Photo © iStockphoto.com/Mikey_Man
The dream of many a natural-product startup is to be acquired by a CPG giant one day. The prospect of gaining access to extensive resources, distribution, supply chain, and marketing power is enticing to say the least. Luckily, investor interest in the health & wellness space has never been higher. For the many small companies ultimately hoping to lure a big fish, spending some time in the hands of a private-equity investor, especially one seasoned in the natural products space, can yield many advantages, says one expert in the field.
Corby Reese is a partner and managing director at Swander Pace Capital (San Francisco), a private-equity firm specializing in the healthy-living and natural foods space. His company has been involved in numerous high-profile transactions, including Clorox’s acquisition of RenewLife, Hormel’s acquisition of Applegate, and Nestlé Purina’s acquisition of Merrick Pet Care. As Reese explains, small companies do, of course, have the option of raising money through debt (i.e., getting financing from a lender). But the drawback is that those lenders typically provide money only, versus the expertise and guidance that a private-equity firm, especially one experienced in the industry, can provide.
Private-equity firms, Reese says, “fill a real need in the market because a lot of these smaller companies aren’t ready to be sold to a strategic.”
“For the entrepreneur or the family business that wants to grow, if they raise debt, the typical banker or lending institution isn’t going to give them any help [in terms of guidance], just capital,” he says, “whereas a consumer products expert investor like us can invest in the business and leverage our background and expertise to accelerate growth of their business—and hopefully get them ready for a much larger sale down the road.”
“More often than not,” he adds, “we’re working with entrepreneurs or family businesses that are retaining significant ownership in their business and bringing us on as a partner. The kind of companies we’re talking to are looking for more than just capital; they’re looking for support and expertise to help their business get to the next level, and we can bring 20 years of experience investing in small, healthy-living product companies, companies that have been through the issues that these new companies are facing.”
But private-equity firms won’t view a brand as a good prospective investment unless the brand has 1) a differentiated product, and 2) has shown consistent growth. “That’s the first question we always ask and the first issue we’re always looking at: What is your unique selling point?” Reese says. “Maybe you’re natural or organic, you have unique sourcing, you have a unique backstory, or your taste profile or your recipes are better. Having a defensible, differentiated product is, I think, very important and a key issue that investors are going to be looking at.”
A private-equity firm will help a brand address numerous shortfalls. As Reese says, “We can help with telling the marketing story better. We can help with getting distribution into mainstream grocery. We can help improve their packaging and incentivize their sales force, or optimize their pricing, sourcing, and supply chain. We can even help them improve their manufacturing if their plant isn’t up to code or isn’t up to the standards of a larger company. Those are the kinds of things we can bring.”
One thing a private-equity firm can’t do is make the product unique to begin with, however. “If they don’t have a differentiated product and a unique white space in the market that they’re filling, that’s harder to fix,” he says. Don’t just be a “me too” product, he advises.
A private-equity firm will look at the nitty-gritty details of what the brand needs to do to make itself attractive as a prospective purchase. As Reese tells it, his company, for instance, will examine how a company’s finances are organized, how the company analyzes its profit margins—or even whether its product packaging is the right size to “slot on a pallet that a larger company would use.” The look of the packaging is also key, he says, as some independent brands may have designed packaging that is “too quirky” to successfully translate to a mainstream audience.
“We know what these larger companies want to see, and we’ve seen [cases] where a sale can trip up over issues like these,” he says.
He also encourages larger CPG companies that are interested in acquiring smaller companies speak to private-equity firms more often, and early on.
“I don’t know that there is enough communication going on between large companies and private equity,” he says. “I like trying to have a dialogue with some of these larger businesses that are interested in the spaces we invest in because we can be a real help to them. If we understand better what they’re looking for, we can go out and identify those businesses often before the company itself does, and get them ready for a sale down the road or take on the kind of work that the larger businesses aren’t set up to do.”
Also read:
Natural Products Investing: Keeping Big Fish, Small Fish Separate