September 29, 2023
(press release)
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There has been a noticeable slowdown in pet M&A activity over the last year, primarily due to the combination of interest rate hikes and concern about a recession. Given their dependence on leverage and loan availability, private equity activity dropped significantly in 2023. PE firms have reported to us that while their deal flow has slowed down, their interest in investing in pet companies has not. However, the potential for a recession does not seem to be quite as risky given that the economy continues to grow at a robust pace and many buyers are compensating for high interest rates by “over-equitizing” – putting more equity down at the time a transaction closes with plans to re-finance once rates come down. While this strategy might result in lower valuations for some industries, that doesn’t seem to be the case with the pet industry given that there is still more money chasing good pet companies to buy than there are sellers. We are still seeing double-digit multiples for branded consumable companies with solid growth and margins; high-single to low-double digits for quality co-manufacturers, and slightly less for non-consumables, but still very robust. While some may not love to hear the market has slowed down some due to interest rates, it does provide future sellers the opportunity to prepare now for when they do plan to sell or raise additional capital. Seller preparedness, or lack thereof, is the biggest seller controllable factor that impacts valuation ranges, derails deals from closing and causes re-trading. Unfortunately, most owners have a false sense of business readiness for exit, and do not appreciate how unprepared they really are for a competitive sale process with intense scrutiny. We often pose the question this way to founder/entrepreneurs, “would you want to show up to the biggest test in your life without having prepared? Then what preparation have you done to be ready for your exit?” Lack of preparedness is one of the top reasons that 70 percent of businesses across all industries do not sell once put on the market. ¹ This is why we encourage working with an exit planner prior to selling, so sellers can have their business evaluated by an informed, but neutral third party that can explain what metrics the top acquisition targets are judged by, and rate how the seller is currently doing in those areas. The areas of evaluation often include owner dependence, market segment opportunity, company longevity, brand awareness, management strength, intellectual property and technology, customer concentration, customer strength, barriers to entry and sales and profit growth trends. This objective evaluation allows sellers to align their expectations with reality; gives them time to correct any areas now that could be improved as part of their regular business activities; and be more prepared when it is time to sell. A seasoned exit planner can also walk the seller through the areas of business due diligence that are going to receive the most scrutiny and identify any areas of weakness that can be improved now. The nominal cost to go through such a preparedness evaluation more than pays for itself once the seller goes to market and increases the likelihood of a closed sale. All positive outcomes for everyone in the future transaction. One trend we are seeing more of is the use of earn-outs to bridge the valuation gap since the industry isn’t growing as rapidly as it was a few years ago, yet the valuation expectations of owners haven’t shifted. These are payments based on the performance of the company post-acquisition and are usually based on reaching an agreed upon level of revenue or gross margin (we counsel our clients to never accept an earn-out based on EBITDA as they don’t have much control over this post close). We are pleased to report that it seems like pet M&A activity is picking up for Q3 2023 and beyond. In addition to learning about at least eight new deals either in the market or coming to market in the next few months, BirdsEye is experiencing increased interest from clients considering launching a sale or capital-raising process in the coming months. We would like to remind both our clients and investors that there is no sign that the pet industry is going to shrink or lose its’ luster. Gen Z’s and Millennials are leading the growth, which is good news for pet company owners as they have many more years of pet ownership in front of them, along with their propensity to treat their pets like children, devour information on labels, and postpone having kids. We just don’t see a world where these pet parents would stop offering their pets the “best of the best,” giving comfort to acquirers that their money is being invested in an industry considered “recession proof.” ¹Exit Planning Institute. Erin Fenstermaker, MBA, is a 20-year veteran of the pet industry and Certified Exit Planning Advisor Carol Frank, MBA, is a 37-year veteran of the pet industry and Managing Director of BirdsEye Advisory Group, a boutique M&A advisory firm focusing exclusively on the pet industry.
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