How to Reap the Rewards of Your Finance Strategy

Giuseppe Gallo, Founder & CEO of Italspirits – ITALICUS – Savoia, presented his keys to attracting investors in the beverage alcohol space. Gallo touched on what investors are looking for and what brands should have in place before attracting them.

 

Brian Rosen, Founder of InvestBev, discussed what brands should look for to form a successful strategic partnership in beverage alcohol. Rosen dissected what to expect from your strategic partner and how to prepare your brand to fulfill its side of the partnership.

 

Valeria Piovesana, a Lawyer at Finity Technology, gave her tips on how to maximize brand value before an exit in the beverage alcohol business. Piovesana touched on company structure, the four pillars of a beverage alcohol brand, and the keys to understanding the exit market.

 

Giuseppe Gallo’s Keys to Attracting Investors Transcript

Giuseppe Gallo (00:03)

Today is going to be three of us. My part to start with, regarding M&A strategy, is more from a business and operator standpoint. I have to admit that when I started my own spirits company, yes, I thought about a potential M&A strategy, but it was not the only strategy ahead. It’s very important to understand that you need to adapt to the momentum and adapt to the markets; you need to be able to shift your strategy if required. When we had COVID, I’m sure a lot of businesses had to adapt to the situation, make different decisions, and adapt to what the market was back then.

I always like to start with this slide. My presentation mainly focuses on the left side when talking about M&A. When I have conversations about M&A, most people just look at the top of the iceberg. Yes, of course, when you sign your deal or get a partner, you feel like you’ve had a little bit of success in your business. But in order to get there, there are tons of things that need to be done—and the most important one, which is not included there, is having some good luck.

Giuseppe Gallo (01:20)

First of all, what are M&A investors looking for in your brand?

1. Brand Positioning: What is your position, and what do you stand for? The brand needs to have a very distinguished and clear brand position, which needs to be communicated to consumers, professionals, and distributors.
2. Strategic Portfolio Fit: How many new gins have we seen in the last 15 years? If you look at all the major spirits companies that could potentially invest in or acquire a new gin, most already have one, two, or even three or four different gin brands in their portfolio. If you launch a new gin today, do you think in 5 or 10 years’ time you’re going to have a position in one of these spirits companies? Not really. Look forward to where you and your business will be in the next 5 to 7 years.
3. Best Practice Markets: This is often a dealbreaker. You need to showcase at least one, two, or three markets where you have best practices. Did your drink strategy work out? Does the brand have the right rate of sales? Does it have brand awareness? You don’t need to be present in 15 markets; it’s understandable for a small startup to focus on one or two markets, showcase that it can grow the business there, and then roll out elsewhere with a strategic or tactical partner.

Giuseppe Gallo (03:07)

4. Business Marginality: This one is key. All the major spirits companies work with an average gross margin of 70% on spirits. To be appealing to them, you might not be at 70% or 65% initially, but you need to be in a position where—with a little bit of work on your cost of goods and price positioning—you can get very close to that 70% mark (whether it’s 65% or 72%). Keep that number in mind. 5. Scalability & Geographical Expansion: Does the brand have the potential to scale up? Can a strategic partner drive volume with it? Will this brand be easy to deliver and expand all around the world? These are all questions an M&A team will ask when looking at your brand or business case. 6. Cost of Goods (COGS): If an M&A team or investor acquires your brand and brings the whole operation and production in-house, will that increase marginality and decrease your cost of goods? Those are all questions an M&A team looks at.

Giuseppe Gallo (04:32)

Looking at the timeline of the Brown-Forman portfolio: everybody is familiar with Brown-Forman and their wonderful brand, Jack Daniel’s. In the mid-2010s (around 2014–2015), when we were in the middle of the gin boom, they had a great brown spirits portfolio, but they were missing gin and white spirits.

The first thing they did was acquire Fords Gin, which was launched in 2011 by a great friend of mine and industry expert, Simon Ford. It was a great gin that had already proven best practices in the US, was loved by bartenders (made by bartenders, for bartenders), available in key cities like New York, Miami, and LA, and had a small footprint in Europe. They had the best practices and brand positioning, so the next stage was taking Fords Gin global to target the on-premise trade. A few years later, they acquired Gin Mare—a completely different animal. It had huge volume and large investment as a consumer gin, and was one of the brands that democratized the Gin & Tonic in large wine glasses. That shows how they fit both an on-trade gin and an off-trade gin into their portfolio.

Giuseppe Gallo (06:27)

In order to have a successful or self-sustainable brand, many things need to work out well. It’s not enough to just have a good liquid, nice packaging, or lots of money—it’s a combination of things, plus good luck. You need to plan accordingly, show leadership in managing sales, marketing, legal, finance, and operations, and be lucky enough to hire the right people and partners to act as an extension of you.

Giuseppe Gallo (07:18)

Here are three basic must-haves:

1. Planning & Finance: This is crucial. I see too many startups and businesses that have no clue about numbers or their P&L. Whether you like it or not, you’ve got to do it, because if you don’t get your numbers right from the beginning, you will pay the price later. If you’re not an expert in finance, hire someone who is.
2. Legal: When people ask me what the best decision I made with my business was, it was hiring a good finance person and a legal advisor I could trust. Every time you open a new market, sign a distribution contract, handle production, or pay an invoice, you need trusted legal and financial experts to review it.
3. Communication: Make sure your brand is out there so the right people, investors, and companies can see and hear you. Whether on a stage offered by Park Street, at a bar show, on a podcast, or in an article, you have to be visible. If people don’t see you or know you exist, they aren’t going to approach you. Thank you very much!

What to Look for in a Strategic Partnership Transcript

Brian Rosen (00:04)

I am Brian Rosen. How’s everyone doing? Good, good! Thank you. I would think you’d be doing better—we’re going to talk about money, we’re going to talk about how to get your brand financed, and we’re going to talk about what to look for in a strategic partner. I run a company called InvestBev, which is roughly about a half-billion-dollar private equity firm based in the States.

Why partner with a strategic firm? I get calls all the time from people who have gotten sucked into a private equity deal or a capital deal with a partner that does not understand them. Generally speaking, if your financial partner is not from the industry, they have a hard time understanding it. As you talked about earlier with the three-tier system, they don’t understand why you can’t just sell it. In the US, there are compliance laws and laws about interstate commerce. A partner that is not strategic in nature will often be a challenging partner.

When you’re out there raising capital and looking for a strategic partner, you want them to have operational expertise and industry connections. You want a partner that knows the higher-ups at Pernod, Diageo, Constellation, ZX Ventures, and all of the big exit portfolio partners. For instance, before we invest in any company, we’ll go to the future buyer and say, “We’re going to look at this whiskey company, tequila company, mezcal, or gin. How do you feel about it in your portfolio? If I can add 10,000 cases of depletions to that product, how do you feel about buying that from me?” We’re always looking for an exit opportunity before we make an entry opportunity.

You also want your partner to understand what depletion allowances and sales look like, how to sell e-commerce, and what the supply chain challenges are that occurred during COVID and still exist today. Finally, you want a partner who can maximize exit outcomes. There are two ways to have a brand in this business: you either want to be a brand operator, or you want to be a brand exitor.

Brian Rosen (02:43)

When we look at a business in our Chicago office—we have 18 people there, each handling a different piece of due diligence—we look at many different things:

• Scalable Business Model: If you made a drink for yourself and say, “I made this cream liqueur because I love it,” you have an audience of one person. If you make a drink for everyone, you have an audience for everyone, and that’s how you get exit potential.
• Product-Market Fit: Are you making a vodka where every dollar we invest requires $5 in marketing to compete on the shelf?
• Trajectory Growth: Is it bourbon, tequila, or mezcal? Those are all trending right now. Or is it something like limoncello, a cream liqueur, or an amaro, which has great exit opportunity but a much smaller ability to scale?

Brian Rosen (03:56)

We also look closely at leadership. Your private equity partner may not do this, but we make our founders take personality tests to ensure all interests are aligned between us as the capital partner and them as the founder. Are they easy to work with? Are they easy to manage? Will they take advice and guidance? It’s not a major sit-down test—it takes five minutes—but it’s designed so the person in the room can work with my personality (which isn’t always easy) or the team’s personality. At the end of the day, it’s going to get easy, hard, easy, and hard again. When the hits the fan, you want to know that your partner is with you in the trenches.

We look at your ability as a team to execute. If you have a history of financial plans—a three-year plan, a two-year plan, a one-year plan—looking in reverse, did you execute on that plan? If your plan is simply a revenue number or wanting to be in every state that Southern Glazer’s is in, that’s not a plan. A plan is depletions by state, P&L by state, and operational expenses by state. Do you hit them, and if you don’t, how do you adjust accordingly?

Then, commitment. A lot of people get into this business as a night job until it takes off, but you can’t treat a brand as a hobby. It is a full-time job and a grind. You’re in the field, on airplanes, in Airbnbs, kissing babies, hugging frogs, and trying to sell your brand. Are you committed? That will be reflected in your numbers, sales, and depletions.

Brian Rosen (05:56)

Transparency and alignment require open communication. We don’t ask a ton from our brand partners, but we ask to be told bad news early and good news earlier. We’ll find out anyway when we look at the financials, so being as transparent as possible is something we always look for.

Regarding alignment on ideals, your capital partner should meet with you in the fourth quarter to talk about what the next year is going to look like, because we will have to align millions of dollars. Our minimum investment is $1 million, and our maximum investment is roughly $10 million per brand. If we’re going to wire $5 million to $10 million into your checking account, we’re going to want to make sure we are aligned and that your plan mirrors our plan. What gets overlooked is that we have partners, too—we have investors. We run a US-based registered investment company, so partners give us money to give to you to get a return when we grow and exit your brand. Everyone’s got a boss, as they say!

Transparency is 100% critical when picking your strategic partner, along with having enough trust to share bad news. Bad news is only bad news when you don’t share it. Sharing it allows your partners to prepare and guide you through the situation.

Brian Rosen (07:53)

Managing post-investment expectations is essential because we have a fiduciary responsibility to our partners. We ask our brand partners to meet with us once a month on a Zoom call or in person and deliver financials monthly. Your partner should have people on their team who aren’t just “yes men” or “yes women.” You should expect to be challenged by your capital partner, and expect them to ask hard questions and offer guidance. If you pick a partner by capital alone, it doesn’t always go the right way; you want to pick strategic accountability.

We are willing to be accountable if you are willing to be accountable as well. If you over-ordered glass during COVID and now there aren’t enough drinkers on the other side of it, those are real challenges. All we ask for is transparency and accountability.

Sustainable growth initiatives like brand activations in the field and “liquid to lips” are critical to growing your brand, and your capital partner should help with that. But it’s not sustainable if you say, “I am the face of the brand; the brand is me.” In that case, you have an unscalable brand. If the juice, the marketing, or the label is the brand, you’ve got a scalable brand.

Way back in the 1930s, my dad and my dad’s dad were retailers. My dad was the face of the business, and the problem was we couldn’t really scale it because customers always thought they were coming to see Fred Rosen in retail. To open more stores, we eventually had to sell the business to private equity. If you are the face of your brand and you’re that constant voice in front of the audience on LinkedIn, Instagram, or Snapchat, the consumer will come to expect you. As you scale, it won’t be you anymore, so you want to get a ubiquity around your brand so it can scale. Cierto Tequila used to be about the CEO, Alex, when they were smaller; now they’re at 50,000 cases in 40 states, and I haven’t seen him on Instagram in two years. JuneShine, Kowa, and various cannabis cocktails are all national brands without a single face attached to them.

Brian Rosen (11:09)

Lastly, collaborative decision-making is key. At InvestBev, we like you to come into Chicago, Miami, or New York to meet with our team for a one-day planning session. We talk about your hopes and dreams for the brand one, three, and five years down the road, and we help you collaboratively make decisions. You’re not in this alone. As entrepreneurs, we often think we’re alone, but if you pick the right strategic partner, you aren’t. More brands fail because the CEO or brand leader thinks they have it all figured out and have all the answers. We kick people out of our office when a guy says, “No offense, I got this—just give me capital.” Those guys are never going to get capital, because it’s a collaborative effort.

I know we’re going to do questions at the end, so I’ll hold off on that. You can find me on LinkedIn. Thanks, everyone, for your time!

How to Maximize Brand Value Before an Exit Transcript

Valeria Piovesana (00:03)

Good afternoon, my name is Valeria Piovesana. I’m a legal and strategic advisor to brands through their journey from setup to exit. What I focus primarily on is how to add value to a brand in order to maximize its valuation when a brand house or private equity comes in and decides to offer you big money.

The first thing I’m going to touch upon from a legal and strategic point of view is the structure of the company. Structure of the company means where you’re going to set up your business, which has different considerations:

• Tax standpoint: You might consider setting up a company in a place that is convenient to you, but always consider it from a capital gains point of view. When you sell the company, you’re going to pay tax where you are resident, so you don’t want to set up a company in some weird countries where you can’t get out the capital. Be practical about it—it’s a small company at the beginning, so set it up where you’re based.
• Shareholders: If you’re by yourself, it’s an easy step and you can control your equity. But if you’re setting up a brand with business partners or friends, you need to have principles agreed upon up front. It doesn’t mean having a 50-page shareholders’ agreement, but a couple of key points defining roles (e.g., “I take care of marketing, you take care of sales”) to avoid misunderstandings in the future. The most important thing is to be aligned on exit. Earlier, Brian asked what the exit game is; the majority of people want to maximize the exit in 3 to 7 years by selling to a brand house. You need to be clear with each other about what your exit target is—for instance, saying, “We’re going to sell in five years’ time and we want to have a multiple of 14.”

Valeria Piovesana (02:21)

Another fundamental point I always advise my clients on is to have a clear strategy on IP (Intellectual Property). Both investors and brand houses will do due diligence on your IP.

You design your brand name and logo, or you might design a custom bottle and spend money on molds and agencies. All of these assets need to be protected because they add value at the exit, add value when private equity decides to invest in you, and protect your brand and assets:

• Trademarks: Protect your logo and name.
• Design Rights: Protect the bottle or the cork.
• Patents: Consider patents on the recipe or the liquid. Most brand houses don’t necessarily consider this point, but I think it’s quite important because first of all, you have extra protection on the liquid. Second, you can apply for what is called the Patent Box, which allows you to have tax incentives and discounts on corporate income when you start generating revenue.

Valeria Piovesana (03:50)

Third point: the P&L. You need to have control of your cost of goods and know how much you spend. You can have a great plan to make wonderful bottles covered in gold, but then you’ve got to sell them at the right price point. Marginality is very important because an investor and a brand house will look closely at margins. Ideally, you need to be around 60% to 70%, though you might decide to start in the first 18 months of your life with a 50% margin in order to decrease goods costs later and exit at the right point.

The four pillars of a good beverage brand are:

1. Liquid: You’ve got to get a good liquid.
2. Packaging: You’ve got to get good packaging.
3. Story: You have to have a compelling story, because without the story, you’re just another brand with another liquid.
4. Storytelling: You have to be a good storyteller. Nowadays, you have various tools to tell your story—brand ambassadors, social media, and digital channels.

Those four pillars, along with positioning and pricing, are what an investor looks at. Within a portfolio, you need to find the right category and positioning. You cannot just bring another gin into the market without having the right story or point of difference. Positioning and pricing are very important because if you price outside established parameters, it becomes very difficult to sell to the market.

Valeria Piovesana (06:16)

Distribution is key to success, because at the end of the day, you can make an excellent product, but if you don’t sell it, you’re just going to drink it yourself! You need to find a good distribution partner who gets you, because distribution houses are going to push their own brands that are already performing. You need to explain to them with your compelling story that this is a good brand that is going to make money and generate revenue so that the distributor embraces your project. If you enter gold-mine markets like the US, on top of that, you need a huge amount of capital to distribute.

When to fundraise: if you have enough money to start the brand, get the liquid in the bottle, get your IP ready, set up the company, and secure distribution in a couple of markets, you have already proved your concept. You are at the point where you can go to investors.

Look for “smart money”—investors who can add value, create a partnership, and help grow your business because they are well-connected. Fundraising is time-consuming, ambitious, and very tiring, so raise the right amount of money. If you need $1.5 million to enter the US, don’t just raise $500,000 thinking, “In six months’ time, I’m going to raise more.” It’s very difficult to raise more, very lengthy, and you probably won’t get the same valuation. Get the money you need to fulfill your business plan, set up a Board of Directors with good advisors who give you governance and expansion ideas, and build a support structure of qualified experts around you.

Valeria Piovesana (09:34)

In terms of exit: after you have raised money, entered markets, and your revenue starts to grow over 3, 5, or 7 years, it’s time to consider what you’re going to do with your brand. It’s always best if it’s your decision to sell rather than waiting for someone to approach you, though brand houses often come to you when they realize you’re on a good growth path.

Multiples generally range from 4 times revenues (the minimum) to 15, 17, or even 20 times for very aggressive valuations. To achieve those millions at exit, you need to have a solid business, solid corporate structure, solid IP, and everything in order.

Exiting can take a few different forms:

• 100% Outright Buyout: Being bought out for 100% of the value of your company, perhaps with an agreement to stay on for a 1-to-2-year transition period.
• Earn-outs / Call Options: The buyer purchases a percentage of your company with an agreement to buy the rest when certain revenues or volume milestones (e.g., 50,000 or 100,000 9-liter cases) are hit. You stay in, run the company as CEO, and two or three years later, they exercise the call option to buy the rest of your equity.
• Earn-out Bonus: They buy everything upfront, but there is a contractual bonus payout when you reach certain target volumes.

Valeria Piovesana (12:02)

To maximize your value, know your customer data, because that data will be transferred to the buyer. You need a compelling argument on why you deserve a 14-times revenue multiple, showing how the new buyer can expand the market and make even more money than what they pay you.

Ideally, you want to control the timing of your exit. When you are on a clear growth path, that is the best time to sell to a brand house for the highest multiple and take home a lot of money. Thank you!

More Resources on Finance and M&A

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