A 7 Point M&A Market Readiness Check for CPG Companies

Q1 2024 Analysis

The market in brief

Last year proved volatile for mergers and acquisitions. A post-pandemic slowdown in deal volumes and the rising cost of debt changed the dynamics for companies headed to market for capital formation transactions or buy-outs.

The news is not altogether bleak. Investor interest is holding strong. Private equity firms alone are sitting on nearly $900 billion in dry powder, which they are eager to put to good use. Given economic uncertainty and global unrest, however, many investors have remained cautious in the types of deals they pursue.

We’re witnessing an interesting result in the deals we’ve been negotiating, as well as in our regular surveys of and conversations with hundreds of institutional investors: a flight to quality.

Competition for the most attractive mid-market companies is keen, driving up multiples for best-in-class businesses. Factors such as larger size, above-average financials, and a proven management team are enhancing multiples and deal certainty. Valuations for top- and bottom-quartile deals are stretching further apart.

What does this mean for companies in the consumer products space?

Strengths to leverage

CPG value drivers currently catching investors’ attention include:

  • BRAND: A strong brand differentiates the business and provides a strategic “moat” insulating it from competitive pressures. Investors are also impressed by strong engagement rates by companies going directly to the consumer.
  • PROFITABILITY: Profitability is always important, but it is now a critical point of differentiation in the CPG space.
  • E-COMMERCE SUCCESS: Online sales, directly and through venues like Amazon, can help CPG enterprises extricate themselves from retailers’ influence on pricing, promotion, and shelf space. A key element of focus—lifetime customer value measured against acquisition cost.
  • GROWTH: Companies favoring existing over new products and same-store over new channel sales are attractive investment targets. Diversification across channels, products, and customers is a big plus in investors’ eyes.

Cause to pause?

Unfortunately, certain weaknesses are more likely to worry investors in the current environment. Be on the lookout for:

  • CORE PRODUCT SOFTENING: Flat or declining sales in core product lines are always a red flag but present a particular barrier today.
  • TOO-SMALL GROSS MARGINS: Investors look for 45% minimum and preferably more than 55% gross margin. Businesses falling short may find today’s M&A market challenging.
  • SALES PER POINT OF DISTRIBUTION: For companies selling through retail, investors will compare sales per point of distribution, a key statistic, against competitor benchmarks and may shy away from underperforming brands.

No company is perfect. A CPG company with EBITDA of $2 million or more and generally good showing on the above factors could find today’s market ripe for a prime valuation.

Not checking enough boxes? The good news is that focusing on these fundamentals makes sense, even if you are years away from a potential transaction.

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About the Author

Alex Woolford is Vice President of Class VI Partners. Over the past three years, he has helped entrepreneurs secure over $750 million in capital in the CPG vertical, closing deals in such sub-categories as pet products, natural foods, personal care, health & wellness, and outdoor apparel.