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2000: The Year of Self-Evaluation for Roasters
(continued)

The Decision to Sell a Privately-Held Roaster

The decision to sell is one of the most difficult decisions that any privately-owned roaster will ever have to make. Owners are faced with the uncertainty of finding the acquirer that will pay the highest price for the company. A sale also raises concern over the future of the management team that the owner and his predecessors have worked so hard to develop. Finally, the owner is faced with the emotional issues that result from parting with a business that may have been handed down through many generations. A focused and directed approach can alleviate many of these concerns and lead to the best result for all of the parties involved.

Depending on the circumstances of a particular roaster, there are a number of issues that must be addressed by the shareholders in a divestiture to ensure that the maximum value is realized. It is recommended that owners selling a company retain the services of a financial advisor specializing in company sales. The financial advisorís role, among other functions, will be the following: to assist in the evaluation of the market conditions and the ongoing M&A activity in the industry; to analyze the current status of the capital markets; to help the seller present and convey the pertinent information in the best possible manner to prospective acquirers; to analyze and determine the optimal selling strategy; to assist in the evaluation of bids; and to affect the transaction. A well thought-out strategy and a disciplined approach to the sale will help the seller realize the highest value for their investment.

For the owner of the closely-held roaster, the investment in the business is likely to be the most significant asset in their net worth. While the emotional ties to the company may be strong and defer the sale process, eventually shareholders must analyze the activity in the market and examine the liquidity alternatives as they pertain to the familyís wealth management plan. A roaster that has become unprofitable or less profitable under the existing structure and market conditions will actually deplete shareholder wealth by continuing to operate. By not being open to all of the possible alternatives, an owner may unnecessarily limit their options and thereby miss the opportunity to realize the maximum value for the investment.

Typically, owners are looking to realize the highest price in the divestiture of a business. However, owners that have a strong commitment to the existing management team must also weigh the ultimate selling price with the future of the people that they have developed. These dual objectives can be addressed by presenting the information early in the sale process and by having a directed search for a buyer. If maintenance of the management team is an objective in a sale, the following question must be addressed: What type of buyer needs the incumbent management team?

In the roasting industry, the likely answer is a foreign buyer or a regional roaster lacking a presence in the sellerís region or segment of the market. Alternatively, the strategic buyer in a complimentary business that is looking to expand horizontally will require the existing management team. A buyer will sometimes require that the management team be part of the transaction (at least for the first few years) since the existing management can help the company maintain profitability after a transaction and allow for a smooth transition with the existing customer base of the acquiree. While meeting this objective is not always possible in an industry that is consolidating largely due to efficiencies and economies of scale, a positive result can be reached if the owners commit to a focused approach early in the process.

What Is The Roasting Business Worth?

The value of a roaster is generally determined by, among other factors, the following: quality and loyalty of the customer base, experience of the management team, historical profitability (adjusted for shareholder distributions), diversity of product line, and age and quality of the roasting equipment and facility. While every roaster is unique, there are several widely recognized valuation techniques that can be used to get a reasonable estimate of value. Three of the most common valuation methods involve an analysis of the following: 1) discounted cash flows (DCF), 2) comparable change-of-control transactions, and 3) market valuations of comparable publicly traded companies. Often a company will use several of these methods to get a sense of the range of likely values. The following is a brief summary of each of these valuation techniques.

1) Discounted Cash Flow

The discounted cash flow (DCF) method is one of the most widely accepted valuation techniques. In the DCF method, projected future cash flows are discounted back to the present using an appropriate discount rate. Effectively, this method attempts to arrive at a present value of the business by analyzing future earnings. The key to obtaining a reasonably accurate valuation lies in the future cash flow projections and the calculation of the discount rate. The result of this analysis is the unleveraged enterprise value of the company. This method allows one to value a coffee roasting business irrespective of how it is financed. This value is then adjusted for cash and debt to arrive at an equity value for the roaster.

2) Comparable Change Of Control Transactions

Another method for establishing benchmarks of value is to refer to price-to-value relationships implicit in the prices paid in recent change-of-control transactions involving companies with similar businesses and financial performance. The premise behind this method is that new transactions will be valued similarly to recent change-of-control transactions. Typical parameters are multiples of EBITDA, revenues, earnings, and book value. These valuation multiples will vary depending on the nature of the customer base and distribution channels (e.g. foodservice, retail-supermarket, and retail-coffee shop) and on market penetration. An analysis of some of the recent transactions reveals that the markets are willing to pay higher multiples for roasters with a recognizable brand and a retail distribution channel than those without an established brand.

3) Comparable Publicly Traded Companies

This valuation method is based on an analysis of comparable publicly traded companies. This method attempts to value a privately-held roaster based on a comparison of its financial performance and future prospects to similar publicly traded companies. While this method is an excellent way to get current market valuations, it is limited by the fact that there are very few stand-alone publicly traded coffee companies. Similar to the analysis of comparable change of control transactions discussed above, this method looks at various financial relationships to public market value. These financial relationships allow the development of an estimate of market value for a similarly situated privately held coffee roaster.

While the strategy and goals of the shareholders of every roaster will be different based on the status and competitive nature of the market in which they compete, the age of the existing shareholders and the plans for the next generation ownership/management, and the need for liquidity at the ownership level, all roasters should be actively analyzing their options. The current capital markets are such that there is a significant amount of investment capital available to invest in profitable companies. Additionally, as the trend toward consolidation continues, acquirers have been willing to pay increasingly higher multiples for strong acquisition candidates. The year 2000 is likely to be one of significant self-evaluation and continued consolidation throughout the coffee roasting industry.

Richard C. Hampson is a vice president at the Wall Street private banking partnership Brown Brothers Harriman & Co., is a financial advisor and lender to the commodities industry.


Tea & Coffee - July/August 2000
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