What makes a spirit company a good target for acquisition? That’s the question a panel of experts answered at the DISCUS annual conference in San Diego last month.
The session included Townsend Ziebold, Managing Director at Cowen investment bank which recently advised on the sale of Penelope Bourbon; Dan Gasper, co-founder and CEO of the Ardent Company; Michelle Ivey, COO of Ilegal Mezcal which was recently acquired by Bacardi; Robert Furniss Roe, CEO & co-founder of Samson & Surrey which was acquired by Heaven Hill; and Anne Cox-Johnson, partner at McDermott Will & Emery, who advises beverage founders and strategic companies on buying or selling.
Panelists stressed that acquisitions are rare, but certain approaches to business can still help founders make their companies attractive to investors, including balancing the tension between expanding while maintaining strong velocity in key markets, transmitting a compelling brand story through all three tiers, and maintaining ideal gross margins. Here are the top four takeaways.
Create a Compelling, Transmissible Brand Story
One key message emerged from the discussion: there are qualitative and quantitative pieces to raising money. We’ll get to the quantitative in a bit, but a brand story that cuts through the noise is essential to getting consumers and investors excited.
“You’re dealing with people on the other side of the table who are to some extent shopping for convincing stories, not just the P&L,” said Roe.
That means having a clear enough message that it can be transmitted across the many tiers, he added.
“Creating something which you can communicate to somebody that is memorable within 30 seconds is probably the part that is the most important and the most valuable,” said Gasper.
With many spirits companies not producing their own liquid, Ivey emphasized that a brand is what becomes that company’s value, which should also be protected. Both Ivey and Cox-Johnson advised brands to protect their intellectual property early on, a diligence process will extend down to ownership of a brand’s Instagram photos, added Cox-Johnson.
Get Your House In Order
On that note, Cox-Johnson warned that strategics will look at every aspect of a business they plan to acquire, and deals have fallen apart for anything from label missteps, an improper trademark registration or misalignment between co-founders. Having written agreements with co-founders early on is one way to avoid trouble later, she added.
After what “felt like 18 months” of diligence, Ivey added that keeping an organized filing system can allow companies to keep focusing on meeting their sales targets instead of tracking down paperwork while going through diligence.
“If you weren’t here on the planet tomorrow, you want somebody to open those files up and know your entire business: your contracts, agreements, your depletions reports, everything,” she said.
Another tangential tip from Ziebold when approaching a deal: take care of the people that got you there.
“Whether it be equity plans or sale bonuses, just be thoughtful about trying to reward the team that helped build your company,” he said.
Know Clear Levers to Create Scale
Going “narrow versus wide” with distribution was the consensus for a healthy growth path, but how do brands simultaneously show they can scale?
“I do think the strategics are looking for brands who can travel,” said Ziebold. “But you don’t want to open up too many markets, particularly in franchise states where it might be hard to realign your distributors, and all at the same time you’re maintaining strong velocity in your core markets.”
Scale isn’t necessarily just a volume thing, added Gasper. Brands should learn in their home markets what levers give them real volume per account, and then validate that learning in a region outside of a brand’s hometown. Finding out how to get an account to go from selling one to selling five bottles a week will allow brands to understand their value proposition.
There also needs to be a convincing answer of how the brand is going to then replicate that volume in other cities in a way that doesn’t compromise quality, added Roe.
One of the main quantitative indicators mentioned earlier? High gross margins are “very focused upon” by strategics, added Ziebold. Margins may differ for agave brands because of costs, but companies with their own distilleries should shoot for 65+% or 50+% if using a contract producer.
Be In It For The Long Haul
Think you’ll make a quick exit? Not the case for most brands, and a partner on both sides willing to go the long haul is important for compatibility. Good founders should be eager to spend up to ten years building a brand, Gasper argued, and should look for investment partners who understand the time it takes to create sustained success.
“You’ve got to find some compatibility if you’re looking to raise money with a mindset that says it takes probably 5-10 years on average to build a good spirits brand,” said Roe.
That means companies should plan what their raises will look like overtime and how to keep as much control as possible while aiming for the on-average $10 million ($20 million for aged spirits) that Gasper says a brand will need to go from zero to 50,000 9-liter cases.
Ivey admitted that the Ilegal ended up “with a pretty complicated cap table at the end that caused us a lot of headaches,” she said.
“There were ways we could have handled that better through managing the business a little bit better, with a little more foresight in the actual management of the business for profitability versus sale,” she said.
The path to profitability has a direct benefit to lowering the amount of capital companies have to raise, said Towsen. In the end, he added, brands should also be prepared that an exit might not be a sale and will more so look like taking dividends from the business over time.