Wholesaler Consolidation with Glazer’s CFO

Today on the podcast we talk wholesaler mergers and acquisitions with Orman Anderson, CFO for Glazer’s Beer and Beverage.

Orman is a former investment banker with Bear Stearns and JP Morgan, and has done multiple transactions as CFO for Glazers. So, this man knows his stuff.

In our conversation, we dig in on how Glazer’s conducts it’s acquisition due diligence, establishes valuations, and considers financing options.

If you’re thinking of buying (or selling) your beer business, this podcast is for you.

Key Topics

  • Valuation methods and multiples
  • Best practices when using a broker
  • How to finance an acquisition
  • How to forecast and achieve consolidation synergies
  • Purchase and sale agreement basics



Speaker 1 (00:00):

In today’s podcast, we hear from Orman Anderson, the CFO for Glazer’s Beer and Beverage Orman and I talk all about mergers and acquisitions in the beer wholesaler space. Talk about why to consider an acquisition, the criteria that you might be looking for, whether to use a broker or not. What kind of due diligence is involved? How do you value a potential acquisition? Or whether you’re a buyer or a seller, how to think about beer and non-alcohol valuations differently. And then we get into synergies. What are these elusive synergies? How do we forecast those? We’re taking two businesses and putting ’em together. What are the things to look out for? What are the models that we want to use? And then how do we finance this transaction? Orman brings a lot of experience to bear as a former investment banker that he’s gonna share with us today.

Speaker 1 (00:51):

We wrap up by talking about the purchase agreement, what the deal structures can look like, and then post merger, once the deal’s done, what happens next? How do you bring these companies together? So please enjoy this wide ranging conversation with Orman Anderson, the CFO for Glazer’s beer and beverage. Just a quick note and we’ll be right back to the podcast. I wanna let you know about the Beer Business Finance Association. This is a network of financial pros, just like you looking to improve financial results, increase profitability, connect with your peers, and share best practices. Our mission is to help your beer business improve financial results through transformational financial training, support, and networking with your peers. If you’d like to learn more, please go to bbb f association.org or simply email me at care@beerbusinessfinance.com. That’s KAR y@beerbusinessfinance.com. Hello and welcome to the Beer Business Finance Podcast, where we combine beer with finance to help you create delicious profits in your beer business.

Speaker 1 (01:56):

I’m your host, Kary Shumway. I’m a certified public accountant, a former CFO for a beer distributor, and I love numbers. This podcast will provide you with useful financial guidance that you can implement right away in your beer business. To make more money in addition to this podcast, please visit beer business finance.com. Here you’ll find free tools and resources information on upcoming courses, and you can sign up to receive the weekly beer business finance newsletter for free. Each week, we cover a specific financial topic to help you improve the financial results in your beer business. Let’s get started.

Speaker 2 (02:37):

Hey, Orman, welcome back to the podcast. Thanks, Kary. Great to be here with you. It’s great to have you back again, and we did have a great conversation not that long ago, and I appreciate you coming back. I’ll link to our first conversation in the show notes so people can check that out. But today we’re gonna talk about mergers and acquisitions in the beer space, in the beverage alcohol space. And why don’t you tee it up with a bit of your background. I know you were involved in investment banking and tell us how that relates to our topic today.

Speaker 3 (03:08):

Yeah, perfect. So yeah, that’s how I kind of came into or got into the beverage industry. I started as an investment banker. I spent 10 years with a bank called Bear Stearns and five years with JP Morgan. And a lot of what I did as an investment banker was to work as an advisor, as a merger and acquisition advisor. And so we would advise buyers and more often sellers on the purchase of a business or the sale of their business. And it’s a little bit like I, I tell people it’s a little bit like a real estate agent, where you go in and you help someone dress up their business and put forth the best package to potential buyers, identify potential buyers and negotiate the best terms for that sale, and try to maximize whatever the seller is trying to maximize, which is typically value.

Speaker 3 (04:01):

And so and the other part of what we did in investment banking, a lot of was financing acquisition. So we would help a buyer maybe they’d already identified the deal, they’d already negotiated the purchase price. We would then help them come up with the best way to come up with the money to finance that through a package of maybe it’s bank loans, maybe it’s bank loans and bonds or equity, depending on the size of the transaction and the complexity. Fortunately, in the beer business lending isn’t really a, an issue. Banks really understand how to lend a beer businesses and if you’ve never worked outside the beer business, you may not appreciate that. But I’ve seen how hard it is to get money. And in the beer business, it is not hard to get money. Banks are very generous with the amount of leverage they will give you, the terms they will give it to you on, and the pricing of that leverage. Yeah. And so we we’re kind of fortunate and, and again, people who haven’t been in another industry other than the beverage industry in particular, the beer industry may not have an appreciation for that, but, but we are quite fortunate.

Speaker 2 (05:13):

So one of the things that I’ve run into is, and, and I’m curious as to your thoughts on this. When you were working with those clients in the past, how would I think one of the big parts of m and a is really making ready for it. So if I’ve got a business and I want to sell it, I gotta get my act together, right? So what do you, how do you think about that? How did you advise your clients to get your act together and, and what were kind of the major things that they would need to pull together in advance of, of actually looking to actively market the

Speaker 3 (05:49):

Business? Yeah, that’s a really good question, and I, I’ll frame it this way, Kary which is as a banker and also in my role in, in, in the corporate world as a buyer, we never persuaded. I I’ve never persuaded anyone successfully to sell their business. So as a banker, really what we looked to do is make sure people understood what our capabilities were, make sure that they understood that we knew the buyers, we knew the market, we knew how to run a process to maximize value, to be able to sell it quickly, whatever, whatever their execution, ambition was. But and, and even as a buyer, what you try to do is you try to be the first call somebody makes when they make that decision to, to sell. And so selling a business is a very personal decision. There are so many other things that go into that.

Speaker 3 (06:47):

And, and again, I don’t think that we’ve ever been successful in persuading someone to sell. I think the most success I’ve had is being positioned so that we got the call as a banker, or we got the call as a buyer to participate in a process to do that. So, so as a seller and we, we have been on the sell side of a few of our businesses, but as a seller, it’s important to understand who the buyers are. I think that may be the first thing that you wanna know is kind of understand what the market is. Like who, who is a, is a potential buyer for that. And sometimes, you know that sometimes there are very natural people in your market who would be buyers. A lot of times there are people who kind of tap you on the shoulder from time to time and, and say they’d be interested.

Speaker 3 (07:41):

And sometimes if, if you don’t know, that’s probably the time when you wanna talk to a broker. And there are brokers that specialize in, in, in the beer business. There are brokers that are a little bit broader, that are typically associated with banks that that can help in that process as well. And so knowing who the buyers are is important. Knowing what you have to sell is also very important. And so being able to, you know, a a lot of business owners have several different business interests and so may maybe you’ve got more than just the beer business and sort of carving off and deciding what it is that you have to sell is is important. And and what it’s worth, I think is also pretty important. And, and that’s something when we look at businesses to buy, it’s, it’s two things really drive value.

Speaker 3 (08:34):

It is your profitability, which really is a way that you generate cash. So it is the amount of cash you generate in your business, as well as the sustainability of that cash flow. And it, it’s a multiplier effect. So if you think about it, if you’ve got a business that generates a lot of profitability, but it can only do it for one or two years, and then it’s a flash in the pan and it’s gone, that’s not gonna be worth nearly as much as a business that has profitability. But it is sustainable year in, year out. And that’s really what we’re blessed with in the beer business, is we have businesses that are very consistent cash flow generators. And so, although we operate on maybe lower margins than suppliers do or others do we have a very consistent cash flow in that a lot of our products are franchise protected. And the product that we sell is a product that consumers consume year in and year out. And it’s part of very important occasions. And, and so that consistency of cash flow is the multiplier effect that, that, that helps drive the value of a business.

Speaker 2 (09:46):

Yeah, it’s interesting too ’cause I think the old adage like, you know, value is in the eye of the beholder. You know, what’s, what’s the price? What’s the right value? It’s well, it’s what someone’s willing to pay <laugh>, you know? And so all of those things kind of hold, but you’re right, I think there’s fundamentally, it’s really about that stream of income, you know, and the consistency thereof, and the fact that you can count on it. And then you’ve got this underlying asset, which is protected by franchise laws, which is in and of itself very valued. So you have it sort of like the golden goose spitting off these golden eggs and then, you know, eventually could sell the goose if you want, still worth quite a bit.

Speaker 3 (10:22):

Yeah, that’s exactly right.

Speaker 2 (10:24):

One of the things that I’ve seen too is that information, good information, and I’m speaking may on, maybe on the, on the side of the seller is, is really valuable. ’cause I’ve seen this where maybe someone’s thinking, boy, I I’m, I’m ready to sell, it’s time. You know? You know, the kids don’t want the business and you know, I’m getting older and it’s time, and you get in there and the books are kind of a mess, you know, it’s like, well, we’ve, we’ve always had plenty of cash. I mean, the income looks good. And then you get in and you look at the balance sheet and you’re like, well, what’s this? And what’s that? So, have you come under circumstances where you’ve worked with a client or, or maybe had that your in experience yourself where you’re like, oh gosh, we’re not ready to sell this thing. We have to clean some things up,

Speaker 3 (11:09):

Uhhuh? Yeah. So I would say we, we, we’ve always found a way around that. I have done a, a transaction where the seller, and this is maybe common across a lot of transactions, most of the time when we’re, when we’re buying a business, the person we’re buying it from is actively involved in running the business. And so they’re, they know enough about the business, they can provide you with details, but, but confidentiality is really critical in these processes. And so as a buyer, usually there’s only two or three of us in the company that know what’s going on at any, at any point. We, we do not bring in a big team to work on these deals. And the, and the primary reason for that is we want confidential confidentiality. We want to be able to assure the seller, because if you’re the seller, that’s the last thing that you need to get out in the market, is that you are shopping the company for sale.

Speaker 3 (12:05):

And so they will also, on their side, the seller will generally limit who is involved in that process. And so if you have a seller that is not actively involved in the business in the day to day, it becomes difficult sometimes to get the information you need without them sort of tipping people off that, hey, they’re, we’re, we’re probably gonna do something here. Why are you asking all these questions? And so it’s always better, I think, to get all of that information upfront. Because if you don’t get it upfront and you sort of have a handshake on here’s what the deal is subject to doing some more work, and then you do the additional work, you get the additional information and things are just a little bit different than you’d expected then you have to potentially make adjustments. And nobody likes that. You know, when you’ve agreed on something, you wanna stick to it. And and the more information you have upfront, the better able you are to set a deal that everybody agrees to and there aren’t any changes because we have all the information up front. So you, you really hit the nail on the head on on one of the critical aspects is having good information and, and having it available and, and being able to provide it upfront so that you’re, you’re not having to retrade anything as new facts come to light.

Speaker 2 (13:29):

Right. Yeah, no, that’s a good point too, that it’s, you don’t want to retrace your steps. Like if there’s, okay, we agree in principle, this is about the price. These, this is the methodology that we’re gonna value it, and then the actual numbers come out and you’re like, wow, this is changed quite a, like, what’s happened in the last 12 months. ’cause When we talked, it wasn’t this way. So yeah, I think having an awareness and an understanding of what are the underlying metrics for valuing this thing, and then make sure you can support those numbers. Yeah. Here

Speaker 3 (13:57):

I would also say as it relates to what we’re buying, we, we really prefer to do an asset transaction, which means we’re buying the assets of the business specifically. We’re gonna buy brand rights, we’re gonna buy inventory that go with the brands that we purchase, and we’re gonna buy some fixed assets. And that’s what we’re buying. We’re not, we don’t even, we typically don’t even buy receivables. We just buy those assets and we leave the liabilities to the sell. And that really limits the amount of due diligence we have to do. Then our due diligence is really focused on what brands do they have, what are the trends in those brands? What does the market look like that they’re in? How, how protected is the or how strong is a franchise lawns particular jurisdiction or state? Those are the things that sort of drive the value and, and sort of dictate what your due diligence is going to be a stock deal.

Speaker 3 (14:56):

We really try to avoid those because as a buyer, you’re picking up all of the historical liabilities of that company, whether you know about them or not. And, and that really raises the bar on how much due diligence you need to do. And it, it gets uncomfortable for both sides when you’ve gotta really do that escalated level of due diligence. And, but sometimes that’s the only way you can do it, is a stock deal. And, and, and we have done a few of those, but by and large, our preference is due to an asset deal, and it becomes much easier. And then you don’t really need to necessarily dig in so deep on the balance sheet because you know what you’re buying.

Speaker 2 (15:31):

Right. Yeah. It seems like, here’s another old adage, and you can tell me if this is, you know fair or not, but it seems like the buyer tends to want an asset deal, and the seller tends to wanna on a stock deal. Yeah. Yeah. For the reasons you’ve articulated, the buyer can sort of cherry pick, well, you know, I want this, but I don’t want that. I want this, but I don’t need that other thing. Whereas the seller is like, gosh, I just want to get rid of all this, you know, and I don’t wanna have to worry about if something comes out of the woodwork later that I, ’cause I, you know, I still own whatever, those liabilities might be real, you know, neither they’re on the balance sheet. Yeah, those are real, I gotta pay ’em. Or there’s some weird thing that’s sort of lurking off the balance sheet that could come up and bite you. Well, and

Speaker 3 (16:12):

Typically we have in the agreement we’ll have an indemnification where the seller is responsible for those things. If, if things come to light later, they’re gonna be responsible for them to, to, to some certain extent. Usually there’s a basket involved. And so we have some recourse back to the seller, but sometimes that requires a big escrow. On, on one of our larger deals, we had maybe as much as $10 million that was in an escrow. So $10 million in purchase price, sat in an escrow account for about two years while we made sure there were no things that came to light. And, and fortunately nothing came to light, and we gave the, the, the seller all $10 million at the end of that period, and, and everybody was happy. But again, it’s, it’s generally better if you don’t have to deal with those things. Yeah. Or

Speaker 2 (17:07):

Overall, let’s, let’s, let’s take a step back and look at maybe the reasons, and this might be just as like an obvious statement, but, or an obvious question. But why would someone, I, I’ll frame this question two ways. Like, why did you guys look into and want to make acquisitions, and what do you think is generally the driving force behind that? So somebody listening to this podcast like, yep, we’re in the market. Yeah. What are, what’s the underlying why? What are we going for there?

Speaker 3 (17:32):

Yeah. So I think that the biggest reason, especially in the beer business, is beyond this, this is the only way to really grow your business outside of just organic growth within your market. It’s not viable to go set up shop in a new geography and try to attract brands enough brands to be able to earn a living at. And so making an acquisition is really a way to grow the business. And, and the real driver behind that growth is being able to gain scale. And the benefit and the advantage of scale is you’re able to amortize certain costs over a lot of cases of beer, over a lot of activity, and you’re able to make greater investments in things that you couldn’t do on a standalone basis, on a smaller company basis. And so for, for us, one example, we, we bought a company called GLI in San Antonio about five years ago.

Speaker 3 (18:32):

It was 2019 when this deal closed just before Covid. And San Antonio was an interesting market. We were the Molson Coors distributor in San Antonio, and then Silver Eagle is the AB distributor, and there was a third distributor in that market called GLI owned by a great guy named John Gillis. And that business had the Heineken Mexican portfolio, so dosis, and it had I think it had Paps and it had several other suppliers that we had in other markets, but we didn’t have in San Antonio. And and so that transaction well, first of all, before that transaction, our San Antonio market share was in the twenties. You know, we might’ve been 20, 25%, something like that. And I think Gillis or, or GLI was probably 15 to 20% market share in that market. And so both us and Gillis, we sort of operated subscale, and we didn’t have, we were going to the same accounts.

Speaker 3 (19:38):

We were selling to the same accounts, delivering to the same accounts, doing all of the same activities. And so when John decided, and, and no one in his family really wanted to continue in the business, when he decided it was time to sell, we were sort of the natural buyer for those brands, and we were able to play, pay him a very high price because of the synergy of those brands, we were able to bring those into our warehouse. So we cut out, we both operated separate warehouses. We were able to cut out a warehouse. Again, we delivered to the same account. So we had to add some routes, but we didn’t have to add, we didn’t have to double the, the number of routes. Our Salesforce was the same. We, we added some salespeople, but we didn’t have to double the size of the Salesforce.

Speaker 3 (20:28):

And so by combining those two businesses, a lot of the gross profit from the GLI brands that we bought really kind of fell down to the bottom line. And so, you know, there were, there were some incremental expenses, but it certainly wasn’t commensurate with the, the increasing both profit. So those kinds of deals where you are buying someone that overlaps your footprint to me, are the home run absolute most strategic deals. That is where you’ve got a market where somebody is the Miller distributor, somebody is the Coors distributor there are a few of those still left out there. Those, those transactions are typically very, very valuable because you’re putting together overlapping operations that do the same thing in the same market.

Speaker 2 (21:16):

Hmm. Yeah, that’s a good point. And the others are maybe contiguous territories or, you know, you’re nearby and you, maybe the word synergies is always a little tricky, so, okay. Right. For me, anyhow, and I’ll, and I’ll ask the question. You can tell me if you agree or not, but so often when we’re identifying synergies, it involves some sort of model template, you know, forecasting tool of spreadsheet, usually like, you know, here’s, here’s their numbers, here’s our numbers, here’s our personnel, their personnel. Here’s, here’s overlap, here’s what can go, here’s what can stay. But do you have any, like, what, maybe just kind of take us through your process to identify, and then what are some areas where you’re like, yeah, we, we didn’t see that. Any, any kind of things, lessons learned in terms of trying to establish synergies and what makes sense, and then what maybe gets missed?

Speaker 3 (22:07):

Yeah, yeah, sure. So we’ve got a little bit of experience with that. So I’ll, I’ll give you two examples. One is, I’ll go back to GLI, again, where it’s an overlapping supplier. And these deals, again, are very rare that you’ve got a third person in the market. Typically you’ve got the Miller Cores, you’ve got the eb and, and Constellation is with one of those two, and there isn’t a third person in the market. But in those cases, what we had to do was we modeled out what’s our, what’s our go to market strategy? How many routes do we need? How many? And, and that drives your sales routes, that drives your delivery routes, that drives the salespeople how many warehouse people are we gonna need? And so you just model it, and you, you, you kind of base it on what you have today with the incremental routes you’re gonna add to it.

Speaker 3 (22:55):

And that comes up with what you’re gonna need from a a, a p and L perspective. It’s pretty easy. On the revenue side, you’re, you’re really just adding their revenue and their gross profit in. So, so that part is not terribly difficult. But on the cost side, you’re coming up with a proforma that says, okay, we, we have 18 routes. We’re gonna now go to 28 routes, and so we’re gonna need 10 more trucks. We’re gonna need 10 more drivers, driver helpers, salespeople, merchandisers, and so on. And so there, you’re almost not looking at the one plus one, you’re looking at the, what do I need to run this business? Alternatively, so last year we bought a business in Nebraska premier Midwest distributing. And so that’s another state, a state we didn’t operate in before. And so there we were more reliant on how does that business go to market?

Speaker 3 (23:54):

We kind of know how, how we go to market in our markets but we’re a little bit more reliant on how do they go to market. And we do go in and we go in and we may tweak it. We may say, okay, well we’re gonna run this many routes. They run this many routes, we’re gonna run this many routes, and maybe more, maybe less. We operate with this sort of structure, so many sales per people per area sales manager, district sales manager and the like. So you, you’ll make some tweaks there. And, and that’s what will determine the in head count that you’re gonna need. And so say somebody operates with 120 head count, and that includes the back office personnel and whatnot, and, and maybe your model, you’re gonna operate with 105 people, and so you’ve got 15 positions you’re gonna free up there in in that, which is, which is a synergy. And that’s one of the advantages to a multi branch operator, is you can consolidate some of the functions that are typically done in a wholesaler at the local level. You’re able to consolidate those. And we do a lot of things here in our, we call it the general office, our corporate office for all, you know, 12 or 13 of our branches, as opposed to having 12 or 13 people in the branches doing that function.

Speaker 2 (25:19):

Yeah. Centralizing those.

Speaker 3 (25:20):

Yeah. So, so that central centralizing really leads to some cost savings. And, and a lot of the time, really what that does is it allows us to pay more for the business is, is usually what happens. And that’s generally because the other parties that could buy the business also generally would have the same synergy opportunity. And so a lot of that value really goes to the seller.

Speaker 2 (25:46):

Mm. Yeah. Absolutely. That’s usually one of my favorite parts of, of doing these as we were buying and selling, was establishing, all right, what, what does this combined entity look like? Right? You can quantify it and you can play with your models. And I was just got a kick out. You know, one thing I think is interesting though, is there’s so much we can quantify, right? You said, we can, we’ll go from 18 routes to, to 28, but we can cut, you know, x number of routes and there’s some synergies we can consolidate our admin, et cetera. What about like, sort of the non-quantifiable stuff, like I’ll say like culture or operating principles, or, Hey, Phil, philosophically we do it this way and they do it. How do you, what have you have you run up against that?

Speaker 3 (26:26):

Well, so I was gonna, the, and the reason I brought up Omaha is where we see that the most is when you’re crossing state lines. So for us to do a transaction in Texas, we have seven markets in Texas. We, we’ve operated in Texas for decades, and so we know the Texas market very well, the Texas laws regulations, but we’re going to now Nebraska, which is a different state, different regulations, different ways of doing business different employment law. And so that, those are typically the areas where we’ve found some inefficiency we weren’t expecting. So for example, we sold a business in Kansas two or three years ago to a guy named Patrick O’Neill. And the business was great. It was, it was centered in Dodge City, Kansas nice old, nice old business there, but it wasn’t very large.

Speaker 3 (27:25):

And because we had that operation, we still had to be up to speed on all Kansas labor laws and all sorts of things specific to Kansas. And those, that overhead for being in the state wasn’t quite commensurate with the profitability we were generating there. And so by selling it to someone who could, could operate a little bit more leanly than we could we were able to not only get paid for the value of that distributorship, but we were also able to dismantle some very specific overhead we had for Kansas that really again, was maybe more than what was commensurate for the size of that operation. Mm-Hmm,

Speaker 2 (28:10):

<Affirmative> makes sense. Then a more general question for you. When you are evaluating a potential acquisition, what types of information are you asking for? Is it, is it the basics of, you know, financials and this and that? Is there anything, what does that list kind of look like?

Speaker 3 (28:26):

Yeah, so the biggest thing that we wanna see is the sales and gross profit by supplier. We wanna see trends to see what the growth is like with those suppliers. We wanna know what their territory is, where they overlap with you know, where they have a partial portfolio, where they have a full portfolio portfolio who their competitors are. Those are, those are some of the, the critical things. And then we wanna look at their you know, the number of routes they run, how geographically dense or or dispersed the population is. Those, those are all critical factors that we wanna look at as well. Mm-Hmm.

Speaker 2 (29:14):

The personnel issue gets tricky, right? ’cause We’re talking about people, we’re talking about jobs, we’re trying to be respectful, but at the same time, confidentiality is a very big deal in these transactions. How have you, or how do you think about that aspect of a deal? So for example, you’re acquiring a company in some cases, maybe you’re not keeping everybody Mm-Hmm, <affirmative>, how do you think about, I mean, there’s the mo I suppose, you know, there’s the modeling, here’s how many we can keep. What, what does that look like though? Just from a I guess process wise, how do you, how have you guys gone about that to be, you know, yeah, to, to make sure it holds together?

Speaker 3 (29:52):

So, so I can speak to this one conceptually, I’m, I’m not terribly involved in this part of our process, but what we do is we come up with how we wanna operate. We, we work with the management team. Typically, we’re going to keep the lion’s share of the people in that operation unless it’s an overlapping operation. And then there are fewer roles that we’re gonna have. But even then, I’ll, I’ll, I’ll use the GLI example again. In GLI, we didn’t just take their people incrementally. We interviewed our people and their people, and we tried to take the best of both companies in that case. But, but again, in most cases, you’re looking at an adjacent geography where you don’t have anyone and you’re just relying on, on their people. And so typically, you’re going to work closely with that general manager, that general manager or sales manager, whoever’s gonna come over with the business, and you work with them to develop, here’s our strategy, here’s our route to market here, and here’s what the org chart’s gonna look like.

Speaker 3 (30:56):

And you start that with no names. You start that with positions. And then what we do is we go in and say, okay, this is the organizational chart that we want, and this is the number of salespeople. This is the number of number of delivery routes. And all the personnel kind of falls into that. And then we go and interview the employees. And and we try to determine who’s the best person for the, for, for which role. And I’ll take the Omaha transaction as an example. I think that we kept at least 90% of the people there, maybe, maybe more than 90%. So there were just, and typically the rule, the roles that don’t come over in a transaction that we would do are some of the back office personnel that, that you need. There, there are more back office personnel. You need to run a a an operation like that than you do with a, with corporate is doing some of the back office for you.

Speaker 2 (31:57):

Hmm. Yep. Absolutely. Let’s, let’s shift gears and talk a little bit about brokers. You’ve, we’ve touched on that earlier, but I’m curious as to your experience working with a broker and then doing deals without a broker and maybe contrast those and then working with a broker, how do you, what are you looking for there? What are some of the things to consider?

Speaker 3 (32:19):

Yeah, yeah. So we have worked with a few brokers on deals where we were the buyer and and the seller had engaged a broker. And those are good because they really get the buyer ready, they get the information together, and and they can be very helpful in terms of preparing the seller for the process and running a process that is efficient and and, and really works. We, we haven’t used a broker for any of our sales because we generally have known who the buyers were and, and were able to run that process on our own. We did back in the wine and Spears days with Legacy Glas we did a transaction where we separated our wine and spears business and our beer business. And we did use a broker for that because it was a, there was a high degree of complexity. Both sides had an advisor to sort of help us communicate with each other and to help us stay on track. And sometimes that advisor takes a little bit of the emotion out of the process as well, which is, which is very helpful to have sort of a sounding board and and, and someone who can keep things on track. So I, I, I, I find brokers to be generally very helpful.

Speaker 2 (33:46):

Hmm. Yeah. They, and they’ve, like you said, they have a process, they can get the seller ready. ’cause If, if it’s like most wholesalers, I mean, been in business forever and, you know, you’ve never had, maybe never had this situation, so you’re like, I don’t, I know my business is worth a lot. I have a, I have a number in my head, but then a broker has to come in and make sure all of that information is well organized and presented and frankly marketed. Right. It’s not just the, the number itself isn’t necessarily gonna sell it. It’s like, you, you need to market this information.

Speaker 3 (34:17):

Yep, yep. And just like a real estate broker that you’re gonna hire to sell your house, they’re gonna earn a percentage of the, of the transaction value. And so typically you wanna arrange that so that they are paid more as they get more for you. And so there’s typically a tiered approach where it’s a sort of a base percentage up to a certain value. And if you get over that value, then it’s a higher percentage to really align their incentives, if that’s what you, if you’re trying to maximize value to align the advisor’s incentives with the sellers.

Speaker 2 (34:50):

Yeah, I see. I love that. I, I want you to say a little bit more about that. ’cause I’ve, I, in concept, I’ve heard that, and I, and it makes total sense. Like, for example, if I’ve got a business that I could sell, I could fall out of bed and sell it for 10 million, right? Yeah. then any broker can do that too. But I do believe I can get 15. I don’t think I can get it. But a broker could therefore have you, how do you, how do you, is that, do you see that? Is that typical?

Speaker 3 (35:14):

Oh, yeah.

Speaker 2 (35:15):

Yeah, it is.

Speaker 3 (35:15):

Okay. Yeah, I think it’s pretty typical. So what you, yeah. And that’s kind of what you, what you would do is you would look at it and you’d say, okay, here’s kind of the break point here is table stakes, and let’s use your example. So if I can sell the business for $10 million as the advisor, I’m gonna, I want say $400,000 or 500, I’ll use a round number, $500,000 to sell your business. If we sell it for, for $10 million and that is what is that 5% of the purchase price? Yeah. But if I’m able to sell it for over $10 million instead of 5%, why don’t you pay me 10% on the portion over $10 million? And, and you may have another break in there, you may say, okay, I’m gonna give you 10% on the portion over 10 million, and I’m gonna give you 20% on the portion, over 15 million. So if you really hit it out of the park you as the advisor are gonna get a really nice payday. And me as a seller, I’m, I’m thrilled that I got a great I got such great value out of my business.

Speaker 2 (36:19):

Yeah. Yeah. I think you’re right. Aligning those incentives is, is super important. ’cause They, you know, you think about that. Like, I, I go back to the example you used about selling your house, right? It’s the same idea. It’s like that broker, if they’re making 5%, they don’t really care if I get another 10 or 15 grand for the house. They want to get the, the four or five or a hundred thousand, whatever the house is. Yeah. Right? They’re getting the lion’s share, which is easy money, and then they’re gonna go sell another house. And, you know, this is not, not disparaging brokers, but that it seems to be the way the structure has been historically set up. So I like this tiered approach.

Speaker 3 (36:51):

Yeah. Yeah. And there are studies that show that real estate brokers take a lot longer to sell their own houses houses that they own than they do to sell other people’s houses. That’s funny. If they like to turn ’em over quickly when it’s somebody else’s house, but when it’s their house, they kind of know the market and they’ll wait to get the right deal.

Speaker 2 (37:09):

That’s good. That’s a good tip. Let’s shift and talk about the process of an agreement. So, so getting to an agreement, so you, this, I’ll tell you the trajectory that I’m familiar with and you can tell me your experience, but it might start with, interesting, we’ve got a target here. I’ve been talking to the owner, I think they’re ready, right? Handshake deal, we talk, you know, general numbers, this and that. Then maybe it progresses to some kind of more formal letter of intent where we get a little, and then eventually we get towards some kind of purchase agreement. Is that tra trajectory you guys have seen? Does it deviate? Or what are the Yeah, yeah. So that,

Speaker 3 (37:44):

That’s, that is a very typical progression. So what we often will do is you’ll have some sort of conversation where you sort of find out what the seller is interested in doing, right? You, you may have talked to them for years and years and and that, that was the case with John Gilis. I wasn’t involved for years and years, but our president, Phil Meacham was, and and he said, Hey, Phil, why don’t you come down to San Antonio? Let’s, let’s meet. He didn’t tell us anything about what the meeting was about. And we came and, and we met at his lawyer’s offices, and he laid out, well, I think it’s time for me to sell. And and he presented to us sort of, here’s, here’s my business. He, he shared with us some, some financial information. We signed a confidentiality agreement.

Speaker 3 (38:29):

And like I said before, we keep the deal team very, very small, especially in those initial stages because we, we wanna honor the confidentiality of the seller in that case. And we took that information, went back, took a couple of weeks to, and analyze it, and then we met with him again two or three weeks later, and we presented a proposed, and we said, we think your business is worth this. We’re willing to buy you on these terms. And we came up with a structure that we put in a letter of intent. And the letter of intent is a document that’s signed, but it isn’t binding it. Either party can get out of it. But it may have some provisions, like it may say, for the period that we are in discussions, we’re, you’re only going to discuss selling yourself with us, for example.

Speaker 3 (39:21):

But you see, you might have an exclusivity provision in there that the seller can, can at some point say, look, I I’m just not gonna sell, or I’m not gonna sell to you. It’s not working out. And they can terminate that and they can go talk to somebody else. But at least while we’re talking and while we’re putting time into this and, and spending money out of our own pocket to evaluate this deal, just let us know that we’re the, we’re the buyer. That that’s a typical ly but it’ll also lay out, here’s the purchase price. Here are the conditions. One of the conditions we commonly have in these deals is to is supplier approvals. And so we will typically want the top 10 suppliers to approve the deal, or if they don’t, we we don’t have to close the deal. I’ve never really, I’ve never had much difficulty with supplier approvals in the transactions we’ve done.

Speaker 3 (40:12):

But you, you wanna know that you’re gonna get a critical mass of what, what you, what the seller is selling. And so that’s an important provision that’s typically in the LOI. Another provision that’s important is for the less significant suppliers, is a purchase price adjustment for the non approving suppliers. So say you’ve got a smaller craft brand and they decide that they want to go with the other distributor, they don’t want to go with with the seller. You don’t want to have to pay for that brand and then not get it because that brand has been factored into your purchase price. And so you’re typically gonna have a purchase price adjustment for non-consenting suppliers. So those are a couple of the terms that are in the LOI typically, you’ll have a confidentiality agreement outside of that, that you signed before. And, and the LOI will refer to the confidentiality agreement.

Speaker 3 (41:02):

And that just lays out in sort of very broad terms what the deal is that we’re agreeing to. And then you will, after that LOI assigned, typically you’re doing due diligence. And so you’re looking at financial information and you’re really confirming what you’ve used to come up with your value. And as you’re doing that, you’re also negotiating what we call a what it’s referred to as definitive agreement or a purchase sale agreement, which is the agreement that dictates the transaction. And, and that, that lays out all of the representations of the, the seller and some of the repre rep representations of the buyer and all of the definitive provisions. That is the agreement that is binding once it’s signed. And and, and that process will typically take a, a month or more as you’re negotiating back and forth one party will draft the agreement, and then the other party will go through and read it and say, well, I’m not comfortable with this, and we need to incorporate this concept into the agreement.

Speaker 3 (42:08):

And and that definitive agreement, when that is signed, that’s typically when you then open up, and that’s when you make an announcement that we’ve signed an agreement. The deal is not closed yet, though you haven’t, money hasn’t changed hands. And that is when you start the supplier approval process. And we typically like to have a 90 day, even like a hundred day timetable to be able to complete those supplier approvals. And at the end of that 90 day process is then the close, and that’s when the actual transaction then is consummated and we pay the seller and the seller conveys to us the brand rights and the inventory and fixed assets and, and whatever else we’re buying in that case. And then, and then your transaction is, is complete.

Speaker 2 (43:00):

That’s a great rundown. Thank you for that. Let me, I want to circle back to the valuation piece. We talked a little bit about this, but how do you typically approach that? So are you looking at, are we looking at sales, we’re looking at margins, we’re looking at profitability, we’re looking at something else. How do you Yeah. What’s the secret sauce there in terms of that

Speaker 3 (43:18):

<Laugh>? So the answer to that is yes, <laugh>. Okay. We look at sales. So again, I go back to, it’s really I’d say it’s three things. It is the profitability or cash flow. It is the sustainability or growth, and it is the franchise protection. So those are the three things that really wrap around the value of, of a business. And so one, one thing we haven’t talked about is beer, brand rights versus non elk brand rights. Yeah. And so we value those very differently. And we, we’ve got a lot of experience and I’m sure a lot of your listeners will have experience with the likes of Bang and Celsius and C four those are all suppliers that at one time did transactions with Pepsi or Keurig, Dr. Pepper, or red Bulls another one where most, in most states, those non out suppliers are not franchise protected.

Speaker 3 (44:24):

And so the only thing you have is the termination provision in that contract. So you can’t go pay, say, five times gross profit for a non a brand when your termination fee is only gonna be two times gross profit. That’s, that’s just a lot of exposure. So we typically will not pay much of a premium to the termination provision for a non ALK supplier and our valuation and we don’t do the valuation purely on brand rights, but that’s one of the proxies we use. And, and we’ll look at a growing supplier versus a declining supplier and assign values relative to their growth and their stability. And so that, that’s part of it. The other thing we have to do though, is we have to come back and see the way that we’re gonna operate this business, what is our profitability going to be?

Speaker 3 (45:22):

And that’s, and we, that’s another check is, and, and that that number is typically around 12 times EBITDA is the purchase price on the profitability that we’re going to generate as the buyer. Now, sometimes in the case of GLI, that number to the seller was a very high number. The, the profitability that they generated from the business was relatively low, but when we had those brands, our gross profit or our our operating profit was much higher. So the transaction multiple to the seller might be 20 times, but it’s really to the buyer, it’s gonna be, it usually around 12 times EBITDA is what we’ve seen in the recent market.

Speaker 2 (46:11):

Yeah, that does raise an interesting question. Like, who is paying for, maybe I’ll just ask a question to clarify was like, who’s paying for those synergies? So for example, as the buyer, you’re theoretically, well, you’re in actuality the one that’s going to bring those synergies to bear on this two combined entity. Yeah. Now the seller knows that to some degree, and they’re, that’s factoring into their price. How do you approach that? Are you paying, and I know there’s a lot of nuance in terms of this brand, that brand and growth and, and what fits your portfolio and what you see value in. But where do you, I guess maybe just philosophically, how do you feel, how do you approach the synergies? Are you guys willing to pay for some of ’em, half of them, none

Speaker 3 (46:54):

Of them? Yeah. It di So I think the factor that most influences that is the competitive nature of the transaction. And so if there are multiple potential buyers, then you’re gonna, the, the seller is gonna get all of it, because any of the buyers in order to get it if, if you’re not gonna pay it, somebody else will generally. And so for the most part, I think the seller is getting the, the bulk of those synergies. And to the extent you can generate more synergy than someone else, you have an advantage over, over anybody else. And so I would say theoretically the buyer has to pay up to the next best bidders synergies. It is, is theoretically how it would work. But I, in, in my experience, we try to be we try to be a good buyer. I tell you one other thing, Kary, that’s important to us is having a reputation as, as a good buyer because that is something that is, is obviously hard to earn and easy to lose. And so we don’t wanna be perceived as someone who tries to nickel and dime a seller. As someone who ret trades a deal, who’s someone who can’t keep confidence. We want to be seen as someone who acts honorably, who is generous with the, the purchase price and easy to deal with Mm-Hmm, <affirmative>, and will take care of their people. And we think those are generally the things that are most important sellers. Yeah,

Speaker 2 (48:26):

Those sound like hallmarks of success. I think that’s really well said. So let’s talk a little bit more about the financing side of this. So you’ve got an agreement we’re ready to go. Usually there’s a financing contingency in there. You gotta actually have to be able to pay for this thing. Mm-Hmm. <affirmative> what does that, what does a typical financing structure look like? Or is there one, or is there a preferred way that you, you like to do these deals or see them?

Speaker 3 (48:51):

Yeah, so this is where it gets where, where our business is generally much easier to finance than, than other companies because in a typical business, you’re gonna go to the bank, and the bank is gonna lend you three, maybe four times cash flow. And then if you need more than that, you’re gonna have to go find some subordinated debt, or you’re gonna have to come out, come up with some outside equity, you have to go raise some money from other people and, and really sell a part of the business in order to, to pay for what you’re buying in the beer business lenders are generally, banks are generally comfortable lending six and sometimes seven times EBITDA on an acquisition. And so go back to what I was saying before. The way we generally pay is, it, it, it’s generally gonna be around 12 times, maybe a little bit less, maybe a little bit more.

Speaker 3 (49:44):

That multiple is really driven by profitability and growth. So a higher growth market is gonna be a little bit higher in on that EBITDA range. And a low growth market is gonna be lower on that valuation range. So let’s say you’re gonna buy something for 10 times ebitda, if you can go finance it for six times, you’ve got a gap of four times ebitda. You need to, you need to fund there. And so if you have your own business that generates ebitda, that’s where that money’s gonna come from. Typically, yeah. And so the, the structure is generally pretty simple. You’ll either do it all as a revolving credit facility where you borrow the money and then you pay it back as you are able. And if you have other needs, you can sometimes draw back down on that. Typically if you start at six times leverage, the bank’s gonna wanna see you de ver that consistently over time. So that means that you’re gonna generate enough excess cash flow in the first year so that your debt to EBITDA goes from six times to five times to four times. They, they wanna see a path of repayment there. And so, so the structure becomes relatively easy. You really just have one tran of capital. Sometimes you may layer in a term loan, which is just another type of loan from a bank. But the structure doesn’t have to be very complicated.

Speaker 2 (51:13):

Okay, so we’ve got this thing financed. Let’s say we get to the finish line, it’s closing day, money changes hands. You’re the proud owner of a new distribution business. What comes next post merger? What are some of the things that you’ve experienced or maybe best practice things for someone that maybe hasn’t done this or hasn’t done this, the number of deals that you have, what are things to watch out for there?

Speaker 3 (51:37):

Yeah. Yeah. This, I had a real epiphany on this too, because like I said, I spent 15 years as a banker on the outside. And as a banker, when that deal closes, that is your payday, you’re done at that point, you don’t have anything else to do. You walk away and, and, and and your work is done. But when you’re the buyer, especially when you’re the buyer, your work really just begins, there’s a lot of work getting the deal done, but then you’ve gotta integrate it, you’ve gotta put it on your systems, you’ve gotta operate it. And so that is where we get our broader team involved. And, and really that starts not at closing, but it starts when we make the, the announcement, we’ll, we’ll announce for our employees, look, we just signed an agreement to buy this company, and we’ve got that 90 day supplier approval.

Speaker 3 (52:25):

And all that time we’re working with in our case, VIP, to get the new company on VIP system. So we can have, have the, the data from that that new operation on our system. Day one we’re working with our insurance companies to add their properties to our insurance and, and to get workers’ comp insurance and, and whatnot. Our HR team, they’re interviewing people and onboarding them and getting ’em on our benefit plans all of those things. So our operations are are in there trying to do what they do to, to influence the operations, to, to implement our safety programs and, and those sorts of things. So there’s, there’s just all sorts of stuff that happens and, and we really wear out the, the team in in Omaha and in Sioux City that just went through this, they were fantastic. Well, I mean, what a great group of people. And but, but <laugh>, we we tease with them to tell us what we’ve helped enough because we, we say we’re there to help and they’re, and I think in the back of their minds, they’re saying, yeah, you’re, you’re a real help. You’re nothing but a pain in my neck. So anyway, it, it’s, it’s a lot of fun, but it’s a lot of work at the same time.

Speaker 2 (53:48):

Yeah, it’s a lot of, you’re, you’re juggling a lot of balls and it’s, it really screams for like you know, the checklist, right? Like, what are we, you know, and there’s, there’s some really wonderful resources out there. I’m thinking of due diligence, checklists in particular where, you know, you can kind of take them and say, well, I don’t need, you know, 50 pages of this, but I think this, that, and the other are good. And, you know, sort of pre you know, during, and then post and in particular with the post, because that’s more operational, that’s more customized towards, ’cause there’s so many things like, oh yeah, we forgot about this, or, you know, and there’s lead time on a lot of this. So if you’re maybe rolling in a new sales team and you, maybe you’re gonna change the compensation structure, well, you gotta talk to ’em about that and educate ’em on it. And if you’re coming in with new systems, you said VIP, and what if they’re on a different, what if they’re not on a system? Well, now they gotta, now they’ve gotta learn it. And so there’s a ramping up in the coming together phase of all these details. And, and it, and it does take time, but I think it’s helpful to have, do you guys have a problem? Do you have like checklist?

Speaker 3 (54:52):

Oh, so we, we, it is a skillset with our company. We’ve now done, again, I think we’ve done six or eight deals since we’ve, in the last six or seven years since we’ve been the, the beer company. And, and we have a very tight process that we follow. We have really it’s a website that we’ve, we’ve created with all sorts of checklists that we use that we’ll go through in the first thing we do is we look at that checklist and we say, here’s what’s relevant, here’s what isn’t for this transaction. And then we drive everything off of those checklists. And our team is phenomenal. They know exactly what to do. And so it is to the point now where Phil and I, when we get to closing, we’re sort of, we just turn it over and the, and the business operates and everybody knows what to do. And it’s, it’s awesome to see it happen.

Speaker 2 (55:41):

That’s a huge asset, no doubt about it. ’cause You’re right, I think maybe do turn it back the clock, you know, 10 years or whatever it would be like the deal’s done, the work’s done, and you’re like, well actually no, the deal’s done. Now it really gets hard. <Laugh>, let’s get, let’s activate the team. So that’s wonderful that you have that.

Speaker 3 (55:56):


Speaker 2 (55:57):

Well this has been great stuff, Roman. I really appreciate your time and I know people listening are probably just eating this up. I know I am. ’cause It’s just, it’s such an important topic, you know, and if, if someone out there is listening and I’m, they’ve been thinking about maybe selling their business or, or looking to acquire one, I think this is a great kind of overview of the things to think about. You know, processes you can run through structures, checklists, all that good stuff. So as we kind of wind down, any, any parting thoughts on mergers and acquisition acquisitions, what people should be thinking about?

Speaker 3 (56:31):

No, I think we’ve covered it. We’ve been pretty comprehensive in this conversation.

Speaker 2 (56:36):

That’s awesome. Well, if folks wanna get in touch with you what’s the best way for them to do that? Are you on, on the socials or, yeah,

Speaker 3 (56:44):

So LinkedIn is probably the best way to, to reach me.

Speaker 2 (56:47):

All right. Well, it’s Orman Anderson on LinkedIn and we’ll put that in the show notes if people want to connect. So Orman, thanks so much for the time.

Speaker 3 (56:54):

Awesome, thank you.

Speaker 1 (56:56):

Thank you for listening to the Beer Business Finance podcast, where we combine beer with finance so that you can improve financial results in your beer distribution business. For more resources, tools, guides and online courses, please visit beer business finance.com. And don’t forget to sign up for the free weekly Beer Finance newsletter. Until next time, get out there and improve financial results in your beer business today.