With softer sales and shifting trade policy rocking the spirit industry, founders searching for a buyer will need to get creative, according to a panel discussion at the annual Distilled Spirits Council of the U.S. (DISCUS) conference in Washington D.C. last week.
“The M&A market does not like volatility,” said Alva Mather, partner at McDermott Will & Emery.
But there are other options, she added.
Mather moderated a conversation about the investment and acquisitions environment joined by Townsend Ziebold, managing director of Arlington Capital Advisors, who recently advised on the sale of BuzzBallz to Sazerac; Dan Gasper, advisor and co-founder of Distill Ventures; Michelle Ivey, co-founder of 11C & Company and former COO of Ilegal Mezcal which was acquired by Bacardi; Robert Furniss-Roe, CEO of Samson & Surrey; and Ann Cox-Johnson, partner of Mc Dermott Will & Emery, who advises beverage founders and strategic companies on buying or selling.
“The Pythons Have All Had Their Meal”
Despite the rush of tequila companies gunning for a buyout after George Clooney’s $1 billion deal, the reality is that acquisitions in spirits have always been moderately-paced. But the environment now is “definitely slower,” Ziebold said.
Large corporations are more “internally focused,” added Ziebold, with many of the spirits giants offloading non-core brands, divesting assets and shutting accelerators as they turn to flagship products for growth.
“All of the pythons that are the strategics have all had their meal over the past three or four years and they’re in the process of digesting,” said Furniss-Roe, whose Samson & Surrey was acquired by Heaven Hill in 2022.
But M&A isn’t an exact science, he added, and that may be cause for some medium-term optimism.
“I think at some point they will wake up and realize that maybe some of the things they took on are not doing that well, particularly in the current context, and over time that will lead them back to ask, what else can we do in that space?” he said.
“Don’t Underestimate That You’re A Master of Your Backyard”
As strategics slow down M&A, founders should be looking to get creative and find lateral alternatives.
That includes doing a partial deal, selling a piece of equity, or joining another smaller company, added the panelists. More examples of the latter may emerge following the closing of Distill Ventures.
“I speak to a lot of the brands that are involved there and their conversation is now, how can we work together?” Ivey said.
Private equity backed-platforms such as Next Century Spirits and Milestone Brands have also accumulated smaller brands. That kind of opportunity may grant a founder some cash while rolling more equity into the holding company, which “at least gets you the benefit of amortizing your brands across a family of brands,” Ziebold said.
Other buyers may come from overseas, added Gasper, as international portfolios look for strategic additions to gain a foothold in the U.S. at a good price. Those portfolios could also be less focused on liquid and brand, and more on “the city that you’re winning in,” he said. That could mean they’re interested in a company’s great team or knowledge of a market.
“Don’t underestimate the fact that you are the master of your backyard and how valuable that might be,” Gasper said.
That’s all the more reason to take advantage of national brands “cutting back on local marketing budgets like crazy,” added Ivey.
“If you take the advice of looking, concentrating, focusing and diving deep in your local market and driving your presence there, the multinationals aren’t doing it, so you’re going to show up,” she said.
Overall, the current climate requires founders to keep their heads down while the industry awaits a more active return to investment dollars, agreed panelists. That may mean founders should rationalize how they’re attacking target markets, cut burn rates to grant themselves longer windows before investment, and put forth the best version of their brand, said Gasper.
Founders should also be clear and realistic about the glass ceilings of each phase of business from startup to expansion, added Furniss-Roe.
“Each of those steps takes capital and takes extra effort,” he said. “And sometimes you might be better off actually just ducking under this particular glass ceiling and keeping your head down, to link the analogies.”