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KSA Foodservice Distribution Update

December 2008

What a Potential Seller Should Consider at the Start of 2009

By Bill Beattie

The market for merger and acquisition transactions has changed dramatically in the past several months due to a variety of factors. Foodservice distributors planning to sell their businesses, and those increasingly challenged by the market today who may or may not have a plan to sell at this point, should be aware of the current market dynamics.

As you start the article below, it may seem odd that, in a piece about selling your business, we start by focusing on the buyer. However, in these rapidly changing times, it’s critical to be familiar with what today’s buyers are thinking as they execute their plans.

Who are Today’s Buyers?

Several of the top national and super-regional distributors, as well as selected regional and local independents could be prospective buyers, depending on the specific opportunity. Acquirers will likely have:

A strong balance sheet
Cash or access to financing
A strategic plan for integrating the acquired assets into the business, and
The ability to respond rapidly to opportunities

How are Today’s Buyers Affected by the Credit Crunch?

It is well-documented that the credit squeeze has reduced the availability of capital to fund acquisitions or otherwise finance growth opportunities -- putting downward pressure on valuations.

At the same time the credit markets are pressuring valuations, companies that have the financial capacity to complete acquisitions are seeing opportunities. Some involve financially distressed distributors who may be forced to sell at discounted prices. These factors have created different types of acquisition scenarios than what have been typical in recent years. It has also led buyers to become much more strategic and selective in their choice of acquisition candidates.

As always, buyers focus on deciding what types of acquisitions they are looking for in terms of cultural fit, product and customer mix. They include:

Fold-outs, where the buyer acquires a business and facility/ies to expand its geographic reach to new markets
Fold-ins, where the buyer will acquire a customer base and fold it into their existing facility to leverage volume or to increase its product offerings while minimizing increases in fixed overhead costs
Specialty Distributors, where they buy a company that has a niche market (ethnic, retail, deli, etc.)
Meat or Seafood Operations, where the buyer seeks to integrate center-of-the-plate (COP) as a strategy to increase flexibility and cross-selling opportunities or to fend off competition
Produce Specialists, which many buyers view as less expensive and less risky to acquire than to start a produce program from scratch.

Looking forward into 2009, the financial climate will cause buyers to be more selective as they identify and negotiate acquisitions. They are reprioritizing how they use their capital because of the number and different types of opportunities, their impact on short-term and long-term projected returns on investment, and the increased scrutiny of their bankers on their investment decisions.

A Buyer’s Post-Close Objectives

In order to achieve its investment objectives, a buyer will set certain goals relative to each acquisition. For potential sellers concerned about their own and their employees’ future livelihood, it’s helpful to understand buyers’ post-acquisition thoughts. They generally include the following:

Customer Retention: in all cases, retaining the profitable portion of the customer base is essential to the buyer. Lost customers = lost revenue. The buyer’s goal in the transition period is to make the purchase as seamless as possible to the seller’s customers, so that operators feel “like nothing ever happened.”
Core Competency Retention: a successful transition generally requires retaining the sales reps, buyers, merchandising/marketing staff and truck drivers. Put simply, those who have customer contact and those who can deliver gross profit or earned income are central to the value of the business.
Working Capital Management: the buyer has, in most cases, purchased inventory and accounts receivable and wants to reap the entire value of these assets.

Who are the Sellers?

The economic pressures on operators have adversely affected nearly all distributors. Those distributors who did not have strong balance sheets prior to the credit crunch may find themselves facing nervous and more assertive bankers – at the same time that they are fighting to simply maintain their gross margin levels.

Distributors without financial resources to ride out the storm long enough to right the ship could be forced to sell or close and liquidate. Others who may have the financial resources but do not wish to risk them, may choose to consider a sale now rather than waiting on the uncertain timing of improvements in the overall economy and in the industry.

Situations also arise where a company that is not currently planning to sell becomes a strategic target because of their location, customer base or product niche. Some owners may find the preemptive offer too good to pass up.

Seller Concerns

Potential sellers have many concerns on their minds including:

Can I get a fair price for my business?
What’s going to happen to my people?
Will I be able to continue to work for the buyer following the sale?
How long should I ride out a financial storm before I decide to sell my business?
Will I move too early; will I wait until its too late?
Can the buyer use my facility or will I have to try and sell that to someone else?, and last, and sometimes most importantly,
If I’m not Joe Smith, president and owner of XYZ Foodservice, who am I?

One of the things we hear most often from owners is their desire to secure employment for their workforce. In many cases, we find that the seller’s workforce is in a more secure position after the company is sold because of the acquirer’s financial strength. This is particularly true when the distribution center is included in the transaction and the buyer operates the acquired company on a decentralized basis. Many owners (and employees) of independent distributors often have the silent concern: “it’s going to be tougher to make it as an independent; we just might be more secure if we were part of a larger organization.”

This and most other concerns can best be addressed by developing a series of realistic and well thought through business and personal goals. Most prudent owners seek objective and unbiased advice from a team of advisors. This often includes their accountant, attorney, and, we believe more critical than ever in these times, an experienced transaction advisor.

Be Proactive & Act Early

We advise distributors to take action early and be decisive. If your revenue is dropping, margins are increasingly pressured, cash flow is squeezed, or you’re spotting other warning signs – we advise you to take corrective action to restore the health of your business, and we also recommend that you have a contingency plan ready so that you protect your financial future. Nobody wants to be forced into an unfavorable transaction. If you find you do need to sell your business, proper planning, with trained advisors, can help prepare you to realize an optimal valuation instead of a fire sale price.

Final Thoughts for Those Considering a Sale

There continues to be a strong mergers and acquisitions market in our industry. Achieving premium valuations today, with the credit crunch, requires more thoughtful planning and professional packaging to appeal to more selective acquirers. Have your contingency plan to sell ready early – whether or not you end up needing it – to preserve the value of your business assets.

As always, please call me at 804-565-6018 or email me at bbeattie@ksadvisorsllc.com with questions – initial consultations are completely free of charge. We all know that when facing challenging situations, talking with an impartial, experienced third party can help.

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