Should I sell, When do I sell, How do I sell? - an Interview with Ryan Lewendon - Ep. 50

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Hi everybody. Welcome to another edition of CPG Insiders. I'm your host, Mark Young. Co host, Justin Gerard. Justin, we got a really great show today because this is going to be focused on something that people ask a lot about and that is when do I sell and how do I sell and how do I get my company ready to sell and what are the, you know, what are, what are valuations and all these kind of questions. I just want to start off with something and that is there's lots of, if you watch the news, there's tons of doom and gloom in the air. Whether it's domestically with inflation and gas and the border, or whether it's internationally with things in Russia and Ukraine, it would be very easy for people to get very depressed and feel that things are going in a bad direction. What I want our audience to understand is in spite of all that, this is still a great time to be alive and a great time to be in business. And there are fortunes to be made. I want you to remember that. Don't let the things that are going on around you now, you have to account for the things that are going on around you. You have to adjust for them, but don't let them be the negative that makes you not go out and do what you want to do, that makes you not grow the company. And just as I'm going to give a couple of quick examples when we get to our guests as an example, lots of companies are having problems just with supply chain. So there are opportunities now for brands to jump in and gain distribution. In some cases just because they can, because you know how to provide the product and other people don't know how to provide the product. All of a sudden you can come in and say, you know what, I can supply you, I figured this out and I can jump in here and I'll have product on your shelves and all of a sudden you just gain distribution. You weren't going to have. The other thing I want to point out to people is people are quitting their job and they're quitting a job because in many cases they just don't like what they're doing Nowadays. Justin and I are always lucky because I always say that we get to do things that some people would do for free just for the experience and we get paid for it. So I mean, how cool is that? We get paid to do stuff that people want to do anyways. But what I want to say to you is because of this labor shortage, because of these problems, customer service is becoming non existent and it's very difficult to find customer service anyplace. Figure out how to solve that problem. And you are a freaking superstar. You are an anomaly. People will kill themselves to get to you. If all of a sudden you're the place that can come through, you're the place that takes care of them, you're the product that answers its emails, you're the people that ship on time. Whatever the case is, resolve that issue and you can easily stand out by doing nothing more than what you should be doing every day, but doing it right.

Well, I think that's a great transition, Mark. What you're talking about is making sure that we're approaching the environment from the mindset of identifying the opportunity. And that is where great businesses are born. That is where great products are developed. I think that's a great transition into our fantastic guest today.

As I said earlier, a lot of people are always asking questions about should I sell, when should I sell, how do I sell? And I want to tell people this. When you look at innovation, and I'm sure our guests will have some input to this, but when you look at a lot of innovation, most of the great innovation in the CPG world is coming from the entrepreneurs and it's coming from the startups. It's not coming from the P and GS and it's not coming from the Kochs. I mean, honest, nothing against P and G, but a technological breakthrough, a P and G is now in an easy pour bottle. It is entrepreneurs who come up with new formulas and new ideas and things that work better. And the way the big companies expand and gain IP, is they buy out these entrepreneurs after the entrepreneurs have kind of proven their story. So our guest today is Ryan Lewanda. Now, Ryan is Ryan, you're an attorney, right? You are a lawyer.

That's right, I am.

We're not going to hold that against you.

Thanks.

Ryan is an attorney, and Ryan is on that side of the world. He is the guy who handles those deals. And you handled some really big deals. Ryan, Tell us some of the deals that you've handled in the past that were entrepreneurial, that were absorbed into big companies.

I actually got into this business in the early 2000s. My law firm, Gianuzi Lewenden, my partner Nick and I, we were the first lawyers for Vitamin Water. So, you know, we met Darius by cough when it was just him alone in a room. And we ended up doing everything for that company. We did every round of financing, we did every distributor agreement, every co packer agreement, every celebrity partnership. You know, Facebook $0.50 deal where he had his own flavor and he had equity in the brand. That was one of the first deals I worked on out of law school. And we did everything for them all the way until it sold for $4.7 billion in 2008. And it was from there that we realized that there was this big white space at the time for people helping brands and founders. If you were a lawyer in the early 2000s and you worked in food and beverage, you wanted to work for Coke or, or Pepsi or P and G or Unilever or maybe you want to work for a hedge fund or investment fund, you want to work for TSG or something like that. There just wasn't as many growths and acquisitions back then. Vitamin Water really sort of broke the floodgates open in that it opened up a lot of people's eyes in the conglomerates world and the entrepreneurial world that just like you were saying before, big companies aren't innovating and customers aren't looking to big companies for innovation. When I was a kid and I learned about a new product, it was a television commercial for a new serial, Saturday morning cartoons, right? And the advent of the Internet came with a real fractionalization of where people were getting their information, their ideas from. And we realized that was happening in the early 2000s. Nick and I, we went to our first trade show. It was the Expo east trade show in Boston 2008. And we went around with our business cards and we were like, hey, we're lawyers. You need a lawyer. And people were like, well, I'm not getting sued. And I'd be like, no, that's not what I do. I help you do the rounds financing and I help you build your infrastructure and I help you do celebrity partnerships and I help you sell. And people were like, oh my gosh, yes. I had six employees. Now I have 68 employees. My lawyer's a trusted states guy. And they don't know what a billback is and they don't know what a distributor does. And I need someone with some contextual basis in my industry to help. You know, we left that first show and you know, we, we picked up Vita Cocoa and Happy Baby Baby Food.

And I was at that show, by the way. I was there, honestly.

Absolutely.

I wish we met back then. Oh, we could have done this a lot earlier.

I want to tell people something really quick. Yeah, it's something that I say, but I'm going to repeat it right now on. In your journey of running your business, there are certain places where you want to save money and there are certain places where you should not. You should try to save money on your shipping, maybe save money on your office supplies. You do not want to try to find discount legal services, accounting services or advertising and marketing services because those three professionals on your team have the ability to make you or break you.

Mark, I really, really appreciate that. You know what I will say to that is look, my practice is sort of like a life cycle practice. I work with companies like Bumblebee, Tuna and Oatly and Fever Tree and Body Armor that are doing hundreds of millions to billions of revenue all the way to just pre rev concept startups. And I help people usually over 5, 7, 10 years grow all the way through an exit. In terms of legal, in terms of accounting. Well at least in terms of legal, you know my viewpoint is when I'm working with you early, I'm just trying to help you keep from making the big, big mistakes. I'm helping you kind of save as much money as you can towards putting towards sales. But I will say not making those big mistakes early on has a compounding effect on your business. If you work with a co packer and the co packer owns your recipe or your specifications because you don't know any better, right? Or because your advisor doesn't know anything, you know by the time you go to sell that could be a millions or tens or maybe hundreds of millions of dollars issue that you got to sort of circle out that quite honestly you could have gotten for free from the get go. So whether it's a lawyer or a business advisor or an accountant or just someone who understands the big issues, not to get into the big mistakes, not to get into putting those people around yourself. Building that team around yourself I think is one of the top most four important things you can do to set yourself up for success later on.

I agree Ryan. So I'm curious, I know we definitely want to get to near the end of the life cycle as we've talked about here, but just that's a great point. So in your experience what would you say are some of maybe like the top three of the top mistakes that these founders can make in the beginning and they need to avoid.

One is not protecting your ip, right? Whether that's a trademark or a trade secret, whether it's if you have something patentable, it's not patenting it. If it's a recipe or a specification, it's not protecting it, it's not keeping it confidential and it's not keeping ownership of it. The other is not sort of protecting your human capital and that might be your employees, but that also might be your sort of outsourced service providers. Right. Most companies I work with, they outsource a lot of their oper and marketing and it's not keeping that, that core together. And that can be, you know, from anything from a NDA non compete and a workmate for hire in place to incentivizing them properly through equity grants or other types of sense. Right. Like the people in these brands are usually the most important asset at the end of the day. And keeping that core together and keeping continuity along, that really sets you up for success. And then the third is like not really starting with an end point in place. Right. From a strategic standpoint, you're going to build your product, you're oftentimes going to pivot a little bit, you're going to learn, you're going to expand. But as you do that, you know, what is that being expanded to? Where are you pivoting to? What is your product offering? If you're sorting to go to an ipo, right, that's one round. But if you're going to get purchased by an acquirer, how does my product mix fit in with that, with that party? Are they over leveraged in my category? Are they under leveraged? Who would be the perfect acquirer? Are there five of them or they're one of them? A lot of people don't really start with that end in mind. And you know, if you can map that out from the beginning, it can inform so many of your decisions.

Now if I'm selling my CPG business, do I need to go hire a brokerage company to do it? A broker to handle it?

That's a great question, mark. I get asked that question all the time. The answer is it really depends. I'll tell you this. Let's say you have a buyer that's already investor in your company, right? Let's say you did a deal early on with the strategic and maybe there's an exit mapped out, maybe there's not. That might be a situation where there's only one buyer and there's one negotiation and maybe there's a lot of information exchanged already and a lot of understanding already. Under those circumstances, when I've sold companies, usually there's not an investment banker involved. On the other hand, let's say you don't have any acquirer in your company. Let's say instead of one potential acquirer, there's 10. Maybe it's a conglomerate, maybe it's private equity, maybe you're a profitable company and Payne Weber could buy instead of just Unilever. In that case, you're going to want to talk to an investment banker. There's also, because they're going to help you run a process. They're going to help you circle those parties, they're going to identify parties that you didn't even know about and they're going to facilitate those introductions and those discussions and they're going to actually give you sort of a little bit of an air of certainty because those parties are going to have a relationship with that banker and they're going to be co signing you to some extent. There's another scenario when you want to talk to a banker is when you don't have any clue about your value, what your price could be. And that's going to depend on a couple of things. Right. It's going to depend on are there other transactions in the industry that have sort of set that value and that multiple that are publicly known that I can sort of tick off against, or am I sort of a new product in a new category or in a very unique scenario where identifying that value might be a very complicated and somewhat amorphous project? If the answer is the lap, you're going to want to talk to a banker because they're going to help you build that story and that case for your value. If the answer is the former, where you're like, look, I'm doing sales here. I'm pretty sure my multiples around here. My number's pretty, it's pretty boxed in. I've got a really strong idea of what it will be. Well, that's a situation where maybe a banker's not going to help as much in terms of that. So when you look at it, the two main things are do I know what the right number is for this company and do I know who the right buyer is for this company? If both answers are yes, you can tend to. I think I've seen companies in the past tend not to use bankers much. If they're no or one is no, that's when you're going to want to lead into a banker. And that's where I had a lot of value.

But even if I have an investment banker representing me, he's not my lawyer, I still need to have an attorney that's looking out for me.

Yeah, absolutely. Bankers and attorneys work together hand in hand. Right, right.

But that broker's job, his job is to push that deal over the edge. He's working for a Commission.

That's absolutely right. The investment banker gets paid the value of the sale. The lawyer gets paid based on hours. And I tell everybody, look, when you're buying a house, your broker's helping broker make sure the deal goes on. You need somebody watching your back because there are things that go into a sale that aren't just the price. Right? Right. There is the purchase price. There is the liability that might go after the fact, meaning how much of that purchase price might I have to give back someday? And more often than not, there's some relationship after the sale, and that might be rolling over some equity, the founder's rolling over equity, which might get bought out over time, or it might just mean an employment relationship that goes over time. But those are things that are going to have a major impact on your life, especially when you should be realizing a very, very big financial windfall. You want to make sure all those things are taken care of. You want to make sure you don't have headaches later on. You want to make sure you can enjoy the fruits of your labor after that exit. And a lawyer like myself is going to help you sort of troubleshoot for those things as well as get the deal done.

And obviously, I need to have a good CPA on board too, because there's tax implications in these sales, too. Do you guys help with any of the tax implications or bring a CPA in for that?

So. So there's two things. I mean, look, taxes. When you're a corporate M and a lawyer like myself, taxes are always a consideration, right? I always say there's three parties to any sort of company sale. There's the buyer, there's a seller, and then there's the irs. They're always there. They're always going to be a consideration. So it's something ingrained in my practice. It's something we troubleshoot for and something we deal with. But first of all, you should have a CPA throughout the life cycle of your. Of your company. You should have one that understands your business, that understands the way you grow. And the legal and accounting should be working together while you're issuing sort of employee equity, while you're making sort of big decisions about investments. Everyone should be aligned on how these things are being treated so that when you go to sell, the buyer doesn't uncover some crazy tax issue or crazy tax liability. Honestly, there's sort of like a couple big things that can derail a deal. One of them is a big tax liability. Right? Because the IRS wants its money. And the IRS a lot of times, if the seller can't deal with it, they're going to look to the buyer and it's really going to scare off the buyer, right? The other issues are like a cap table. If you don't know who owns your company or if there are people that potentially could make claims to owning your company, that's something that's going to chill a deal, right? A buyer is going to say, look, you got to tell me who the people are and you got to tell me who owns it. And if somebody pops up saying, hey, I actually own half this company because we had an agreement when we were in business school that we'd start a company someday, that's going to chill the deal, right? It's going to, because they're not going to know who to pay the money to. So big things like that accountants and attorneys should be working on together to have a lot of certainty and give a lot of confidence in a seller that when you're at the closing table, those things are not going to be issues.

One of the things they need to look at, and this is assuming that their goal is to sell. And by the way, we talk to clients all the time who at the startup phase, their goal is to find a buyer to grow the company and find a buyer that's not unusual.

You know that.

What are the things I need to be looking at and doing in my company to make it more attractive going in?

A couple of things. First, you're going to want to get all your IP set, right? You're going to want to file your trademarks. You're going to want to protect your secret sauce, whether that's a patent or whether it's protecting it by a trade secret, making sure it's kept confidential. You're going to want to consider international trademarks as well. If you're doing business out of the country or for most big conglomerates, when they buy you, they're looking at where you're doing business, but they're also looking where you're not doing business, right? So is it going to be a defendable trademark outside the US if you're doing business in the US as well as inside, you're going to want your manufacturing supply, distribution. You're going to want it set up as fluid as a state as you can, right? So what does that mean? Well, you're going to want, if you have your druthers, you're going to want a supply chain is there for you that is committed to you but gives you flexibility to upgrade it over time. Most Buyers, when they come see you, they're looking at a smaller company and they're saying, how can I improve on this company? And usually it's not marketing, usually it's not sales. Entrepreneurs do that better than everybody else. The big conglomerates can't keep up. And they know, but where do they think they can add value? Supply chain cogs, margins. So you know, you're going to want a manufacturer that is going to be around for 18 months post sale because you know, if Coke or Unilever buys you, they're not going to do much for 18 months. They're going to get in there, they're going to transition eventually, but eventually they're going to want to absorb as much as they can of this company's supply chain internally or through their outsourced preferred partners and they think they're going to recapture a lot of value. You know, when you're doing contracts now, that means having distribution agreement that's not perpetual. It means having a manufacturing agreement where yeah, they, you have commitments and they can meet your capacities, but that don't go on for 10, 20 years and that don't have penalties if you want to have alternative manufacturing. Right. You want flexibility in your supply chain in terms of your human capital. You want, for the most part, especially on the C suite side, you usually, now more often than not, big companies want to absorb that C suite for some period of time. I would actually say it's even more common these days for a big conglomerate to buy some, but not all the company to start maybe a majority position, maybe starting a minority position, but, but to eventually buy the rest of it over time. And they're doing this because they realize that when they get in a company and they get rid of all the people that made its heart and soul, when they get rid of the driving force and the entrepreneurs, this company loses something. And if you see some of the purchases now in the market, you're seeing them take a 51% stake and then an 80% stake and then 100% stake because they've realized that the human capital is the heart and soul. So you want to make sure that your top level executives are sufficiently incentivized to stay even in the face of potentially earning very, very big paydays as a result of this 51% deal and their incentives. You want to keep that together, especially as may be the case now with a lot of your wealth might be on that last second or the last or second to last bites of the apple, right? Your wealth can be tied up in the performance of the company, post that official sale. So it's your human capital, it's your supply chain, it's your ip. If you can start shoring those up now, that's going to put you in a much better position and a very attractive position to a buyer. In addition to having great sales, having great customer penetration. And today, in today's market, this wasn't the case 10 years ago, but in today's market, having profitability, buyers want to see profitability or pathway to profitability. The days when you could buy, when a company could have, could be losing money, but be like at a 3,500% growth rate over three years on the top line and sell for a 6, 7 multiple, those days are gone. If you are a company that's doing $100 million a year, growing 30% a year and losing $10 million a year, you're going to have a hard time selling. If you're doing $100 million a year, growing 30% a year and making $10 million a year, everybody's going to want to buy you, right? It's the nature of the world these days. So when you're earlier on, you don't need to turn a profit in your fifth year. You don't need to turn a profit if you're below 50 million sales. But you need to be able to tell people just acquires and by the way, sophisticated investors these days, you need to be able to tell them this is how we're going to be profitable. The weworks of the world and the Caspers of the world, they really did sour a lot of these big companies on the sort of grow, grow, grow and worry about profitability later on. Everybody's looking at profitability these days with a much harder lens.

That was a business model, I have to tell you, especially during the dot com boom and everybody was worried about what the burn rate was instead of what the profitability was. That was, that was an entire model of business that never made sense. For me it's like, why do you want to burn rate? How about, let's at least get to a break even point here. If we're not, you know, if we can't make money, let's not burn cash. So if I'm picking something up from you, if I'm trying to build the value of my company, let's say I make some kind of topical lotion, am I decreasing the value of my company by actually having manufacturing capacity of my own? Am I better off to be a contract, you know, to use contract Blenders and manufacturers.

That's actually a great question mark. And you know, I have this conversation a lot of times with my clients because they, they come up with that themselves. I think it kind of nets to really one issue is can I find sufficient manufacturing alternatively right, what is my product? Is there a big manufacturer out there that can take it on? Does the potential acquirer have all their own manufacturing or is this something a little unique? Right, like Quest Bar, QuestBar for years manufactured its own product, very unique product, a lot of secret sauce, a lot of ip. They did all did it in house and they did that there for years. And it was probably cheaper to do that in the long run instead of building a facility for someone else, which they would have to do. It's very fact specific. And then look the other side of it is how much of a margin am I going to capture with my own facility? Because as we said, profitability is a big thing, not only in the sale but in terms of what types of investors you're attracting these days. And if you're self manufacturing, the answer should be you're capturing significant margin there hopefully in the near term and the long term. And you do see, you know, especially, especially in like, you know, the alcohol worlds where there's a lot more self manufacturing is, is a lot more common because one, there's a little bit more uniqueness about it but two, you're capturing so much margin. Both of those things play into that decision and it's not going to be right for everybody. What I do suggest when you're looking at one of these things is really go find an expert. There's a great place, they're called Whole brain Consulting and all they do is they help people develop supply chain. Find an expert in that, talk to them, see hey, what are my alternatives, right? Is there a facility within arm's reach that I can manufacture at or is this very sort of unique that I should think about making something proprietary for myself?

So clients will often ask us what's the threshold they need to get to. And I'm going to tell you my experiences. Feel free to disagree or give me your impression. I usually tell people in the CPG world. So again, products at Walmart and Walgreens and cvs, whatever the case is. My experience has been that you don't really get on the radar to be an acquisition until you've crossed the $20 million line. And then I find the multiples get better once you cross the 40, $50 million line. What's been your experience with that Yeah.

I totally agree with that. I totally agree with that. What's interesting about the market for CPG these days is that over the past eight years or so, every acquirer, whether it's Diageo or Coke or Unilever, has developed a venture arm. And those venture arms do work. I'd say the venture arm start looking at you 5 million in revenue, right? But that's not for an acquisition, it's for an investment. And I do find a lot of entrepreneurs get a little like, they get a little sideways about because like, oh, I'm speaking to Coke, I'm speaking to Pepsi, right? And they start thinking about acquisition at that stage point, but it's not right, it's for an investment. I will say the conglomerates start looking you about 20 million revenue. If you get there sooner rather than later, they start looking harder, right? Because 20 million revenues over 20 years and 20 million revenues over two years means a lot.

Whole different story.

50 plus they definitely start looking at buying. I will also say though, I found now this is where the profitability comes in, right? If you're 50 million losing money and you've got a good pathway to profitability, that's one thing. If you're 50 million, no pathway to profitability, it's another. But the big conglomerates are willing to wait a little longer and pay more these days to make sure that your product is fully formed to be a profitable company. You look at body armor and sold to Coke for $8 billion, significantly higher than the Vitamin Water sale, which is where Coke's venture arm came from. They developed vee after Vitamin Water in part to develop new brands, but in part to keep initially from paying as much as they paid for companies as they did for Vitamin Water. That view has shifted. We'd rather take a more fully formed, profitable business that is going to be more easily integrated into our system than take something earlier. And they don't say this but that we're just going to screw up.

So when they jump in, you're at the 5 million level and you get a call from one of these private equity arms of a multinational. What's in their head? Is it, we want to get our head under the hood early, we want to write to first refusal, we want to be on deck with these guys in case they take off. What are they thinking?

It's, it's interesting. If you look at different conglomerates, they kind of report to different places. Like some of them are a function of their marketing arm, right? And some of those ventures, when they're A function of their marketing arm. Yes. They're looking at things. All of them, by the way, are looking at potential acquisitions, Right. But there's other things. If they're a function of the marketing arm, they're looking at information. They're looking at understanding the market from different viewpoints. They're looking at potential extensions away from where they're going. Now, when the venture arm is a function of like their financial or a subset of their M and A. Right, which a lot of them are, they're really more straight looking for potential acquisitions, right. They're saying, I'm looking for an acquisition and maybe if it's not right for me, it'll be a venture investment. What I'll say is this. When you're doing a deal with any strategic early on, I always say you either got to be getting married right off the bat or you just got to be very lightly dated.

Right.

You shouldn't get in between because a lot of them do want that right of first refusal on your company for making a $2 million, $4 million investment. And what I tell people is, look, it's great to have the name in, but if they don't have an obligation to buy you later on, but they have an option to buy you later on and they don't, and they don't trigger that option, everybody's got enough, it's going to cost, it's going to put a cloud over your company. They're going to say, hey, you know, General Mills, they had an option to buy and they did what was wrong.

And they've already got $2 million in it and they walked away from.

Yep. So either have no option. Right. And just be friends, you know, who are seeing each other lightly, or get married early on. And either. Either of those can work. Right.

So they're corporate friends with benefits is what I.

That's absolutely right. That's absolutely right.

So if I have a choice, if I'm out looking to acquire companies, so I'm a big company, I'm private equity, whatever the case is, and I'm looking to acquire firms, am I more focused on brand is received or that they have some great, really protected ip?

That's a great question. I think when you're a big company, I think the. Look, the IP matters. I think people said the liquid ID deal was in part because they had real ip. But I will say that the majority of the time in cpg, it's not really the ip, Right. It's the team and it's the customer awareness and it's the customer affinity and then a little lower than that's the relationships with the trade and the accounts and all that stuff. But at the end of the day, what these big companies are really buying is they're buying brands that people are loyal to. And these big companies know today, in today's world, consumers want independent products. They want things that were discovered, they want things that were not force fed to them by some big corporate machine. And they definitely transition over time, but they're able to maintain those. And if you can find that brand loyalty and you can make money these days, which is the trick, right? But it's that brand loyalty, developing that brand loyalty amongst consumers. And in today's like a post Covid world, I will also say developing brand loyalty but in terms of like a platform, right? Brands out there that are more platformy, that are ultimately more expandable, that stand for, you know, more than just the product that they're putting out there. You know, like a vital proteins that stands for sort of like beauty and you know, extending, you know, your youth and all these types of things. More so than just collagen powder. Platforming brands with really loyal fan bases, that's what people are looking for.

Now what about companies, and again, I'm thinking about valuation here. What about companies that decide to a get involved with a cause early on? Or what about companies who take a particular position? So, you know, when we look at a Ben and Jerry's where they are on the far left or we look at a Chick Fil a that can be over on the right, or maybe Black Rifle Coffee might be a better example. Look at Ben and Jerry's on one side. Black Rifle Coffee. Does that limit my acquisition opportunities?

Well, I think from a very macro level, right, it might limit your, it might limit your sort of upside, but like maybe in the billions, right? I think as, as look as society has gone, we've become like a more polarized society, right? But at the end of the day, brands are built by their rabid fan bases, right? And you know, you look at these products, Black Red Pulp Coffee I think is a great example that have really resonated with a certain group. That's key. Like almost no brand has been successful in the past five, seven years without starting with that rabid fan base, right? Rx Bar had the Paleo crowd. You look at Happy Dad Seltzer and they've got this sort of college age crowd and these younger, these younger dads. You're finding these rabid fan bases for these people and you're growing on it from there. So I think polarizing is one way to find a rabid fan base. I don't think it's going to prevent you from being purchased. Ultimately, it might narrow the number of purchasers. But I think if you don't have a rabid fan base, you probably won't get purchased. So you need a rabid fan base. And in today's world, it's becoming more and more likely that that fan base will be some, you know, some very subset, some definable subset of people.

So we can pretty much guess that Disney wouldn't be buying Black Rifle Coffee. But it doesn't mean that there are not companies out there who would look at Black Rifle Coffee and say, these guys have a great fan base and a good market and let's. Let's own a brand.

That's absolutely right. Yeah.

One of the things we always tell people, we're always telling our clients, it is far more important to be passionately desired by a small group of people than to be well known and irrelevant to the entire country.

That's great advice.

And our example of that is if name recognition was the key to success, Kmart would be doing wonderfully because everybody knows who Kmart is, Everybody knows who Sears is, but where are they? So that's one of the things we focus on. So we always try to tell people, we need to find this small, passionate tribe who will go out and be evangelists and who can't live without you and who will go tell everybody in their tribe that they need to go out and try your product. Also, is a company that grows organically a more valuable target than a company that grows by just sheer advertising and marketing?

It all sort of ties together. Usually if the company's growing organically, it's spending less on marketing and it's got more profitability. Right. But a company that goes to 2 million organically versus a company that gets to 200 million through marketing, the $200 million company is going to be more profitable. Look, the trick is when you have both. You know, Essentia, when we met, Ken up came from Essentia. He came in this conference room here, and he said, ryan, you know, I'm the number one enhanced water on Amazon. I'm the number one enhanced water in Whole Foods. I'm beating up smart water up and down the aisle, and I'm not doing it right. And I'm going to do people. It's sticky. People are pulling it.

Yeah, I'm a customer of the product.

I buy the product, love it.

I love it, but it was doing well. It just had a stickiness with some people. And then, you know, I said, all right, Ken, we'll raise some money. We'll help you. We'll put you with Whip Stitch Capital. Well, here's the people to staff it. We'll put some people. We negotiated 86 DSD agreements. We built out a national DSD, and the company shot up, and it put some marketing in there behind a sticky product. And the thing shot up like wildfire and was sold to Tenacity Waters last year. Look, it's a combination of the two. Right. I. I think the right stickiness with the right marketing added is where you find something really, really special. But having a product that people love and want to buy, I think that's the core.

What kind of multiples do you see for CPG companies? And this is really. This is a guess, folks. This is. Don't say, well, Ryan told me I was worth three times profitability. This is all over the place.

Yeah, yeah.

So let's talk about net sales. Cause I still think that's how we're looking at things. Even with the profitability. Look, I think you're looking at any. Like, if you're at 2 or 3x, you're dead. You sold the company and you sold it. Right. If you're between four to six, you did good. And anything over six, wow, you knocked it out of the park. Right. But look, are there multiples.

I don't.

You're not really seeing multiples over 10 on an exit, but are there multiples below 10 in the 8 range? Yes. Are companies that are doing really well in that four to six range? Yes. Do a lot of companies, probably most of them sell at 2 to 3? Totally. It all depends on market size, velocity, profitability.

So I'm doing 20 million in net sales. And net sales folks would be. That'd be your wholesale number. Less all of your returns and chargebacks and all of those things. So I'm doing 20 million in net sales. So if I'm an average company, let's say I don't have this amazing ip, I spend pretty heavy in advertising. I'm pretty marketing driven. I'm modestly profitable. I'm a 40 million to $60 million target.

Yes, I'd say you are.

For the.

For the right folks, you know, for the right company. Absolutely. And I do think, Mark, maybe if you're 20 million, the way that gets cut is they come in for 40%. Right. And then they have an option to buy 70 up to 70 and then they buy the rest out of there. Because I think a big company is going to still want to steward if you're selling to a private equity company. So let's say you're modestly profitable, private equity looks at you and they say, all right, we can make this thing profitable. We can get this from $250,000 in profit to $2,000,000 in profit a year. Pretty easy. They might buy you up entirely. Maybe they want you to stay on for a year. Unemployment agreement or something like that. Yeah. Or certainly 40, 60.

Now most of these deals, when you get bought out, most of these deals come with some kind of non compete agreement too, right?

Oh yeah.

What do those usually look like?

Well, look, depends who your lawyer is. But you want that to be sort of as narrow as possible, right. So what they're going to give you is they're going to say, look, you're going to get a five year non compete. Right. And by the way, I'm a New York lawyer, I'm a California lawyer. California people in California say non competes aren't enforceable there. They're not in terms of employment. But if you're selling your company, they are. Absolutely.

That's different game.

So they're going to ask for five years and they're going to ask for anything that competes with the business now or anything that we're going to come out with or anything that we thought about coming out with. And you're not going to know what the hell that is. Because if you're like everybody else, you've got a deck somewhere in your computer where you were doing topical, but you said maybe we'll come out with sparkling water or a hard seltzer at some point. It was in the mix. When you're thinking crazy stuff and you're not going to know what that is, you want to keep that very narrow and tight, right. You want to get it to be the most definable core of what your business is. Then you also want, you want to have latitude to go work at a conglomerate because let's say you sell your water company to Coca Cola or yeah, can you go work at Pepsi if your non compete is in water and you're working on Pepsi, who knows Pepsi owns water too. So you want to carve out that you can go work at a conglomerate as long as it's not directly on that vertical. And then what you also want, you're about to make a lot of money is you want to be able to invest in other funds that invest in that area and you want to be able to start family offices and funds that might take passive or possibly active investments in those as long as you're not starting the company and running yourself.

Oh, so some of these non compete agreements could even limit how you invest your money then?

Yeah, I mean they're very, they're written very, very, very broadly. You're not supposed to start, be involved in, talk to, advise for, invest in. You're not supposed to be associated with these folks at all. So you know, the non compete. And again, this is definitely want to work with a lawyer on this. You want to narrow that down and you want to have a conversation with your lawyer about like, all right, well this is what I want my life to look like afterwards. And by the way, you always want to do a little bit, you always want to add a little bit more because I speak to lots of entrepreneurs that they're getting ready to sell their company and they' I am not doing this ever again. I'm good, I'm going to go fish for the rest of my life. And you know, if you're an entrepreneur, six months go by and you got the bug again. You're like, hey Ryan, I got this great idea, can I do this? And then we got to figure it out. So just realize if you're at the end of your company's life cycle and you're selling your business, just allow some room for that creative fire to fan up again and for you to be drawn back into that area.

So another thing, as I said that you don't want to try to save money and getting discount legal fees and CPA fees. I want to add another little tip to that and that is the people you don't want to lie to is your lawyer and your CPA and your advertising expert. Because guess what? None of us can work for you unless we have transparency and we really know what you're doing. And what made me think of that was I'm thinking if you were negotiating a sale for me and you were negotiating my non compete, it would probably make sense for me to sit down with you and say, well, Ryan, I've got this other idea I'm thinking about going into. So right now I'm making topical arthritis cream. But you know what? I've got this idea. I want to go into suntan lotion when I get out of here. I need to tell you that, don't I? I need to let you know where it is. I want to go.

Absolutely, you gotta let me know where it is. You want to Go. So I can help you navigate that. And look, usually, can I also say look, when you're doing these things, the time to do a lot of this from a strategic standpoint is when you're getting your term sheet stage. Right. There's a lot of things that I do part of these negotiations that you can get away with. If you started at the term sheet stage, you're always going to get asked for a non compete. When you sell the company, the buyer is always going to try to put some recourse of the money they're paying for it to you in the purchase agreement. You negotiate those things upfront in the term sheet before you're exclusive to them. You can get away with a lot more. The business people are engaged. They're willing to trade some of these things away to be the person that goes in exclusivity with you. Once you sign the term sheet, if you're working out later in the deal, they're not going to be as flexible. It's the lawyers who are in charge at that point. They've already sort of button that down. They already know they got you. So one thing I will say on a lot of these big life changing decisions, have that conversation with your counsel early and openly and transparently and start it before you sign your term sheet because you can, you can button off a lot of these issues upfront and I've done it a lot of times and it makes the transaction go so much smoother, so much more efficiently and yeah, yeah, usually end up saving a lot of money if you batten off these issues from the get go.

I will tell you, even for us, it helps if, if we bring in a new client. It helps if the client tells us my goal is to be out of here in five years. Because how we manage the client knowing that there's an exit in place is different than how we manage the client if we know their goal is they want to run the company for the next 20 years. Because now we know. Now we know. Okay, let's limit, let's limit how much cash we're putting in. Let's squeeze out, let's not look so long term. Let's find out all the places that we can squeeze out some, some quick hits and, and know that we're moving them toward that direction. Anything else you want to. I think this has been fabulous by the way. I just, you just been great and I'm looking forward to working with you in the future. Folks, I want you to know that if you go to the show notes you go to cpg insiders.com and go to the show notes of today's show with Ryan Lewend. And we'll have the link to their website and all his contact information right there. Ryan, if someone, if, if someone is looking for an attorney, they can, they can contact you. You guys will talk to them, same as we do. We don't charge people to have a conversation.

Yeah, Mark, absolutely. Look, first of all, it's been great speaking to you both today. This has been awesome. I've really enjoyed this conversation. My law firm, Gnuzzy Lewenden. The link is in the notes below. Yes, please reach out to us if you're at a company, if you're getting ready to sell, if you got a big decision coming up, if you're thinking about getting your company together. We're a life cycle firm. Our business is built on working with you early and working with you all the way through your big exit. And we're super competent and we're efficient and we're skilled at both. We're kind of the most ambidextrous thinking law firm out there in that we know how to work with you when you're big and you got a little leverage and we know how to work with you when you're early and you need, and you need to get to. Yes. Because you don't have the leverage. But yeah, it doesn't matter where I'm located.

You're in New York and California, but it doesn't matter where I'm located.

Right? Yeah, we've got offices in New York. We've got offices in California. I'm a New York and California lawyer. I'm back and forth. But we work with companies all over the country. We work with a lot of companies that are outside the company that are a country in the U.S. and if you're interested, please reach out to us. Our contact information is in the notes and we'll be happy to chat with you and see if we could do something together.

Yeah. I assume you guys are very similar to us and that is no one hires us for our geography. They hire us for our specialty.

That's absolutely right.

You know, because we're, we're a zoom meeting or an airplane away from whatever it is that, that we need to do. Wherever somebody's located.

100%.

Ryan, you've been amazing. Justin, any last thoughts?

For you?

No, no, no. I think it's, I think it's been. You've been great. So much great information. This is a topic we hear all the time. So it was fantastic to get your insights on it.

I appreciate the time.

It has been great. Folks. I encourage you that if you are looking for a law firm that understands our business, you have found one and that's not easy to do. It's no different than when people find us because it's like, wow, an ad agency that just does cpg because that's all we do. And you guys have that same kind of niche. And I think that is critical because I can come to you and I don't have to pay you to have a learning curve to learn about the CPG business. You can hit the ground running. You already know what to do. You don't need to say, well, I've never done that. But we'll figure it out. I've got a law library and I'll figure out how to do this. That's right, Ryan, thanks for being with us. It's been fabulous, folks. If you like today's show, again, you reach out to Ryan. If you like today's show, please make sure you go to wherever you get your podcast. Leave us five star review and remember, not only can you always contact Ryan, you can always contact Justin or myself. To find us, just go to cpginsiders.com or you can go to jekyllheidagency.com and you can find either one of us. And the same as Ryan, we're always happy to have conversations and talk to people. That's it this week on CPG Insiders. We'll see you on the next episode. If you're looking to greatly increase sales on your CPG product, don't hesitate to contact us at Jekyll and Hyde Advertising and Marketing. By the way, the only advertising agency with a guaranteed result. Just go to jekyllhideagency.com or feel free to give us a call at 800-500-442 10.