Watching Middle Market Private Equity in Action

By Generational Equity

04/29/2019

From time to time we like to highlight a middle market private equity firm’s recent transaction history to shed some light on how these firms operate and how they focus on growing and expanding their holdings.

In this piece we are highlighting Huron Capital’s platform, Ronnoco Coffee, and its recent acquisition of Beverage Solutions Group. This deal caught my eye for a number of reasons. First, the facts:

Ronnoco Coffee, a portfolio company of Huron Capital, has acquired Beverage Solutions Group. This is the eighth add-on acquisition for Ronnoco since being acquired by Huron Capital in September 2012. Beverage Solutions Group (BSG) is a provider of beverage equipment to convenience stores, food service locations and offices. The company’s products include creamer and sugar stations, sugar and sweetener stations, and other custom dispensing machines.

And here is the description of Ronnoco Coffee:

Ronnoco Coffee roasts, blends, grinds, packages and distributes coffee and teas under six primary brands: Ronnoco, Seattle Roast, Wild Horse Creek, Henderson, Coffee House and Camellia. The company also provides a variety of other beverages, such as cappuccino, hot chocolate, and smoothies, and coffee-related products and equipment, including cups, flavoring syrups and condiments.

Note the clear synergies in this transaction. Beverage Solutions Group and its products market to the same customer base that Ronnoco and its other brands focus on. These synergies are key.

We have no idea how many other suitors Beverage Solutions was courting at the same time. Nor do we know how many other targets Ronnoco/Huron were examining before making this investment. Odds are good that there were quite a few on both sides. The important issue to realize here is that the intangible assets (aka, off-balance sheet assets) were what ultimately caused Ronnoco/Huron to take the leap at this opportunity. 

We have examined off-balance sheet assets before. These are items that are nearly impossible to quantify on your balance sheet but they are usually the most important component of any transaction. Think of it as the old 2 + 2 = 8 theory.  

The fact is that when a seller is not represented by an investment bank like Generational Equity, they often undervalue their intangibles, such as business methodologies, customer list, and brand recognition. Peter Drucker, one of the leading management gurus of years past, put it best when he famously said, “the buyer rarely buys what the seller thinks he is selling.” 

This really applies when you consider your business and tally the list of intangibles that make it unique. If you think your buyer is only buying the present value of your future earnings, you have already undervalued your opportunity. You must consider what different buyer groups would find attractive about your business and, once you have done so, emphasize those intangible assets in all your documentation.

The Beauty of Add-Ons in Middle Market Private Equity

The second feature of this transaction that caught my attention was the sheer number of additional acquisitions that Ronnoco has made since Huron partnered with them in 2012: 

This is the eighth acquisition Ronnoco has made since being acquired by Huron in September 2012. The company previously acquired International Blends, Henderson Coffee, the coffee and tea business of Love Bottling Company, Biff’s Coffee, Beverage by Quench, U.S. Roasterie, and Black Waters Coffee Company. “For over 20 years, Beverage Solutions has provided high-quality products and equipment along with excellent customer service,” said Matt Hare, a partner at Huron Capital. “The addition of Beverage Solutions expands Ronnoco’s national footprint from 35 to 43 states and provides additional distributor relationships.”

As we have described before in past posts, this type of add-on activity is quite common amongst equity firms that focus on middle market companies. An initial investment in a platform company is made, and multiple, usually much smaller, companies are acquired over the course of 5-10 years (sometimes even longer in the case of family offices). The goal: To build a much larger, highly synergistic firm with the goal of selling it or taking it public in the future. 

This is clearly the case with Huron with eight add-on acquisitions over the span of seven years. Odds are really good that there are several equity firms like Huron operating in your industry. Since they usually fly under the radar screen to avoid publicity, you may not even be aware of them.

But we are!

We have over 34,000 registered buyers in our buyer database, a good portion of which are equity firms that have given us very specific criteria of what they are looking for in add-on acquisitions. Plus, our deal teams are extremely experienced in working with and negotiating transactions with these firms. They know how to package documentation to highlight a company’s intangible assets and which equity firms (plus other buyer types) to approach that will pay a premium for these off-balance-sheet assets.

If you would like to learn more about how these types of firms operate and why your company may be of interest to them, visit our website, provide us with your contact information, and we will be in touch.

And kudos to Huron for having such a brilliant plan and executing on it so efficiently!

By Carl Doerksen, Director of Corporate Development at Generational Equity.

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