What you need to know if you’re thinking about getting out of the business
By Carl Sacks, Certified Catering Consultants
As consultants specializing in the catering industry, one of the most frequent questions we are asked is: How do I go about selling my catering business?
Many caterers, including some of the most successful catering entrepreneurs, entered the business almost by accident. In our experience, very few caterers started their companies with a detailed business plan that included an eventual exit strategy. But many catering companies are nicely profitable, and profitable businesses can be bought and sold.
The practice of buying and selling catering companies is often referred to as catering M&A, or mergers and acquisitions. In this article, you’ll learn about different categories of caterers, which types of catering companies are most likely to sell and who the buyers are. (See the November/December issue of CFE for part two of the article, which will cover how to prepare your business for sale, among other topics.)
Catering Company Categories
Before the pandemic, there were approximately 12,000 catering companies in the U.S.—companies for which catering is the primary or sole business. There is a much larger pool of companies that offer catering, including restaurants, hotels, gourmet stores, contract foodservice units, warehouse clubs, etc. But this article is focused on CBDC—catering by dedicated caterers.
Within the CBDC classification, there are two primary types of businesses: on-premise caterers and off-premise caterers. There are substantially more off-premise than on-premise caterers, since the barriers to entry for a startup off-premise caterer are very low. In many markets, an aspiring caterer can find a legal rental kitchen to use on an as-needed basis, while in some states, caterers can legally use a home kitchen.
It is not unusual for an off-premise catering company to be founded with little or no invested capital. As consultants, we’ve reviewed the balance sheets for hundreds of off-premise caterers. The most common amount of invested capital we see on caterers’ balance sheets is $1,000. This minimal invested capital total is frequently seen even for caterers who are now generating millions or even tens of millions in annual revenue.
In contrast, substantial capital investment is often required to start an on-premise catering company. An on-premise caterer must own or operate a facility in which to cater events. These event venues cost money to build—capital either borrowed, invested, or both.
A caterer working occasionally in an event space is generally considered an off-premise caterer, since they don’t own or operate the venue.
The number and density of on-premise catering companies varies by region. There are more dedicated on-premise caterers in the Northeastern U.S. than in other areas of the country. On-premise caterers in the Northeast primarily operate wedding venues. In much of the rest of the country, weddings are more likely to be held in country clubs, hotels, restaurants, church halls or event center venues in which off-premise caterers are allowed to operate.
What Types of Catering Companies Are Most Likely to Sell?
Since there are substantially more off-premise than on-premise caterers in the U.S., there are more off-premise M&A transactions. However, since the average revenue as well as the average profit percentage for off-premise caterers is less than that for on-premise, the value of these transactions is typically substantially less than for on-premise transactions.
Many off-premise caterers are bought and sold by related parties. Examples might be a second-generation family member buying out the founders of the company, or a management team or individual buying out an owner. These are sometimes referred to as “arm in arm transactions”—a deal made between two parties interested in the same outcome.
But there are also many “arm’s-length” M&A transactions, when off-premise caterers are purchased by unrelated parties. Generally, an off-premise caterer would be attractive to an unrelated buyer if the company has a solid history of profitability, a good client base and—most importantly—at least some contracted repeat business.
On-premise caterers are often highly profitable on a percentage basis and represent an attractive opportunity. The potential value in an on-premise caterer is not solely from the profits generated by the business, but also from the real estate that the company owns.
Of course, many off-premise caterers own commissary/office/warehouse real estate as well, but generally these facilities are in industrial areas and may not offer the appreciation in value that an event venue would.
What Types of Entities Are Looking to Acquire Caterers?
There are generally two types of potential acquirers for caterers in arm’s-length transactions: strategic buyers and financial buyers.
A strategic buyer is either a person or a company already operating a hospitality business, who likely has the expertise necessary to operate the business once it has been purchased. A financial buyer is a person or company looking at acquisitions strictly from an investment perspective.
There are also buyers who represent a hybrid of these two types. For example, a large and successful caterer may partner with an investment firm to acquire other caterers. This strategy is often referred to as an industry consolidation, or a roll-up.
Some examples of strategic buyers making acquisitions in the catering space include regional or national contract foodservice providers, or restaurant operators. The restaurant operators most likely to be interested in entering catering through acquisitions are full-service restaurant companies operating multiple brands.
To be attractive as an acquisition target for a contract foodservice company, an independent caterer not only needs a history of profitability, but they also need contracts. Examples include cultural venue exclusive catering arrangements, B&I (business and industry) contracts or institutional catering agreements.
Small off-premise caterers, primarily those with revenues under $1M annually, are also bought and sold. For caterers of that size, the typical buyer would likely be an individual rather than a corporation. For example, in recent years we’ve learned of several talented chefs who have decided to get out of the restaurant grind, purchasing small independent catering companies to operate.
But no matter which type of buyer, there is one hard and fast rule: The value of the economic returns from the purchased company must be substantially more than the amount the buyer is paying for the business. This rule applies even when the potential financial benefit is indirect—for example, a caterer purchasing a smaller caterer to take a competitor out of the market; or a money-losing caterer selling off some of its shares to a profitable buyer, who could then harvest some tax losses to offset their investment cost.
There have been several high-profile acquisitions of major catering companies in recent years. And several entities are currently in the market looking for acquisitions in both the on-premise and off-premise sectors. These buyers are looking for consistently profitable caterers as their most likely targets. However, many are willing to write off the losses in the COVID years as a black swan event, meaning that it is unlikely to recur in the near future.
Understanding the Acquisition Process
In catering M&A, most transactions are acquisitions. There are very few actual mergers of equals—there is almost always a dominant partner in any deal. There are some acquisitions that are publicized as mergers, but they’re not.
Another decision that needs to be made in the acquisition process is whether the transaction would be an asset sale, or a stock or company sale. Most small-scale deals in the catering space tend to be asset sales, primarily because of tax considerations and legal risks that are incurred if you acquire a business that may bring unknown liabilities, such as a lawsuit from a former employee or unpaid expenses.
Stock sales, by contrast, don’t offer as much tax flexibility, but have the advantage of being much simpler. Most acquisitions by financial buyers, as well as most large-scale acquisitions, tend to be stock sales. The stock vs. asset sale question is an important one and should be addressed early in the acquisition process.
Regarding compensation, most large caterer acquisitions are structured to include an initial purchase of the company, either as a stock, company or an asset purchase, to be followed by a smaller incentive payment. This incentive payment is often referred to as an earnout.
An earnout is a term of a purchase sale agreement (the document that details the terms of the sale for the buyer and seller) that provides additional compensation to the seller if various targets are met. In the catering sector these generally include revenue or profitability targets. But earnout terms can also include such goals as signing contracts for repeat events, closing on an exclusive venue, or retention of key personnel.
ABOUT THE AUTHOR
Carl Sacks, the managing member of Certified Catering Consultants, has spent 20 years as a consultant to the catering industry. His list of clients includes many of the most prominent and successful caterers in the industry.
Sacks is regarded as the top expert in several catering related areas, including maximizing financial returns, strategic planning, and exit strategy development and implementation; and is also widely known for his expertise in contract and venue RFP response development. Sacks also provides advisory services to both buyers and sellers of catering companies and has been involved in many successful transactions. To contact him, email: [email protected].
