August 02, 2021

Consumer Products M&A—How to Come Out Looking Great

3 min

As the M&A market enjoys unprecedented levels of activity, no sector has been more volatile than consumer products. With changing buying patterns, wild swings in consumer spending, and attitudes shifting from fear to wild optimism, the sector has been impacted by recent events in profound ways. Throw in a healthy fear of increasing taxes, and you have the recipe for a wild and very busy ride.

State of the Market

As most in the ACG community know, the middle-market deal community is as busy as ever. Record levels of dry powder, low interest rates, rosy predictions of growth, a maturing private equity community, and aging founders are fueling a sprint in activity. Many service providers have reached, or are nearing, capacity. These anecdotes, however, are not yet fully reflected in the data.

The apparent current level of activity contrasts with a generally weak 2020, particularly in the second and third quarters. For example, the year 2020 saw, according to Bain & Co., a 15% drop in consumer product-related transaction value compared with 2019. There were, however, clear winners and losers in the world of COVID-19. Some generally positive trends continued through 2020. For example, growing throughout 2020 were deals focused on insurgent brands, which outpaced category growth and for which acquirers were prepared to pay a premium. Such deals, even in last year's relatively anemic market, continued the same yearly growth rate of two- to threefold that has been experienced since 2015.

Capturing the Special Sauce

Identifying and capturing the economic driver of the target is at the heart of what any buyer must prioritize. For consumer product companies, often it takes a special mix of attributes to ensure success. The quality of the products themselves is clearly part of the story. A consistent supply chain, a strong manufacturing/production infrastructure, and a way to ensure ongoing product development and enhancement are essential. After production, sales channels that provide for sufficient avenues to market and appropriate price points are equally important. A team that ensures execution and clearly articulates what sets the business apart, or the brand identity, is also required.

In the midst of a robust market, where valuations are frothy, the need for buyers to perform adequate diligence could not be greater. One simple miss anywhere along the diligence journey could turn likely gains into losses. Where there is pressure to close the deal as promptly as possible, care is required, and partnerships with supportive professionals to assist in analysis and deal execution are an important part of the team.

For sellers, pre-sale preparation has never been more important. Seller funder quality of earnings reports before the sales process is instituted, audited financials (even if not done historically), buttoning up key contracts with employees and third parties, a list of all contracts requiring consent, and general corporate housecleaning can all help to speed the transaction.

On the buy side, peeling through the numbers to be certain you are not paying for results that may have been an anomaly must be a central concern. In addition, for many consumer products, from food to health-related products, or anything manufactured overseas, the regulatory landscape continues to evolve rapidly. Understanding the current rules, and anticipating changes that may be coming, must be part of the analysis in any transaction.

In the world of consumer products M&A, deals are happening, and, when done well, they can help both the buyer and the seller come out looking great.