Nick Beste, founder of Mighty Spark Foods, had been thinking about the concept of selling the company more or less since it began.
“It was always on our mind,” Beste said at the Minneapolis Smart Business Dealmakers Conference. “We were always asking people what did they do? How'd they do it?”
He says they interviewed many different investment banks, law firms and accountants and asked them what benchmarks the company should meet in order to get sold and the benchmarks to reach different valuations.
“We heard pretty consistently certain benchmarks in terms of gross margin we needed to be at, EBITDA we needed to be at, certain hurdle levels on those, which I think is somewhat different for every industry, but it was pretty consistently if you're above this certain EBITDA mark, if you have these gross margins and these revenues, you're at least sellable,” he says. “And then the big thing was for us, we needed a team that could sustain the company afterwards, as well as through the process. It couldn't just be a one-armed paper hanger out there in myself trying to do this. So, we recruited a great team that was able to run the business and show that they would be able to do it after the sale as well. Once we hit those benchmarks and had the team in place, I felt we were ready.”
He says they were given multiple diligence checklists from their investment bank, attorneys and accountants, and they started working through those well before going to market. Early on, they began populating the data room with items they thought they’d be asked for and got them buttoned up. And then they also did a lot of things to derisk the deal and overcome concerns that they anticipated they would have — things like customer concentration.
“Having less than 20 percent of our sales tied to a specific customer was something we really pushed hard for,” he says. “We (added) in a couple new sales channels and new products, just to prove that when we say we're going to grow by adding new SKUs or new channels that we can do it. And those weren't huge things for us, but we got 100 stores here and prove that we can go into convenience stores, for example, or launched a new item that was in an adjacent category just to prove that consumer would want that.”
He says they co-packed their products and had one plant making the products. That was a risk, so they got backup co-packers for all their categories. And because they sold meat products and that price fluctuates, they recognized that as a commodity risk and got all of their meat on contracts for 18 months. They also changed their recipes so that they were less dependent to a specific type of meat or a specific provider.
“We did all these things just to anticipate the concerns people would have and derisk the deal,” Beste says.
Before they started interviewing investment bankers, he says they sat their team down and told them they were considering a sale and what they needed to do as a company to get sold. They put exit bonuses in place and equity for everybody on the team — from the admin all the way up, so that everybody was aligned and incentivized. And they shifted much of the day-to-day operational responsibility to the CFO so Beste could focus on selling the business and the process.
“Having that team aligned that this is what we're trying to do, this we're trying to go for, was important,” he says. “And also recognizing that we were all going to point out the blemishes on our baby and that that wasn't a bad thing. And so let's all come together and think about what could somebody poke a hole in this business with? Like, what could they say that would potentially decrease our valuation? Let's get all those ideas on the table, and let's figure out how to overcome them before we go to market.”
He says the reason he told everyone in the company about the impending sale process was because they wanted everybody to work really hard.
“We were asking a ton out of people, to say the least,” he says. “We have half of the amount of staff that we probably need getting paid probably not the market rate for their comp and, oh, by the way, now I'm going to ask you for the next year to have two jobs: your day job and then we're going to try to sell this business, which is a whole other job in itself. And we knew that management presentations and management interviews were coming, and I was afraid that somebody might not say what they should say, perhaps, or be as excited about the future or whatever. And so I wanted them to be excited and to want the sale as badly as I did.”
He says the timing of when they went to market based on the lifecycle of the company was important to maximizing value, and was something they’ve thought quite a bit about leading up to the process.
“Your growth rate mixed with what your revenue and margins are at leads to potential different valuation metrics,” he says. “If we would have held onto the business for another year or two, we would have grown — our growth rate probably would have decreased from what it was, is my anticipation. So, maybe we got a slightly higher valuation overall. But I think we really maximized it for where we were at, at the stage of the company.”
A process, he says, is an auction at the end of the day, which is something he didn't appreciate before they got into it but it also helped maximize value.
“Having that second bidder, or third or fourth, in the process is so critical, because I really feel that the bidders, they definitely catch on pretty quickly if they're the only bidder that's interested,” Beste says. “So, thankfully, we had multiple and we could accidentally, casually, make it somewhat known or imply that we have another meeting going on so it can't do a management presentation that day, those things really help.”