact Rebecca Burford with any queries: firstname.lastname@example.org.