With a backdrop of cautious optimism among operators who attended the Coffee, Tea and Water Show in Las Vegas, Mike Kelner with VBB Advisors expects increasing product sales for operators to translate into a flurry of M&A activity in the coming months. In this Q&A, Bob Tullio caught up with Kelner, an industry leader among business brokers, to discuss 2022 and the outlook for 2023.
Tullio: For most operators, would you say that their company valuations are much higher at the end of 2022 than they were at the beginning of 2022?
Kelner: Absolutely - I think we've seen a positive trend line all year. The other thing is that for various reasons, we've been able to successfully push up the valuations from our buyer pools.
Big investment by VBB Advisors in 2022
Tullio: That is good news for operators. VBB Advisors took some big steps, made a big investment in the valuation process this year. Tell us about it and why you felt it was something you had to do, why was it important?
Kelner: I felt it was important because all too often operators are guessing the value of their business based on some rule of thumb that really has no bearing on reality. If you look at other industries, if you look at larger businesses out there, there's a professional valuation process that's applied to these companies. I felt like it was time for our industry to have that as well, so we now have a dedicated valuation consultant on our team.
We provide a professional valuation, which includes looking at the business from a financial perspective for asset values, multiples of cash flows and market values. We do a search of SIC codes for comparable transactions from the last 12 to 18 months. Then, we also apply any transactions that we know from firsthand experience. The result is a professional valuation package that is the foundation of our selling process. We have seen a lot of interest in the operator community.
The buyers in 2022
Tullio: Who are the buyers in 2022? Can you give me a rundown on the playing field?
Kelner: As always, you have the national companies. Sodexo is a new player in the market, having acquired Accent Foods. They're an active and well-funded buyer. Surprisingly, Aramark is back to buying vending in certain markets, and as you and I both know, they've been in and out of vending a few times in our history, but they're certainly back. We have some private equity-backed groups that are buying. We've also sold businesses to large regional operators.
Tullio: Did anyone get out of the game in 2022?
Kelner: What I am seeing is that smaller players are not getting transactions done.
I think to a large extent, it's very difficult for them to get funding. A smaller operator coming out of the COVID period doesn't generally have the financials to support bank financing. Most of them also coming out of COVID don't have the cash to do it on their balance sheet.
The “baby boomer tsunami”
Tullio: Did you see that tsunami of baby boomers ready to retire; did that wave start to gain speed and momentum in 2022?
Kelner: I'm seeing a lot more inquiries and a lot more listings, and these sellers are often 60 to 65 years old. I have one client right now who is 84. If you look at it from a demographic point of view, that baby boomer generation right now is 70 million people strong, and it's forecast that their business sales will be the greatest transfer of wealth in human history as these people make a move. Not just in our industry, but across all industries. We're seeing it happen, and it is going to make 2023 very exciting.
Outlook for 2023
Tullio: How exciting?
Kelner: I believe that 2023 will be the busiest year that I've ever had. Just based on the pipeline and the inquiries that I'm seeing daily; I think it's going to be busy. A lot of operators wanted to sell in 2019 and 2020, and they've had to wait. They are just at the point where they're tired of waiting. It's time to get something done and they're ready. I'm seeing a lot of that. There was pent-up demand that couldn't be satisfied until we got out of COVID.
OCS is coveted
Tullio: You wrote last month that OCS is still coveted by buyers, largely because of the great margins. Do you see that being the case as we move into 2023 and hopefully larger office populations?
Kelner: I do. Office coffee took a big hit, but as it comes back, the beauty of office coffee is low capital expenditure to grow, recurring revenue streams, low service requirements – many factors that make it attractive not only to strategic buyers but also financial buyers like private equity folks. OCS will be in demand in 2023.
Vending – still relevant
Tullio: What about vending? Does that have a future in 2023 for attracting buyers?
Kelner: Absolutely. There was this mass exodus from vending into micro markets, but now some of those locations are moving back to vending for a variety of reasons, including reduced employee count. Cashless technology has also been a positive for vending, and buyers want to see it.
Micro markets – “the technology sizzle”
Tullio: One of the things that attracts buyers to our industry is the micro market industry. Is it the technology that makes it so attractive?
Kelner: Definitely. I think it will continue to evolve. The technology is something that makes our business attractive to private equity in particular – the technology sizzle, if you will. Also, it is scalable without a lot of capital expenditure. Buyers love the micro market channel.
Why operators need an advisor
Tullio: Operators are confident entrepreneurs, and I imagine many think they can sell their company on their own. I'm sure you hear it all the time. Is it a mistake to go at it alone?
Kelner: Yes, absolutely. You can sell anything yourself, but will you get the best outcome? Frankly, there are some major reasons why you don't want to do it yourself, and the first is objectivity. There is a reason why athletes have agents, comedians have agents, musicians and authors have agents. An objective third party is able to execute a transaction without all the emotional baggage that goes along with being the owner.
The second reason: I have done hundreds of transactions, so there's just the factor of experience, knowledge of purchase agreements, considerations of allocation of purchase price. There's a whole multitude of considerations that are often overlooked by sellers. So, that is a big reason why large operators, sophisticated businesspeople, are using VBB Advisors.
Working on the sell side of the table
Tullio: You call yourself a sell-side broker, one who only represents sellers. Why is that important?
Kelner: I am fully invested in making sure that sellers in the convenience services industry receive the best possible price, along with the terms and conditions that satisfy their needs. My interests and the seller’s interests are completely aligned. As an intermediary, you can’t serve two masters.
VBB Advisors is well-connected with private equity firms and operators who seek acquisitions. That is part of the VBB Advisors advantage, but those buyers know that once I connect them with a seller, I will be working on the seller’s side of the table exclusively.
Mike Kelner can be reached at (704) 942-4621 or email@example.com.