"In recent years, we have seen the Food & Flowers market being discovered much more by Private Equity parties. Until a few years ago, this interest was fairly low, but it has been rising strongly in recent years," note Maarten van Dijk and Mariëlle Ansems-Van Mourik of BDO Accountants & Advisors, both working in the Corporate Finance department.
Maarten van Dijk and Mariëlle Ansems-Van Mourik
Particularly in the corner of horticultural suppliers, there have been the requisite transactions involving a private equity party, which Van Dijk says is quite easily explained. "Through Private Equity, investments are made with money from third parties, for instance, large pension funds. On the one hand, they want to invest responsibly in companies that meet ESG (Environmental, Social, and Governance) criteria. In addition, it is precisely the companies in technical supply that are known for their innovative nature. These companies make growing food and plants in high-tech greenhouses more efficient. Such initiatives can offer great potential as solutions to contemporary and future problems, making these companies very interesting for financial buyers. They offer solutions to macro trends such as a growing global population, consumers demanding certain products year-round, and climate change. As such, the sector has a lot of growth potential."
"Moreover, it is a relatively stable sector, which is nice for investors. Since the Food & Flowers market provides several basic necessities, the market is relatively insensitive to cyclical movements. And stability drives interest. However, primary producers seem to be less in the picture. This is partly because - despite their often decent turnover - they are limited in size in terms of organization and management and therefore too dependent on one or more employees," says Maarten.
Analysis by BDO recently showed that despite macroeconomic uncertainties and geopolitical turmoil, merger and acquisition activity in the Food & Flowers (F&F) sector remained level in the first half of 2022. Although the number of mergers and acquisitions showed a decline in the past six months compared to six months earlier, the total number of transactions remained relatively stable compared to a year ago. "This indicates a degree of insensitivity to the short-term effects of macroeconomic developments. However, it remains to be seen how companies and investors will react in the coming quarters."
Lots of money available in the market
"Take the current gas crisis in horticulture, of which we at BDO have many companies in our client base. You see now that there are growers who leave their greenhouses (partially) empty and sell their energy contracts and can survive financially with this. However, there is less supply on the market, there is the threat of competition from abroad, and staff are losing their jobs. What effects this might have in the longer term is difficult to assess. And especially when it comes to interest from investors. During the Covid-19 outbreak, we thought the deal activity would come to a standstill for a while, but it lasted two or three months at most. While it is safe to speak of a crisis situation with the current economic turmoil, there is one big difference from, say, the credit crunch, and that is that there is a lot of money available in the market now. Private equity parties have both increased in numbers but also have much (more) capital available."
Increased capital availability is also caused by the rise of alternative sources of funding. Alternatives to Private Equity are the so-called "Alternative Debt Funds," continues Mariëlle, who is co-responsible for the Debt Advisory practice within BDO. "This is - besides the traditional banking channel - a source of financing, where the growth of the company is financed with debt (while retaining your shares). This can sometimes be an intermediate step to facilitate growth on which sale still follows at a later (and often better) time. A solution for growing entrepreneurs that is increasingly being found (especially in this sector)."
BDO is approached by companies in Food & Flowers as well as investment companies. "This is also where our added value as a consultant comes into play. Because of our broad network, we are well placed to connect the right parties. Once you have a good picture of a company's culture, you can also find the right parties to match it. In a traditional family business, for instance, we are not likely to introduce an Anglo-Saxon fund."
Getting ready to sell
Asked for tips for entrepreneurs who are in the market for sales (and or growth financing), Maarten replies. "First of all, it is important to ensure that the administrative organization is in order for such an issue (financing, sale, or purchase). Unfortunately, this is not always the case in practice. Moreover, basic principles are that there is operational optimization, a good customer spread, and the ability to distance oneself from the company as a seller. These are all elements to make the company sales-ready. What's more, you should especially be assisted by an advisor for whom this is day-to-day business. A private equity party looks at what payback period an investment has, and a debt fund assesses repayment capacity. This is not always the nuance that an average entrepreneur or DGA is concerned with. Therefore, get advice from an adviser who suits you and can serve as an extension."
For more information:
Maarten van Dijk / Mariëlle Ansems- Van Mourik
BDO Accountants & Adviseurs
Tel: +31 (0) 030 284 98 00