When it comes to the natural products food and beverage industry, one thing is certain: 2020 did little to dampen activity. In fact, consumer enthusiasm for cooking at home did much to promote growth and even create opportunities for industry stalwarts and newcomers alike. As such, merger and acquisition opportunities have remained ever present. But in the fast pace of keeping up with supply and demand it can be hard for a company to keep up with financial know-how. That’s where Gassen Mosbahi, partner at Moss Adams, notes that when it comes to mergers and acquisitions, there’s a lot to consider. Whether you’re preparing for a sale, or looking to buy a company in the natural products space, Mosbahi, who typically works with companies making less than $250 million in terms of revenue, walks us through the importance of due diligence so that all parties clearly understand their respective opportunities and risks.
New Hope Network: What role does Moss Adams typically play when it comes to mergers and acquisitions?
Gassen Mosbahi: When it comes to mergers and acquisitions, our role is to assist private equity companies and strategic buyers through all phases of the acquisition process. We perform a “Quality of Earnings” (QoE) on either the buy-side or the sell-side. We work with strategic buyers or private equity firms when they want to acquire a company, and we provide financial due diligence services for companies wanting to go to market. It’s the same analysis on both sides. We look at initial deal analysis, financial and accounting due diligence, valuation, identification of synergies and integration. This includes analysis of recurring earnings and quality of earnings, analysis of key revenue and cost drivers, a critique of balance sheet exposure, input on closing deal structure and assessment of operating working capital needs.
NHN: When does a buyer or seller typically enlist the services of Moss Adams?
GM: When we represent the buyers, they come to us when they have already identified and signed a letter of intent and are starting their due diligence period. They have identified the company they want to buy and want to learn more. On the sale side, they come to us maybe three to four months before going to market. They usually come to us following a recommendation from an investment banker. Having a QoE can help sellers understand the risks and helps the bankers run a more efficient transaction. Information in our reports often can be helpful to fine tune the key inputs used in the valuation model. On either side, we might find that EBITDA is above or below what a buyer or seller thought.
HNH: Do you advise people to buy or sell?
GM: No, think of it more like when you want to buy a house, you hire a realtor. In this case, that’s the investment banker who will help you find the house. Once you find it, you come to me. I am the equivalent of the home inspector to help the buyer or seller become aware of certain actual and/or potential big issues or problems; that is my job. We don’t guarantee we’ll find everything, but it’s always best to have another set of eyes looking at things, someone who does this type of work on a regular basis and has a much better idea of where to look to spot a problem than many buyers or sellers do. A home inspector will never say “buy it” or “don’t buy it,” but rather, “I found a problem with the roof,” or “the pool foundation,” but they would never tell you to buy or not to buy, and they won’t guarantee they’ve found everything. We let the facts do the talking.
NHN: But can your work influence a transaction?
GM: Yes. Sometimes companies are hesitant to pay for a service they don’t understand, but the benefit of a financial analysis definitely outweighs the cost. Again, it’s like buying a house.
Bankers try to do an analysis, but at a very high level. They might identify one or two obvious items like a CEO salary that is too high, but they don’t do a deep dive of technical adjustments like we do. This is my job. I’ve done hundreds and hundreds of deals and I have a long list of potential adjustments that could be made, while a banker may only have three or four.
Our sale analysis could cost $75K, but then through our work, we might find an adjustment that improves EBITDA by $500K, which triggers an improvement in the value by $3-4 million. So, a project of $75K can give you additional value of $3-4 million. This type of situation isn’t guaranteed, but remember that the buyer and their due diligence team isn’t going to tell you that if they find it—why would they want to do that? The buyer is still going to do their own due diligence. Likewise, for a buyer, we may find that a company is not worth what it says it’s worth. Especially for sellers, this happens all the time because companies are not familiar with how to do a full analysis since it’s not their daily job. We find that when a company goes to market having done a QoE, they are significantly more prepared and know their worth.
NHN: What trends are you seeing in the current marketplace?
GM: Now as a natural products food and beverage company, adopting ecommerce into your model can assist with your growth goals. A lot of people are buying online. You can’t ignore this marketplace and your margins are generally higher when you do online versus going through a retailer. You can have more repeat business and you have customer email addresses and can reach out to them directly. An online strategy should be a part of any business plan if a company wants to grow. Companies with even a decent ecommerce platform tend to outperform those without one.
Overall, the volume of business transactions we are seeing has increased. A lot of companies are wanting to sell and there is a lot of investor money wanting to buy. The market is dynamic and the cycle of how long people are holding onto companies is shortening. Perhaps it’s a behavioral thing with a new generation—they create a nice brand, take it to market, feel like they’ve done their hard work and they want to exit, cash out and go do it all over again with a new product or service, while others just want to do something else altogether. Entrepreneurs are becoming more serial entrepreneurs, especially with brands. That is driving the activity. And there is a lot of money out there. With high inflation, people would rather put their money in assets than keeping it in cash and bonds.
NHN: Any trends or thoughts specific to the food and beverage marketplace?
GM: In 2020, food benefited and showed to the world that it is a resilient industry. Everybody has to eat. Ultimately, food is always in demand and that’s not going to change. But then, of course, there is a lot of competition right now, especially for branded new products coming into the market. You have to have something special to differentiate and stand out in the marketplace. There is strong demand, but if you want to start a new product, you have to have something compelling. There’s a lot of choice out there and it’s not easy to compete.