On November 24, 2020, Private Equity firm L Catterton and McCormick & Company (NYSE: MKC) announced the pending sale of the popular Mexican hot sauce maker, Cholula Food Co. to McCormick for $800 million.  With 2020E sales of $96 million and ~$32 million in EBITDA, the deal translates to ~8.3 x revenue and ~25 x EBITDA: an outsized outcome for L Catterton by any standard.  L Catterton made 4x its money on the deal since buying the majority of the business in April 2019, according to an article published in Food Processing.

So, what made the deal so attractive to McCormick that they agreed to anti-up such a big multiple?  Even more interesting, what was L Catterton able to accomplish in such a short time that would drive the value of Cholula to such stratospheric multiples?

According to the deal press release, the value-creation program over their nineteen-month ownership period was multi-faceted and included recruitment of industry-leading talent, operational improvements, and heavy investments in the brand and its marketing by increasing awareness and loyalty.  L Catterton was able to increase household penetration by over 50% during their short ownership period.

According to Cholula CEO, Maura Mottolese, “L Catterton… vastly improved our commercial execution efforts, and pivoted our foodservice strategy to position Cholula for long-term growth and success.  L Catterton was well-positioned to acquire and grow the Cholula business by virtue of its global footprint, including its presence and local team in Mexico…”

According to an interview with CNN, Mottolese outlined that forty percent of consumers learn about Cholula through their in-dining experience at restaurants.  At the onset of the pandemic, foodservice sales dropped dramatically, so the company needed a new strategy.  It chose to focus on the co-branding of new menu items and new packaging.  It also pivoted its retail grocery strategy with the introduction of a new 2-ounce bottle for consumers to sample, as they began cooking more at home.

L Catterton is no stranger to effectively growing middle-market CPG companies. With $20 billion of invested equity, L Catterton claims to be the largest and most experienced CPG-focused Private Equity Group in the world.

Although Cholula’s hot sauce recipe has been marketed and sold in Mexico for years, it was first introduced in the U.S. in 1989 and is now sold in over 20 countries.  The product line is made with a unique blend of peppers combined with a secret blend of signature spices.  Since the brand was first introduced into the U.S., it has been effectively marketed as “The Flavorful Fire” through sporting events such as snowboarding, football, baseball, and joint promos with restaurant chains such as Papa John's.  In 2019, it launched “Tacopedia”, a series of interactive exhibits described as “an Instagrammable Amusement Park Disguised as a Pop-up Museum”.

According to Lawrence Kurzius, McCormick Chairman, President, and CEO, “McCormick has a history of creating value through acquisitions. We have a proven track record for achieving our plans and accelerating the performance of acquired brands. We plan to grow Cholula by optimizing category management and brand marketing, while also expanding channel penetration…”

In an investor presentation, McCormick outlined the following as the key drivers behind the acquisition:

• Accelerates McCormick’s global condiment platform and growth opportunities
• Strongly complements McCormick’s portfolio
• Capitalizes on the growing consumer interest in healthy and flavorful eating
• Broadens McCormick’s product offering to consumers and foodservice operators
• Meaningful margin accretion in Consumer and Flavor Solutions segments
• Hot sauce is an advantaged high growth category
• Leading Mexican hot sauce outpacing U.S. hot sauce category
• Beloved premium brand proudly made in Mexico
• High-quality ingredients in a 100-year-old recipe
• Asset light strategic third party manufacturing model
• Strength in retail and foodservice
• Strong margin profile

McCormick became intimately familiar with the trends impacting the hot sauce market through its acquisition of Frank’s RedHot Hot Sauce in 2017, as part of a $4.5 billion deal with RB Foods.  
According to Statista, the hot sauce market in the U.S. is currently a $1.5 - $1.55 billion market and expected to grow to about $1.65 billion by 2022.  Nielsen estimates that the hot sauce category has been growing by 9.7% over the last four years.

Here’s the first take-home message! High-quality distinctive product line with growing sales and high margins + rising tide for product category + brand marketing and management expertise + smart capital + strong fit with well-capitalized industry leader = outsized exit multiple.

And here’s the second take-home message!  While it is unclear how much scale was driven by L Catterton’s investment during its ownership, this deal is an outstanding illustration of how private company owners can partner with Private Equity to become highly attractive, middle-market companies when they choose the right firm.  And even more importantly, when owners roll equity through a PE recap, the rewards for a two-step exit plan can be truly outstanding!

Prepared by Eric Bosveld and Vijay Malhotra, B&A Corporate Advisors

In a Harvard Business Review article, entitled "The Secrets to Successful Strategy Execution", "information flow" and “clarifying decision rights” are identified as the most important factors in determining whether a business is effective in executing its strategy.  Also important were "aligning motivators" and "organizational structure."  All four factors are highly inter-related and of course, executing a well-thought-out strategic plan usually leads to an increase in enterprise value.

Effective information flow throughout the organization allows for quicker and better strategic decisions, whether it is information flow from the front office to the back office, from corporate headquarters to the locations, from the plant floor to the office, from one business unit or department to another, etc.

As an organization grows, effective information flow becomes more complex and naturally gravitates to become increasingly ineffective. So how do you resolve this challenge?  We believe there are three primary ways to improve information flow and hence dramatically improve a business’s ability to effectively act on its strategic plan.

1) Strategy Communication.  The business's strategy must be clearly communicated throughout the organization regularly to be understood and thereby acted upon.  Everyone in the business must also understand how their role contributes to the strategic plan.  Management must commit to effective information flow on how the business is progressing towards its strategic goals to maintain momentum and employee engagement levels.

2) Strategy Review Meetings.  Many people think they already participate in too many meetings.  To effectively implement your strategy, strategy review meetings need to be separated from operational meetings.  They also need to be scheduled regularly.  The optimal interval between meetings depends on the business growth rate and how quickly the market landscape is changing.  For very fast-growing companies the interval needs to be very short, however, in all cases, they should never be less frequent than once per quarter.
Each strategy review meeting has three primary purposes: 1) to repeat, reiterate, and reinforce your business strategy to gain deeper team insight, input and clarity, 2) to review progress towards your strategic goals and identify the key barriers/challenges that need to be resolved, and 3) to set your top strategic priorities and the action plans that need to be implemented before the next strategy review meeting.   Regular strategy review meetings build and maintain momentum by keeping the team focused on what's important.  They also facilitate effective information flow which is essential to bring the strategy to life.

3) Information Technology.  Information flows up, down and across the organization has never been easier with today’s communication technology.  However, at the same time, it has become more difficult to separate the important and critical data/information that is needed to drive the organization’s strategy, from the everyday noise about operations, the market, your competitors, etc.  Strategy-focused organizations have systems in place to collect, analyze, and share critical data, such as key performance indicators on important strategic initiatives, in real-time.  Each strategic goal needs to have an “owner” i.e. the person that is responsible for the collection, analysis, and updating of the data used to assess progress or when key milestones are completed.  If it is a high priority, highly important, stretch goal, it normally will only be accomplished if the team can stay intensely focused on implementing the action plan.  It must then remain “top of mind” through effective information flow.

It is amazing what a team can accomplish when focused and given clear insight with real-time feedback on the team’s progress towards a shared goal.  And when a team is energized, rewarded, and focused on important strategic goals, it inevitably drives enterprise value and creates more and better exit options for shareholders.
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In our next blog article, we will address how “clarifying decision rights” inter-relates with “effective information flow” to drive an effective strategic plan implementation.

​Sellers routinely underestimate what it takes to convince a buyer to close on a deal.  They also often tend to mistakenly withhold information that they deem to be immaterial, only to find that when it emerges during due diligence, it threatens the deal or the potential buyer tries to renegotiate the initial offer.

Potential buyers of a business view investment risk and opportunities from a completely different frame of reference than the seller.  They worry that they will pay too much, or even more so, that the business may not perform as expected once they become the owners (and hence, they paid too much).

The seller, on the other hand, is already intimately familiar with the business and understands its customers, its suppliers, employee matters, etc. and the business risk and opportunities associated with each.  Transferring that deeper understanding of the real risk and opportunities from the seller to the buyer is ultimately the overriding purpose of the due diligence process. Sellers must look at the business from the viewpoint of a buyer and try to anticipate how buyers will perceive risk and opportunities with a healthy dose of skepticism.  Simply put, buyers will believe what the seller can prove and be skeptical of what they can’t.

Undertaking a comprehensive “Pre-Sale” due diligence process will go a long way in preparing the business for a smooth sale when it is time to sell.  By “Pre-Sale” due diligence, we mean a comprehensive investigation or review of all aspects of the business, either through the utilization of internal resources or by an outside advisor, to identify, document, and ultimately correct issues that will be inevitably uncovered by a potential buyer.

So how do you begin the process?  The first step is to compile a due diligence list and populate it.  Buyers expect to review almost everything today electronically, so start by building a directory on your server or online.  It should be organized by major sections, such as “Financial”, “Operations”, “Sales and Marketing”, “Legal” etc. with subdirectories for each major section.
  
Once the information readily available has been uploaded, gaps and shortcomings will start to emerge. Are your operating procedures up to date and documented properly?  Have changes been made to your performance management program that is not fully reflected in your latest employee manual?  Employee matters are a critical part of the due diligence process by buyers.  Are there restrictions to assignment clauses in important supplier agreements?  Are there inter-company or related-party transactions and relationships that are not documented with formal contracts and are they at market rates?

Revenue quality (sales that are, profitable, sustainable, and predictable) is one of the most important aspects explored extensively by potential buyers early in the due diligence process.  Sellers should be able to aggregate and segregate sales and margins by customer, customer type, region, salesperson, location, product, product line, etc.  Sophisticated business analytics capabilities will go a long way in helping a buyer assess risks and opportunities, as will a comprehensive, up-to-date, written business plan, complete with embedded strategic planning and implementation processes.

Having audited statements will help ensure that the firm’s accounting practices are up to date and the internal controls are up to industry standards.  An audit will help build a buyer’s level of confidence in the financials, but some may require a “Quality of Earnings” (QofE) review.  A QofE will help a buyer determine maintainable earnings by adjusting for one-time/non-recurring expenses and sales, owner-benefits, inter-company and related-shareholder transactions, etc.  For companies that have a lot of potential adjustments, undertaking a QofE by the seller before going to market may be advisable.

Organizing and compiling the information a buyer will need to review will give you a “running start” when you hire an advisor to assist you in the sale, or when you begin discussions with potential buyer candidates.  It will also get your potential buyer to “yes” or “no” a lot faster if you’re prepared.  Drawn-out extensive discussions and “bit by bit” information flow usually leads to a monumental waste of time for all involved.

The reality is that buyers will eventually uncover any “skeletons in the closet”, so it is always best to identify and correct them on your terms and well before you get into detailed negotiations with a potential buyer.