Q&A With Mike Kelner: Mergers & Acquisitions During COVID-19

Mike Kelner is the founder of VBB Advisors, a full service merger and acquisition firm serving the vending, office coffee and bottled water industries. Mike is a Certified Business Intermediary and Value Builder Advisor. He can be reached at [email protected] or 704-942-4621.

Is the coronavirus pandemic impacting merger and acquisition activity in our industry?

Yes, unfortunately as the significance of the pandemic is better understood, both buyers and sellers have retrenched. Both sides seem to be taking a “wait and see” attitude. Potential sellers must now have their attention solely focused on urgent tasks at hand. Issues related to cash-flow, employees, payroll and debt obligations take priority over any consideration of longer-term goals.

On the buy-side we have two communities. The first is strategic buyers (those already in the industry) and the second is financial buyers such as private equity firms.

Strategic buyers face the same challenges as other operators and the urgent need to manage cash-flow. This means that few if any of them will be doing transactions for the foreseeable future.

Financial buyers have significant capital to invest but are reluctant to make any major investments given the uncertainty. It is safe to assume that they believe valuations will be lower in the near future and better deals will be available.

How would you advise someone who is considering selling or buying a company to proceed right now?

For sellers, obviously the urgent needs have to be addressed first. Once those are reconciled, now is a great time for owners to work “on their business” rather than just “in their business.” Now is the time to rethink digital strategy, develop a subscription model for the business, implement dynamic routing, add a product line, or other such initiatives that are typically on the back-burner for a time constrained owner.

To a buyer, I would say that the coronavirus is a one-time event that doesn’t change the dynamics of the refreshment services industry. If anything, unattended retail is an ideal solution for today’s needs and vending is the answer for clients who want to limit the amount of hands on a product before it is sold.

Are there any non-traditional buyers from outside the industry?

Absolutely. The two big ones are the convenience store industry and the soft-drink bottlers. They are interested because it's a growth opportunity for them and an open door into unattended retail.

These untraditional buyers have powerful brands, retail experience, extensive distribution and many have regional commissaries with bakeries, so for them, it's an opportunity to leverage what they already have into new markets. So, they're very interested in the convenience services industry.

There is another thing happening that is both a fascinating and exciting development. For years and years, there was limited interest from private equity, or what we would traditionally call financial buyers, because our industry was seen as stagnant, capital intensive, and generally lacking any technology to make it more scalable. Today, with the vending management systems that we have, with remote monitoring, kiosks, with more and more of the transactions going to credit cards, we’ve attracted the attention of private equity firms.

I receive three to eight inquiries a week from different private equity firms looking for opportunities in the industry. That is significant. There are literally hundreds of millions of dollars held in private equity right now looking for transactions. This is great news for a seller that wants to exit or an operator who wants to grow. Private equity firms will often partner with an operator and look to grow the business from a regional footprint into a larger one.

What else makes an operation attractive to a potential buyer?

There are several things. One is recurring revenue. Everyone wants a recurring revenue stream, and that's why you see so many businesses going to subscription models, and frankly our business is very much a recurring revenue business. People go to get their coffee every day, they buy their snacks at break time, so it's very consistent revenue. And even more so on the coffee service side of the business, where month after month they buy their cases of coffee in a consistent pattern. Typically, our business has relatively low customer churn or turnover. This reduces buyer risk and adds value.

The other thing that makes the business attractive is that it is scalable. Particularly now, as we look at micro markets, the capital expenditures are much lower, and that's attractive. Twenty-five years ago, it would cost you thousands of dollars every time you got a new customer. Additionally, the enhanced management systems and controls provide buyers with further assurance of a well-run business.

Customer diversification is also key. It is a red flag for buyers when they see an operator who has one or just a few customers that represent a significant portion of the revenue.

What else can an operator do to prepare for a potential sale?

As you know, I became a Certified Value Builder Consultant this year to help prepare my clients as they move toward the sale of their business. Value Builder Systems is designed for the purpose of preparing a business for a successful sale. The Value Builder System™ is a statistically proven methodology designed to improve the value of a privately held business.

At the core of the system is The Value Builder Score™, an evaluation system driven by an algorithm that evaluates a business on the eight core value drivers that buyers take into consideration when evaluating a company for acquisition. In this new and challenging M&A environment, this type of preparation becomes essential for operators who wish to maximize the value of their company.

The Value Builder Score™ gives a comprehensive assessment of the "Sellability" of your business, whether you want to sell next year or whether you want to know if your company is positioning itself properly for a future sale. There is plenty of free information available to operators on the Website.