*By Maria Pearman, CPA, Advisory Partner & Food and Beverage Practice Leader at GHJ
Preparing a business for acquisition in the beverage alcohol industry is a complex and lengthy process requiring meticulous attention to detail. Recently, smaller players within the industry are not only selling brands to strategic buyers, they are acquiring brands themselves.
Buyers and sellers can better prepare for these events by understanding the steps required on both sides to optimize the process. By addressing these points, both sellers and buyers can expedite the process and cultivate an environment for sustainable future growth and mutual success.
How to Prepare as a Seller
Financial Preparation Steps
A foundation of internal due diligence clears the path for conversations with potential acquirers. Sellers should thoroughly review and organize financial records, contracts, and process documents. This will identify potential issues that may arise during the buyer’s due diligence process. Historical financials should be accurate, complete, and compliant with Generally Accepted Accounting Principles (GAAP). Consider providing reviewed or audited financials for the past two to three years to fast-track conversations. An analysis of financial records by an external third party cuts down on the buyer’s independent diligence.
Sellers should always provide clear and transparent financial statements during the due diligence process. For example, if a company sells whiskey, vodka, and gin products, it should clearly show the performance of each sector along with the related cost of goods (COGS). This transparency helps the buyer see the performance of each business segment.
Realistic and well-supported financial projections contribute to a successful deal. Buyers often want to understand the growth potential of the business, and well-documented projections can contribute to a positive outlook.
Legal and Compliance Preparation Steps
Sellers should clean up the legal structure of their enterprise. A business endeavor is often made up of multiple entities. Ensure that prior to going to market the legal structure is organized and uncomplicated. Resolve any outstanding legal issues, litigation, or compliance concerns before entering into deal negotiations. Additionally, having a clean slate for all compliance requirements is a must-have for all beverage alcohol transactions.
Specific to beverage alcohol is the matter of federal and state alcohol licenses. Businesses should make sure that they are properly registered with all federal and state agencies, and that the proper compliance documents have been filed.
Intellectual property (IP) protection is also important and sellers should confirm the ownership and protection of key intellectual property assets. Clear ownership and protection of patents, trademarks, and trade secrets can enhance the attractiveness of the business to potential buyers.
Contracts are another critical element of the legal realm. Review and organize all contracts, agreements, and obligations. Ensure that contracts are transferable and that the business is in compliance with all contractual obligations.
Operational Readiness Steps
Buyers generally want operations that can continue running successfully after an acquisition.. The first element of operational readiness is to document processes. All key operations and workflows should have a written standard operating procedure (SOP). This not only helps in the due diligence process but also ensures that the business can smoothly transition to new ownership.
Human capital requires planning as well. Develop a plan for employee transition, including communication strategies and any necessary training. Retaining key employees may be critical for the business’s continuity and success after the acquisition.
Finally, identify and address potential risks in operations. Risk mitigation could include legal compliance, customer dependencies, and other factors that might impact the perceived value of the business.
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How to Prepare as a Buyer
Financial Due Diligence
The main component of due diligence is financial statement analysis. Buyers typically conduct a comprehensive review of sellers’ financial statements, including income statements, balance sheets, and cash flow statements. This analysis helps assess the financial health, profitability, and overall performance of the business.
Buyers should understand the target company’s assets and liabilities, including any potential risks or contingent liabilities, which is a liability that may or may not occur depending on a certain future event. If the seller has audited financials for the past two to three years, this should disclose contingent liabilities. Absent audited financials, buyers are advised to perform a detailed examination of tangible assets, intellectual property filings, and existing contracts.
Assess Strategic Fit and Synergies
A buyer should assess how well the target company aligns with their overall business strategy and goals. This involves evaluating the compatibility of products, services, markets, and customer bases.
Additionally, having a clear understanding of combined synergies post-transaction is key. Buyers look for potential synergies that can be realized through the acquisition, such as cost savings, revenue enhancements, or operational efficiencies. Understanding how the combined entities can create more value than they would independently is critical.
Having an integration plan is essential to a successful business combination. This includes identifying key integration milestones, addressing potential challenges, and ensuring a smooth transition for employees, customers, and other stakeholders.
Operational Due Diligence
A business operations assessment can assist buyers in evaluating their target company’s day-to-day operations to identify strengths, weaknesses, and areas for improvement. This includes assessing production processes, supply chain management, technology infrastructure, and overall efficiency.
Understanding the target company’s organizational structure, key personnel, and management practices is also crucial. This involves evaluating employee contracts, skills, and retention risks. Assessing the compatibility of the management team with the acquiring company’s culture and goals is also important. Merging two corporate cultures can require additional time and attention.
Buyers will also need to ensure that the target complies with relevant laws and regulations, of which there are many in the beverage alcohol industry. This includes reviewing licenses, permits, compliance filings, and any legal issues that might pose a risk to the acquisition.
By addressing these key aspects, both buyers and sellers can maximize their potential for success post-acquisition. Working with experienced advisors, such as legal and financial professionals, can also be instrumental in navigating the complexities of an acquisition.
More Resources on Mergers & Acquisitions
A Rundown of Beverage Alcohol M&A in 2023