Rosset’s M&A update: Current buyers want more than seller’s clients; they want management, staff, facilities

In my last M&A update at VendingMarketWatch.com in November, the presidential and congressional elections had been held, but not totally settled. There were several vaccine contenders being tested, but none had been approved by the FDA. The number of new cases of COVID-19 had started to rise again, after a slight decrease over the summer. And the only real positive in the nation’s economy was the stock market’s continued rise after taking a beating in the spring of 2020.

In the convenience services acquisitions sector, a few traditional buyers were starting to poke around, looking for acquisitions after a near total hiatus last spring and summer. To my knowledge, only a handful of meaningful deals were concluded since the spring. That was about to change.

Toward the end of 2020, I was introduced to and contacted by a handful of new potential buyers in our industry. While some were strategic buyers, most were looking for standalone platforms – companies whose offices and warehouses would remain whole and not fold into the buyer’s infrastructure – that would provide footholds in specific cities or regions.

Historically traditional deals of established companies purchasing direct competitors and folding the seller’s operation into their own, although still a very viable transaction for some, was now expanded upon by these new companies that were happy to rent or purchase the seller’s facilities, and to keep the owners and their staff employed.

While the purchase a standalone platform does not afford the buyer the same kinds of synergies that are available with a fold-in or rollup, thus eliminating building, owners and redundant employees, these new buyers, in many cases, do not have the facilities yet to do those synergistic fold-ins. Some also needed to hire the former owners or family members as they wanted knowledgeable people in the industry to not only run the new operation but also to help the acquisition asset grow. Retaining management ensures continuity of the good service the previous owner provided its clients.

The strategy of making few if any changes guarantees these purchasers the solid base needed to grow and prosper. Eventually they will find a few other companies in the same area that can be purchased and combined.

For the first time in years, it has been exciting for me to be able to offer sellers the opportunity to take money off the table in this risky and uncertain economy, and yet continue to do what they love and have been doing for most of their lives. Of course, they could still retire if they prefer, after a short transition period, but they now have new options open to them that they didn’t have before.

Three-month forecast

Right now, there are at least four pharmaceutical companies that are producing vaccines to combat the spread of COVID-19. While rollout of shots for the general population is still a few months away, most healthcare workers, first responders and vulnerable seniors have had access to a vaccine. The process is still slow; while the new variants of the virus may lengthen the time of complete herd immunity in our country, the future looks brighter than it did two months ago.

Most operators to whom I speak say their companies’ revenues are still down significantly, compared with pre-pandemic levels. The amount lost is dependent on the type of clients they service, and the services they offer. Many schools and universities are still conducting virtual classes, hospitals haven’t fully opened up for noncritical treatment and operations, office buildings for the most part are still shuttered, and many employees from various industries are still furloughed or unemployed. I predict that our economy will not come back quickly, and some segments of convenience services industry will not ever totally recover.

There is no denying that office coffee service clients, especially white-collar locations, will continue to experience a dramatic shift from permanent onsite workers to a hybrid workforce if not totally offsite personnel. The same will probably be true for large scale cafeteria and industrial foodservices.

A large regional foodservice operator told me recently that many of his long-term accounts are requesting that he switch from full-service manual cafeterias to micro markets for their employees. The way many businesses will change how they operate now and, in the future, will dictate that the most nimble, tech savvy and aggressive operators who are not afraid to change with the times, will be the winners going forward.

Specific deals being made now

Many operators are frustrated by the past year’s instability brought on by the coronavirus and social unrest, and they are concerned about future. Some want to get out, but feel they have to wait until a high percentage of lost (or delayed) clients return. But that’s not the case with the deals I am seeing now.

All buyers with whom I work have agreed to reevaluate the revenues of the business they have purchased, from anywhere between six and 12 months after closing and to still pay for business that comes back in that timeframe. So, if an owner wants to sell now, they have the opportunity to either retire, sell and do other things, or stay and help the buyer grow the division. Either way, they are assured to get some future payment for those accounts that either are presently not allowing the operator on the premise to provide service or are temporarily working with reduced personnel.

As I previously mentioned, buyers who don’t have a facility in the area are eager to take over the seller’s building and hire the principals and staff.

At some point there is a strong possibility that these same buyers won’t need the turnkey operation in a previously purchased area or that they won’t need the current owners as much as they do now. But for the foreseeable future the standalone platform deals are still available.

In the meantime, all owners need to reduce personnel and fine tune their operations (cut the fat) to keep pace with reduced revenues. A number of clients tell me that their gross margins are higher now, as this emergency made them take a closer look at their operating expenses and modes of operation, so they have made the changes necessary to become more productive and profitable.

ABOUT THE AUTHOR

Marc Rosset is founder and president of Professional Vending Consultants Inc., a specialized intermediary for acquisitions of full-line vending, foodservice and office coffee companies in the U.S. Since 1993, PVC has managed more than 310 transactions with aggregated gross sales of of about $900 million. Rosset has played a key role in helping to frame industry-recognized guidelines for determining the value of an operation. He can be reached at [email protected] or (312) 654-8910 (voice) or text at (847) 814-3939.