Why is Private Equity so interested in the pet industry and is your company a candidate?

Why is Private Equity so interested in the pet industry and is your company a candidate?

Carol Frank

I get at least one contact a week from a private equity firm that wants to invest in the pet industry.  As politely as I can, I tell them to line up behind the other 50+ firms I have on my list that would like to invest in pet.  As owners of manufacturing companies, you probably get many of these calls as well.  So I decided to delve into the question of “why is private equity so interested in pet, and what type of companies would be an ideal acquisition for these groups?”

Over the past several years, pet industry analysts have witnessed an increase in mergers and acquisitions and a significant inflow of capital into pet businesses across the country. The action the pet industry has seen is primarily attributable to institutional capital’s demand for recession-resilient companies and innovative operators. Since the demographics in the pet industry are such that customers continue to own pets even in recessions, and operators typically find creative solutions to address underserved markets, demand has been piqued in the pet industry.

Conversely, multiples in the industry have been on the high end relative to manufacturing and distribution counterparts in other industries because demand for these companies exceeds supply of pet companies that meet private equity’s criteria. As a general rule, for companies to be PE-ready, they have to have or be close to $1 million to $2 million of EBITDA, which basically translates into a company doing at least $15 million in sales.

The challenge for many of these potential industry investors is finding a company, or group of companies, that allow for significant sums of capital to be put into the pet industry. Once a pet company reaches $2 million of EBITDA, the marketplace becomes extremely friendly – even downright competitive.

There are a large number of companies with great products and superb management teams. If they can achieve some scale and profitability upwards of $1 million to $2 million EBITDA, they become extremely attractive to private equity investors. Since the market seems to have spoken on this, it should be no surprise to see companies moving this direction. Some of them will do it organically, while others will do it through acquisitions. This is why we have seen so many lower-middle market strategic transactions in the pet industry.

To make sense of the recent demand for pet industry companies, one has to understand the dynamics within the private equity world. Private equity is sitting on a record amount – almost $500 billion – of unused capital. This unused capital is often referred to as  “dry powder.”  As corporate profitability returns, outside capital is being put to work in stable, well-positioned companies. The positive demographics of the pet industry are attractive to this capital.

While the pet industry has been on the receiving end of much of this activity, it’s a trend that’s been developing across the broader middle market. A recent survey of fund managers found that an increased investment of capital is expected in 2012. According to the Perspective Private Equity Study by BDO, 22 percent of fund managers expect to invest between $30 million and $50 million in deals and acquisitions during 2012.

This is a significant increase, up from just 10 percent of respondents a year ago. And 16 percent of fund managers surveyed said they would deploy somewhere between $51 million and $100 million in capital over the coming year, an increase from only 11 percent last year. That means a record amount of dry powder is now being aimed at the middle and lower-middle markets. Those in the pet industry are among the most highly sought-after targets.

The sharp rise in deployed capital, along with pre-recession EBITDA multiples in private equity is an excellent signal for those looking to sell a business in 2012. The combination of pricing and increased deal flow means now is the time for private equity candidates to prepare for sale. Those in the pet industry have a great opportunity to place themselves right in the middle of this equation.

Bio

Carol Frank of Boulder, CO, is the founder of four companies in the pet industry.  As a Managing Director at SDR Capital Markets, an independent office of Colorado Financial Service Corporation, Carol leads the team in executing pet industry transactions including M&A, capital formation and strategic advisory services.  She is also the owner of BirdsEye Consulting, the consummate source for pet sector consulting expertise.

She can be reached at carol@carolfrank.com

To learn more about the American Pet Products Association (APPA) visit their website

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Will Customers Really Buy this? Ask an Advisory Council!

Will Customers Really Buy this?    Ask an Advisory Council!

Carol Frank

As a pet industry consultant and entrepreneur, one thing I am continually amazed at is the amount of money thrown at unproven products – many of which end up failing.   This was top of mind this past week as I sat through a fascinating presentation by the Director of Innovation for Del Monte Pet Foods, Geoff Tanner.  Geoff took us through the process of how they launched their new line of dog treats, Milo’s Kitchen.  It was a detailed and expensive process, impeccably designed to ensure a successful product launch.  Of course Del Monte Pet Foods can afford this and it has ended up paying off handsomely for them.

What if you don’t have the millions of dollars that Del Monte spent on their product launch?  How does the little guy make sure a new product idea will end up being successful in the marketplace?

This is where Advisory Council comes in.   I distinguish between the terms Advisory Board and Advisory Council because, in my experience a Board is created to help you through you business issues versus a Council, which is designed to help create and validate products and services.  For example when I owned Avian Adventures I had both an Advisory Board and Advisory Council.  The Board consisted of three wonderfully wise people that I paid a reasonable sum of money to fly into Dallas three times a year to meet with my team and me.  The purpose of the Board was to hold us accountable, brainstorm ways to improve the business, and leverage their years of experience so I could grow the company.  I loved having these guys as part of the team and they got a kick out of helping this little ol’ birdcage business (which is now owned by Midwest Homes for Pets).

I formed my first Advisory Council in 1999, three years after founding Avian Adventures.  Since I had already sold my retail and distribution company, I no longer had easy, direct access to the “front lines” – the customers who buy my product.

To address that problem, I formed a group of six “Council Members” – bird store owners, breeders, and avian veterinarians who could give me first hand feedback on what customers were asking for, what products were missing from the market, trends in the industry, which of our products were selling well, and making sure we addressed any health issues around our products.

Our Council members were honored that we invited them to serve in our group.  We flew them in the night before the meeting and had a group dinner.  Meetings were one day, then they usually flew home that night. We paid them a small fee for their services, paid for their travel expenses, gave them freebies and discounts, and put their profiles on our “Advisory Council” page on our website.  Our best selling product ever, the Poquito Avian Hotel, came out of a brain storming session with our Council.

Recently I was talking to Scott Click, the owner of a 7-store chain of stores in Austin, Texas.  Scott was telling me what a great experience it has been for him to serve on the Coastal Pet Advisory Board. Coastal has implemented a similar concept – they fly in a group of retailers from around the country several times a year to discuss what is happening in the world of collars and leashes.  Coastal is just one example of great companies taking advantage of outside advisors.

An Advisory Council is a win-win experience for all parties involved and I wouldn’t operate another business without implementing this concept.

 

Bio

Carol Frank of Boulder, CO, is the founder of four companies in the pet industry.  As a Managing Director at SDR Capital Markets, an independent office of Colorado Financial Service Corporation, Carol leads the team in executing pet industry transactions including M&A, capital formation and strategic advisory services.  She is also the owner of BirdsEye Consulting, the consummate source for pet sector consulting expertise.

She can be reached at carol@carolfrank.com

To learn more about the American Pet Products Association (APPA) visit their website

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