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The Fork in the Road for Start-Ups: Take on Equity or Sell

Considered one of the most diverse emerging markets, the food and beverage industry is poised for new heights, with many start-ups focusing on evolving consumer demands. Most start-ups face a decision early on: do you sell your business or take on equity early on? Continue reading see what best fits you and your business.

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Considered one of the most diverse emerging markets, the food and beverage industry is poised for new heights, with many start-ups focusing on evolving consumer demands. Most start-ups face a decision early on: do you sell your business or take on equity early on? Continue reading see what best fits you and your business.

Considered one of the most diverse emerging markets, the food and beverage industry is poised for new heights, with many start-ups focusing on evolving consumer demands. While the more common direction for start-ups is to take on equity in order to facilitate their long-term growth strategy, some may be looking to cash in their chips immediately through the sale of their business. Perhaps you’re in a niche market and your products are in high demand, or simply want to capitalize on a strong market. In either event, a potential sale could be on the table as an option to explore.

If taking the equity route, it’s important to seek private equity firms or investors that have experience with the food and beverage industry. It’s imperative that an investor understands the specifics of the industry and the factors necessary for growth, in addition to food safety regulatory matters and consumer trends in the marketplace.

In the long run, it will be more important to find the right partner, particularly if you want to remain involved long-term and see the organization grow. Identifying an equity partner is not just about who brings the best offer to the table but is also about choosing the right private equity firm and/or investors that align with your vision and support your goals. The relationships you have built with your customers and vendors are critical to future success—you want investors who value those established relationships. Additionally, difficult decisions will invariably arise as your start-up takes flight, so it is vital to have mutual trust with this new partner in order to achieve success.

Regardless of whether you’re seeking investors or outright selling, there are key elements that must be in place, starting with having your financials in order. Many start-ups in the food and beverage niche have never required an audit or review of their financial statements; you may still be working on a cash basis and using a basic financial reporting package like QuickBooks. At this stage, it’s important to invest the time to ensure your financial data is clean in order to create an accurate investment memorandum, and focusing on this now will prevent additional diligence issues down the road.

As a transaction practice, blumshapiro is seeing a trend in the market to perform sell-side diligence in advance of going to market. This can be performed in a formal process— Quality of Earnings—or more informally through general sell-side assistance. Relying on a firm that also has experience representing the buy-side of a transaction (like blum) better positions a start-up looking to attract investors or buyers, because your financial data can be analyzed in a manner that anticipates what a buyer or investor would be looking for. The impact is that by making the investment up front, there will be less effort required to navigate through a potential buyer’s or investor’s diligence during the transaction. Additionally, with validated numbers from a firm such as ours, a buyer can feel more comfortable putting together a strong bid based on the enterprise value that you’ve taken to market.

All corporate and legal documents and Human Resource policies should be in order whether selling or seeking equity for a start-up. Employee manuals and workers’ compensation policies should be appropriate for the size of your business, and a viable management structure should be in place. This can be achieved by having an appropriate management team already in place, or by having a plan for future personnel hires that will bring value to the business and facilitate the achievement of your long-term objectives.

It’s also crucial for the start-up entrepreneur to understand where the value lies within the business, which will help them identify the right partner. It’s important that you do a deep dive and identify where your business’ profit is truly generated from, down to the product line or SKU level. A good partner is going to ensure they have that level of detailed understanding of your business. It’s imperative that you perform the analysis up front because it will help you better drive the transaction process. Whether you’re in a niche market capitalizing on a recent consumer trend (like locally-sourced products, organic, gluten-free, etc.), understanding what your value proposition is will contribute to your success in this next milestone.

As you enter this process, it’s important to go in with the right mindset as diligence can be an extremely grueling and exhausting process, particularly for start-ups just trying to get through day-to-day business and all it entails. The additional hours required to deal with potential buyers, attorneys, and the overall diligence process is extremely time-extensive. It’s not at all uncommon for sellers to become fatigued as the process drags on. That said, doing the appropriate sell-side work in advance with an experienced firm like blum greatly streamlines the overall process and allows you to spend more time focusing on the negotiations and more importantly, what you do best…running your business.

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