Challenges faced during food company acquisitions

Just like any other industry, the food and beverage industry presents private equity firms with a handful of unique operational and transactional challenges. On the operational side, such challenges include the identification and retainment of key individuals, and understanding and capitalizing on growth opportunities. On the transaction side, increased competition and finding fair deals represent two of the biggest challenges facing private equity firms in today’s market.

During a recent panel discussion, select groups of private equity firms that have made recent investments in food and beverage companies gave their views on the middle-market food and beverage industry. The panelists included:

• Andy Unanue – Managing Director – AUA Private Equity Partners
• Ed Benford – Managing Director – Benford Capital Partners, LLC
• Chaoran Jin – Managing Director – Keystone Capital
• Meranee Phing – Partner – The Riverside Company

In an excerpt from Private equity craves specialty food companies, the panelists describe the operational and transactional challenges facing private equity firms in today’s food and beverage market.

What do you see as operational challenges and transactional challenges in the food and beverage industry?

AUA: The operational challenges are similar to what you see in most businesses. How do you achieve growth? How do you get families to grow the management team? How do you groom and work with management to execute on a growth strategy?

One of the areas we are spending a lot of time on is within environmental, social, and governance (ESG) - we believe there is an opportunity to increase alpha in our deals by following an ESG framework. For us, ESG includes work cleaning up the labels/improving ingredients, better-for-you foods, workplace safety, cleaner equipment, and more. We think about this as early as the due diligence process all the way through to running the day-to-day operations of these businesses.

As far as transactional challenges, finding deals at fair prices is probably one of the biggest challenges we face today. It’s not easy staying disciplined in the food and beverage environment where companies are trading at double digit multiples and a lot of our competitors can justify five-times or more leverage. Also, making sure families and management teams are truly interested in a transaction can be a challenge. We always like to make sure the family is truly interested in partnering with AUA and we spend a lot of time educating them on what bringing a strategic partner means for them and their business. We ultimately think this is one of the biggest decisions they will ever make and are firm believers that everyone should be happy at the table if we are going to make the business successful in the long-term. We’ve had due diligence periods go from 45 days to close all the way to three – four years to consummate. A major challenge is explaining to families that we’re not a traditional finance-only private equity firm, but one with a strong operational background that truly cares about the corporate culture. We try to be as upfront as possible about the possibilities ahead, and are also fully transparent that the process of having third parties go through all of your business issues with a fine-tooth comb is not an easy one.