4 Questions Every Consumer Goods CEO Should Ask Before a Deal

The consumer goods space has seen a flood of interest from investors and buyers over the past few years.

Investors have long coveted consumer goods companies for their close connection to their customers and ability to establish brand value through products that can be easily touched and felt. Today, consumer goods is the most sought-after sector on Axial among capital providers and buyers.

Meanwhile, more and more sellers in the industry are looking to ink deals, thanks in part to successful marquee transactions like Constellation Brand’s $1 billion bid for craft beer maker Ballast Point and Unilever’s $1 billion purchase of shaving upstart Dollar Shave Club.

“It’s still a seller’s market for consumer goods,” says Adam Deutsch from River Hollow Partners.  But in an extremely competitive landscape, consumer goods CEOs can expect potential investors and buyers to be very educated about their market and discerning when it comes to what great growth looks like.

Regardless of whether a transaction is imminent or 3-5 years down the road, here are four questions every consumer goods CEO should ask before bringing a deal to market.

How will you tell your growth story?

Are you experiencing growth because you’ve brought a new, unique product to market or do you have the most respected brand in a larger category? Is your story one of a differentiated business concept or a solid distribution strategy? Identifying your company’s main driver of growth is especially important in the crowded consumer goods space.

For example, one of River Hollow’s portfolio companies, Sir Kensington’s is a new product with unique positioning in a well-established category. Deutsch says they invested in the craft condiment maker, who makes products such as Dijonnaise, a mustard-mayo hybrid, based on the idea that bringing a great new product into the ketchup and mustard category. According to Deutsch, even if it only took away a small percent of market share, this could be a win.

“If you go to a nice bistro in Paris or a Burger King in Dayton and you ask for ketchup, they’re going to give you the same thing,” says Deutsch. River Hollow recognized Sir Kensington’s opportunity to target upscale establishments looking to bring a more distinct offering to discerning customers.

Another one of River Hollow’s investments, Dancing Deer Baking Co., has a different narrative. Their story is one of superior distribution, differentiated branding and strong core products. The company, founded in 1994, presented an opportunity for River Hollow to work in partnership with management to achieve more profitable growth. “Cookies and brownies are still really popular, and it is all about organizing a good business around that,” says Deutsch.

Can you showcase true discipline?

“There are relatively few consumer goods companies that are so disruptive that they can act without discipline, and none that should,” says Deutsch. “In a market like this, what is paramount is running a really solid business that demonstrates appreciation for what stage you are at.”

Show investors how your business got to where it is today — the more detail you can speak to, that will be essential in deal diligence and in helping to build trust.  

There are five questions investors say they’ll ask CEOs in the initial conversations about their business to determine their level of discipline:

• How are you different from your competitors?

Peter Vogt, at Murano Group, says it’s more exciting to investors when brands have authenticity and fill a distinct consumer need versus being an ingredient or flavor copycat of a national brand. “Don’t pitch me Pop Chips,” he says. “I don’t want to directly compete against a giant.” Establishing what makes your offering unique is far more important than modeling the business after a similar product.

• What future need does your product address?

Have an in-depth understanding not only of the current need your product meets, but also how that need might shift over time. Milan Roy of Lyra Growth Partners says a company should be strategically aligned with where their consumer is going. Back up your plan by proving your sell-through in a smaller core/local market rather than focusing on broad top line revenue achieved through wide distribution but weaker velocity.

• Are you growing steadily?

Be prepared to share your sales and growth profit margins. Deutsch says companies don’t need to show meteoric growth year over year, “but the upward trend needs to be strong and convincingly so.” Show investors how you’ve grown the business successfully in a way that generates cash into shareholder value.

• What’s your supply chain and distribution?

“The relationships and ability a CEO has to get product on the shelf is very important,” says Vogt. Be prepared to talk about how your supply chain, distribution, and partners fit into your growth plan.

• What are your strengths and weaknesses?

Even though an investor will have his/her own perspective on what your strengths and weaknesses are, a CEO should come with their own view. “Being self-actualized in this environment goes a long way,” says Deutsch.

If you don’t have this level of financial and operational detail or no one to focus on gathering it, the years leading up to the deal are the time to focus on that. Whether it means paying someone to do it (a great advisor or banker) or making a hire that will focus on those areas (e.g. a CFO or COO), these are vital preparations that will pay dividends during a deal.

Are you growing at the right rate?

Private equity buyers and investors interested in consumer goods businesses will expect CEOs to be transparent about what progress is being made and what growth can be expected in the future. In other words, buyers will want to see that you are always matching forecasts to plan.

This is especially important in the consumer goods sector where the typical hold time for an investment is three to five years. “That’s not a huge amount of time,” says Deutsch. “The timeline can be flexible but not endless for your PE partner.”

Investors don’t want to see growth in a million different directions. They want to see concentration on channels that have been proven, they want to see that your product can get onto the shelf, and they don’t want to see you burning a tremendous amount of cash to get there.

Vogt suggests that in order to meet aggressive growth plans understanding all your capital alternatives may be wise. Just make sure you are meeting your goals. “If you don’t hit it and your growth slows then you might not get the valuation you want,” he says.

Who is your next customer (and how will you reach them)?

The most coveted businesses will not only have a deep understanding of their legacy customers, but will have an educated opinion on where the next wave of customers are coming from and have a plan to capture them.

“Buyers are looking at brands that have done a better job at activating and reaching millennials and other harder to reach and gain consumer segments, says Roy. He suggests this is a reason that consumer goods investors are starting to act a bit like venture folks. “Earlier stage companies have the luxury of building their brands without being stuck to legacy channels and models. They can focus on direct to consumer and a social focus to tell their story and be more transparent. We’re seeing a lot of very interesting companies using these tools and strategies.

Having a keen understanding of what motivates customers to buy is incredibly important. Knowing how your competitors and the markets are performing will help you develop benchmarks for growth so that when it’s time to take on capital or sell, you’re truly ready.