Category Bob Wolter’s Cheese and Dairy Blog

The US-Mexico-Canada Agreement (USMCA) Brings Relief to the Nation’s Dairy Industry

In May 2019, the United States announced an agreement with Canada and Mexico to remove all tariffs on steel and aluminum imports from those countries and for the removal of all tariffs on American goods including dairy products, bringing much needed relief to the US Dairy Industry. The Dairy Industry and CEO Tom Vilsack of the US Dairy Export Council, has praised the Trump administration as well as Mexico and Canada for their collective efforts on getting this deal done.  With this agreement in place, it will ensure that US, Mexico and Canada will maintain and grow their respective markets in this time of uncertainty with our agricultural economy. The USMCA also includes important improvements that will expand exports of US Dairy products to Mexico and Canada. Now we need Congress to ratify this agreement sooner than later. Read the full article published May 24, 2019 from the Cheese Market News: Deal with Canada and Mexico Brings Relief to U.S. Exporters

Alliant Energy Center, Madison, Wisconsin – 2019 US Cheese Expo

Creative Business Services/Creative Business Services / CBS-Global was represented by owner Michael Schwantes and M&A Advisor, Bob Wolter at the 2019 US Cheese Expo in Madison last week.  2019 is the third time we had a booth at the show and this year’s event was very well attended. We worked our booth on Wednesday and meet many Dairy individuals that were interested in learning more about our services and the help we can provide as a specialist in the industry.  Additionally, we connected with many, many acquaintances and friends we have gotten to know the last dozen years or so. Thursday’s seminars and events were very informative and innovative.  What I thought was most exciting was the ongoing effort and stand-alone business the US Dairy Export Council is providing for Wisconsin’s cheesemakers.  The US Dairy Export Council is opening up new markets in Japan, North Korea, Hong Kong, Taiwan the Mideast, Mexico and South America. The US Dairy Export Council creates access to the above mentioned partners through culinary schools, Chefs Associations, and a pilot expansion program through their Cheese Retail Program increasing awareness and confidence in US Cheeses. They have commercial support through buyers and suppliers accessing shoppers and consumers in these markets.  In 2018 US Dairy Export Council introduced 321 new US cheeses in these markets. In February 2019, the US Dairy Export Council attended the first annual Food Exposition in Dubai, which was a huge, huge success.  I meet with a couple of folks from DATCP that attended and they concurred, it was a great way to network and connect with the world’s consumers. We were encouraged to attend the 2nd annual event in Dubai in February of 2020.

Seller be Prepared

The buyers in this market are trending to be very careful and diligent in their approach because the tell-tale signs of an economic slowdown are on the horizon.  I have seen much more scrutiny from banks and lenders in their underwriting and the process for financing a deal is becoming more demanding in mitigating any risk.  As a result, the buyers are looking for acquisitions of premium quality. To the owners who want to sell their companies, it is strongly recommended to have a solid management team, other than the owner, that will stay on after the sale and is prevented from competing with the company, if they terminate their employment. Secondly, stability and predictability of revenue and cash flow, with low customer concentration.  Also, it’s important to have state of the art operating systems. It has been my experience that most companies are not camera ready for the market place because it takes time, planning and commitment to prepare a business for sale. Before a company goes to market owners and their advisory teams must have plans to enhance all aspects of the company to maximize value.  It is also strongly recommended that the owners do not negotiate with potential buyers without the aid of a seasoned business broker and M&A attorney.  These buyers are typically much more experienced, sophisticated and knowledgeable about the sale process and implement highly experienced M&A attorneys and investment bankers of their own.  So, it’s critical that these owners level the playing field by being prepared with their own team of highly skilled professionals.

Deal Communication and Technology

Today’s technology has made it a lot easier for M&A professionals. Information about buyers and sellers is readily available online, which allows buyers to find and act on deals all across the country and from under the radar sources which weren’t available before.   If one is heavily relying on technology to assist in the deal, it can slow the process down and increase the amount of time it takes to do a deal.  Even when today’s technology can shorten the time period to perform the due diligence process, it can be difficult to develop a relationship and an understanding of the parties involved between buyer and seller when much of the communication is done by email. Example: When there are endless updated requests for Trailing Twelve Month revenue updates and the use of virtual data rooms and using them without ever meeting the other side in person, makes it difficult to interpret the right context and cultural insight on both sides. “That means you end up talking to the other side and using that conversation to really try to understand the other side’s industry and their place in it.   Decisions are data driven and not enough time is spent on the focus of the relationship side on the negotiations.” Misunderstandings abound when extensive email communications are the mode of exchanging information to the other side. One can’t help but think that the process would be faster and more straight forward if more in-person meetings were integrated into the process. Today’s younger folks seem less likely to value the face to face interaction and some choose not to meet anyone at all. There are times the face to face meetings are not necessary, but we have to remember that many deals require collaboration and partnerships and you need to get to

Tax Legislation Impacts the Next Move

The current Tax Proposal Bill could have huge impacts on companies deducting corporate interest.  The proposed bill will only allow companies to deduct interest up to 30%.  This will be a big change from the current 100% deductibility of interest. Private equity firms rely on leverage and would be hurt by not being able to deduct the interest from their companies’ taxable income.  Leveraged buyouts rely on a tax shield to embellish their returns.  Also, this will be huge for non-traditional bank lenders, who will have to figure out new ways to conduct business. Conversely, this may not be so bad to have less reliance on leverage.  The tax law could force private equity firm to focus more on making companies better rather than on using leverage for their returns.  Lately, the industry has been more focused on making improvements rather than financial engineering. It also seems that portfolio companies could have more money as a result of the corporate tax cut from 35% to 21%.  This could make these companies more competitive globally. Read the full article: 2018 Forecast: 5 Major Trends Hitting the Middle Market

The Bogus Trade War Victory is Bogus for the Dairy Industry

The Canadian Trade War “Victory” Claims for U.S. Dairy are Bull Flatulence! “Victory” shouts from the likes of President Donald Trump, Wisconsin Governor Scott Walker and the dairy co-op lobby — National Milk Producers Federation are hollow! The recent United States Mexico Canada Agreement (USMCA) accomplishes virtually nothing for U.S. Dairy Farmers and processors, in terms of dairy exports to Canada.  The deal only allows for microscopic volumes of dairy exports to be allowed to enter Canada.  The current deal is for 6 years (2025).  The percentage of our fluid milk production goes from 0.0003% to 0.002% over 6 years to Canada.  Those are the same numbers for our Cheese too. Mexico’s 25% tariff on cheese remain in effect.  So, in the short run US dairy trade to Mexico is worse off than it was a year ago.  The European interests are keenly aware of this opportunity and have recently concluded a trade deal with Mexico that should offer Europeans increased access to Mexico’s dairy markets. Our dairy industry is currently experiencing financial difficulty as it is and this Trade Deal offers no help at all.  There will be considerable political blow-back from this in the very near future. So the cries of “Victory” are Bogus!

Exclusivity Period/No Look Period during Due Diligence of an Acquisition

In the acquisition process after the “Letter of Intent” has been agreed to and signed by all parties, there is a “no look” period in which the potential buyer has exclusivity for a period of time prior to the date of purchase, usually 45 to 75 days, depending on the size of the deal. The biggest risk to the seller is that the buyer is not moving things along in good faith.  It may be clear the deal will not likely be consumated, but the seller is still bound to the exclusivity period and has to wait.  In the meantime; the business is not getting sold and the seller cannot explore the market for fresh interested buyers until the end of that period. One of the best ways to protect the seller in this instance is to set deadlines or milestones within the exclusivity period. Example; the buyer must complete the due diligence by a certain date or present a purchase agreement by a set date, so the seller has the right to get out of the exclusivity period if the deal doesn’t stay on track. If the buyer is having difficulty where the deal is taking longer than anticipated and the exclusivity period is running out, but the buyer is still working diligently and asks for an extension, the seller has an opportunity to use some leverage. For instance; the seller may trade items in the purchase agreement to get things moving faster or make a financial request or whatever the creative seller thinks of because the leverage has shifted. The buyers will want the extension to get the deal done. Lesson learned here is that there may be a lot of nuances in an LOI and it’s important to get your attorney involved early to make sure the

Strategic Buyers vs. Financial Buyers

These two kinds of buyers have fundamental different goals.  In the M&A world, strategic buyers often pay higher multiples than financial buyers.  In many instances, strategic buyers are looking at different elements of the acquisition and they may have different mechanisms in which to generate a healthy return on their investment. Strategics often have an existing customer base and relationships they can leverage with acquiring a company. They want to acquire customers to rapidly increase their market share.  One of the largest synergies that companies seek to formulate is a one stop shopping scenario. When a financial buyer acquires a standalone company as a new platform there isn’t an existing business in which they can merge anything together so there are no economies of scale for efficiency.  There are two fundamental reasons why financial buyers tend to be unable to pay as much as strategics. The financial entities are under pressure to hit a target return percentage on their investment.  The three main drivers of returns are entry price, exit price and leverage. Therefore, financial buyers are focused on pricing for a certain rate of return during the acquisition process. Secondly, financial buyers usually can’t benefit from operational synergies like a strategic buyer most often can. For those reasons, synergies usually result in strategic acquisitions and are the driving force that determines how much a buyer is willing to pay. For financial buyers these synergies don’t exist unless the deal is an add on of an existing portfolio, they can’t benefit from operational synergies.