Articles & Alerts

Pictured left to right: Megan Klingbeil and Transaction Advisory Services Leader Michele Harlan

Expo West was an event full of excitement, gatherings, panels, collaboration, reconnecting, and new ideas. By now we have all seen articles and posts discussing the trends observed from the product side, so we would like to share some key business and financial trends observed in our conversations that were top of mind at Expo. I was fortunate to speak on a panel on the state of the capital markets, and many experts in the industry agree that there is more optimism around deal flow already in 2024 and it is expected to continue in the upcoming twelve months.

Here are a few of our takeaways:

1. Capital Efficiency and Profitability – Investors are holding brands more accountable for the capital being deployed into their companies and they are not automatically funding the next round as we have seen in prior years. In light of this added scrutiny, brands should be focusing on their cash flow and capital efficiency and understanding the cost versus benefit of promoting additional sales and gross profits. One way we see brands focusing on retaining cash is by investigating trade spend deductions taken by retailers and distributors and disputing unapproved amounts. Since a lot of companies do not have the resources to do this internally, there are service providers that successfully dispute such chargebacks, preserving capital and adding to profitability. Additionally, we see companies focusing on the return on investment (ROI) from advertising programs to determine whether or not the program generated enough ROI to merit continuation. There has also been a shift to shopper marketing programs whereby smaller companies who can’t afford to pay for more data can get data to support the spend.
2. Debt vs. Equity – In the current economic environment, companies are considering whether it is better to pursue equity or take debt. While both have their pros and cons, in an environment where it is more difficult to raise capital as a growing company, debt can be a viable option. While the most beneficial aspect of taking equity may be the lack of repayments due at a set time (though each investor will have a unique comfort level with the time it takes to see a ROI),  and the equity partner can help you with the growth of the business, equity requires a valuation to be made on a company, which could result in a downward valuation in the current economic climate. As capital is harder to obtain, debt is a great way to fund operations while the company continues to grow and become cash flow positive. Smaller companies may not qualify for the larger lenders, but there are many options in the alternative lending sector that have a higher cost of borrowing but are obtainable and can support the business as it grows.
3. Path to Growth – Investors would like to see a true path to growth and profitability. The company’s projections should be made conservatively and have data and facts to support the expected growth so that investors can validate the numbers.
4. Professional CEOs – Founders are great at building brands, but many hit a proverbial wall when they get their business to a certain size. At this point, a lot of founders seek professional CEOs who have industry experience and have demonstrated their ability to take a company to the next level. We have seen founders take a step back to focus on what they love to do and hire those who have experience in focusing on growth while increasing gross margins.
5. Small vs. Big Deals – We are seeing more small deals versus the bigger exits to strategics. These deals still involve due diligence, so you want to be prepared, especially in an environment where funds are limited. As you prepare to raise or explore a transaction, it is important that you are organized from a legal standpoint as well as an accounting standpoint. The accounts in the company’s internal financial statements should be shown in accordance with Generally Accepted Accounting Principles (GAAP). An investor looking at your financial statements wants to make sure they are comparing the revenues, gross profit, dilution rate, and contribution margin to the industry standards. A lot of times when starting with a client, we see internal financial statements with incorrect classifications (for trade spend, for example) which could blow a deal because once the investor digs in, they may discover that you have misrepresented your gross profit. In the current environment, they may not be willing to listen to an explanation and there is no shortage of companies looking to secure financing. We suggest that when you are ready to enter a process, you have your financial statements properly classified since you may only get one chance at doing this.

To sum up, the capital raising environment is improving, but investors are savvy and data-smart, and trends show that they are more conservative, favoring smaller deals and focusing on companies that have their financials in order, and are profitable or have a realistic path to getting there. Whether you are looking to raise debt or equity, it is important to know your numbers, have a picture of where you are heading, and make sure that picture has substance so it can be validated.

Megan Klingbeil is a Partner in Anchin’s Food and Beverage and Consumer Products Groups and Co-Leader of the firm’s Beauty, Health & Wellness Group. To discuss this or a similar matter, contact her at [email protected].