Agribusiness is the business of agricultural production. Private equity investors, family offices and agribusiness management funds are increasingly investing in agribusiness companies—and for good reason. Several factors make it an opportune time for investment in the space: record fundraising levels and the need to deploy capital; a fragmented industry facing opportunities with capital investment; technology innovation; and growing food demand.
Agribusiness owners and operators stand to benefit from this scenario. Investor interest has driven company valuations to record multiples, and well-prepared companies could pick from several suitors. Whether looking to accomplish business goals, such as increasing production or finding an economically advantageous exit, companies can make significant gains from the capital financial investors can provide.
What types of businesses benefit? Agribusiness entities of all sizes can potentially benefit. The increased capital needs of a traditional agriculture company, coupled with long-term investment opportunities that can offer attractive returns, are garnering the attention of investors. Private equity investors are interested in strong returns through consolidation, integration and value development.
This often entails developing a vertical organization that includes production, processing, branding and sales. This means investors buy companies at different stages in the same supply chain and merge them together to centralize operations and drive efficiencies. Even a relatively small operation can be acquired if there’s strategic value to the vertical operation as a whole. The following three steps can help guide you through the mergers and acquisitions process.
Attracting an investor’s interest is flattering, but it’s important to think about current and long-term business goals. A key factor involves the specific ownership group and whether it’s looking for a liquidity event. Or, in the case of a family business, perhaps there’s an opportunity to take some equity off the table, or do a majority transition if there isn’t a viable succession plan. With more financial investors coming into the space, there are new channels for investment and exit opportunities. Traditional investment arrangements are being supplemented with new creative structures that can accommodate both sales and investments.
If a company is contemplating any sort of equity transaction—whether with a strategic or a financial buyer, or even a recapitalization—it should make sure its internal operations are in order. This includes a deep internal assessment of not only its financial records, but also IT systems, human resources practices, management team, customer relationships, and grower and supplier operations. Anticipate that all investors are highly sophisticated and will uncover any weaknesses in your operations through an appraisal process.
Ideally, businesses should prepare for a sale three to five years in advance. This timeframe provides sellers ample opportunity to position the company for sale, prepare multiple years of performance data and put systems and information in a place that will be seen as desirable by potential buyers.
Final preparations, including conducting sell-side due diligence, should begin three months before the anticipated go-to-market date. This allows enough time for the seller to organize financial information and prepare management for a potential buyer’s examination of the company. Conducting sell-side due diligence helps ensure the sale of a business will be successful. Performed correctly, the process uncovers opportunities for sellers to enhance their company’s value prior to a sale, while likely facilitating a faster close time because common seller weaknesses can be eliminated.
Consider hiring an investment banker and a key business advisor, such as a CPA, tax advisor, or legal advisor, to help you perform a self-examination before going to market. This will help identify areas of weakness that could be used as negotiating points to reduce the company’s purchase price. Understanding your company’s finances inside and out, and presenting and articulating that financial picture is important for successful conversations with potential investors. Even if a company decides not to sell, its stakeholders will gain invaluable insight into the organization’s profitability, performance and other value drivers they can focus on improving.
K-deep Dhaliwal has provided auditing and consulting services to food processing and agriculture companies since 2005. He leads the agribusiness practice for Northern California. He can be reached at (559) 835-0162, or email@example.com. James Rothenberger has worked in the finance industry since 2007. He supports middle-market business owners with a range of corporate finance services. He can be reached at (206) 302-6777, or firstname.lastname@example.org.
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