Even for someone who has dedicated a good part of his life to facilitating the combination of vending, foodservice and office coffee service (OCS) operations with their competitors, I am dumbfounded by the amount of activity that has increased in this space within the past year.
After watching the industry slowly consolidate over the last 25 years, I thought by this time most of the marginal operators would be gone and the large buyers would be taking care of business, instead of acquisitions still being the major avenue of their strategic planning.
While it is a fact that in certain areas of the country, one or two main operators control the vast majority of revenues there, (e.g., Iowa, South Carolina, Oklahoma, Arkansas, Nebraska, Wyoming, Florida, Idaho, Montana, Tennessee, Vermont, New Hampshire, Western Colorado, Northern Virgina and Maryland, among others), I find more mergers and acquisitions (M&A) activity happening at this time then in the past.
This is partially due to Accent Food Service's recent spate of acquisitions in areas they hadn't service before, Company Kitchen's (formally Treat America) revitalized attempts at consolidation as well as the usual players like Canteen/Canteen franchisees, AVI, First Class Vending (California and Nevada), American Food and Vending, Express Foods and a handful of local buyers in target areas.
Why there hasn't been a slow down to M&A plans
I have brought acquisitions to all of those named earlier, resulting in being privileged in discussing with them a general formulation of their M&A plans and intents. Like any other strategy of the industry, these massive amounts of acquisitions are being driven by supply and demand concerns of the buyers. They know consolidation has eliminated much of their competition and want to complete this process before there are too few quality operators left to purchase. With a looming recession, (based on recent interest rate increases and U.S. deficits), robotics and artificial intelligence (AI) technology predicted to take over many industrial and service related jobs, the maturing of the micro market segment and the roller coaster of OCS cost of goods, traditionally acquisition is the quickest way to grow. Using acquisition is looking more like an end game than a continuing source of increasing the top line.
With new or rejuvenated players vying for the same operations, it's not necessarily who’s the best fit for your company, but now becomes who gets to you first, before their competition does.
My company model has always been based on who was the one best buyer for my seller. I would take in demographics, type of equipment each operated in the field, ease of employees to get to their new employers, compatible computer and software programs and numerous other criteria to match the two best compatible companies and help them transition the business in the least disruptive manner for the employees and customers.
With many of the recent deals I've seen happen outside of my jurisdiction, much of this traditionally careful matchmaking seems to be unappreciated concerning the buyer and it has been buying just for buying sake.
I, personally, have turned down numerous listings or won't work with certain buyers on some deals where I feel the parties won't be compatible after the transition. My guiding principal of "it's not how much you buy, but how much you keep after the transition" has always resulted in putting the right two parties together. Unfortunately, I don't see that in all deals that have been recently announced. Some of the players, in order to grab all they can while they can, will not make acquisitions with the best results for either the buyer or seller.
Going it alone
One of the major hurdles I see that delivers poor results is when the selling operators try to do the transaction on their own. I’ve personally spoken with numerous sellers who did these without professional help and heard some of the horror stories that developed. For instance, one operator friend in California who never received his holdback money.
Virtually every deal consummated in this industry calls for 15 to 20 percent of purchase price being held back at closing for a specified period. This is to guarantee the seller’s reps and warranties concerning the amount of the gross sales stated and contract terms and quality of the accounts represented to the buyer before the close.
This operator didn’t have the typical language I always ensure is represented in the Purchase Agreement, in that the buyer can’t disrupt the sales or lose an account of the sold business by poor service or not following the wishes or contracted instructions of the client management. In this case the buyer did a poor job in servicing accounts and lost about 15 percent of the business within 6 months. They sent the seller a letter stating they wouldn’t be paying him over $200,000 of the holdback money.
Without the right language and back up from an industry professional, the seller had no recourse besides accepting the buyer’s position. The commission the seller thought he was saving by not having industry specific representation cost him almost eight times that fee.
Example #2
In another deal, the seller was told that his building would be rented for up to a year and he and his son would be needed for at least 6 months but probably longer. As it turned out, the buyer let him and his son go after 30 days. At that same time, they told the seller they would be moving the operation to another facility within the week. The seller was taking the word of the buyer as an agreement to part of the deal, when in fact he didn’t make sure these promises were backed up in some form on the Asset Purchase Agreement. He had no recourse and within the week would need to be looking for a job and trying to get his warehouse rented. What a mess.
On the other side, I spoke with a buyer I represented a few times in the past, who decided to do a deal without my help. The results were that they hadn’t completed effective due diligence and after the close realized that the seller was ‘R” factoring (I.E. not paying) commissions to the tune of $250,000 a year and the seller was not in good standing with the state as he owed over $200,000 in unpaid state sales tax. All this could have been avoided if they had the proper advice and representation.
Many think their accountants and lawyers (who are not cheap) will faithfully represent them in these deals and they are therefore protected. My experience in the sale of over 300 operations is that very few of these advisors know much about the industry and have never dealt with important language needed in the APA or major due diligence items that need intensive discovery, pertaining exclusively to this industry.
You can’t treat an asset deal like a stock deal and the due diligence for a vending operation is wholly different from the client the lawyer may have just finished representing on the sale of a chain of car washes.
I know that completing successful acquisitions and the right transition is an art form and that everyone is more likely to achieve success with professional industry specific representation.
The old adage of “Buyer beware” should be changed to “Both Buyer and Seller beware” as it pertains to acquisitions in our industry. As more and more unqualified and inexperienced buyers and sellers think they can complete these deals without following successful industry protocols’, both parties will realize too late, the nuances and expertise that is needed to ensure not only a good close but a tremendously successful transition of the business after the sale.
