From lack of succession planning to the need to scale, private equity continues to grow its presence in the supply chain. 

The foodservice industry was long known as a haven for family-owned businesses. This was particularly the case when it came to members of the supply chain, including dealers, service agents, manufacturers’ reps and manufacturers alike. For a variety of reasons, though, the ownership profile of many members of the supply chain continues to gradually transition from mainly family-owned businesses to various ownership groups, including those backed by private equity. 

Here’s a look at what these private-equity investors see in foodservice equipment and supplies dealers and factories.

Industry consolidation remains a key trigger driving some companies to seek private equity partnerships. As dealers and manufacturers, among other members of the supply chain, continue to grow via acquisition, other companies feel pressure to seek ways to accelerate their development, too. “You find yourself as a stand-alone brand, and if you were not well enough funded, you found yourself looking for other options,” says Kevin Fink, a longtime member of the foodservice industry whose background includes working with foodservice equipment manufacturers that were both publicly traded and owned by private equity.

Sometimes ownership reaches an understanding that what made their business successful may not keep it that way. “Every founder gets to the point where they take the business as far as they want. Building businesses can be exhausting, and they need someone who can help take it to the next level,” says Elliot Wheeler, chief investment officer at Cooper Management, which owns a collection of foodservice equipment and supplies dealers known as the CES Family of Companies. “Our approach to any deal is to find people who are doing something well and help them do it well in a bigger way. We want you to call us when you are starting to think about it and have another five to ten years in the tank.”

If a business owner does not have a succession plan, private equity may emerge as an attractive option for them, too. “A lot of founders work these jobs really hard, and they are very sensitive to their legacies and about the future of their employees, but sometimes they do not have someone inside their four walls that’s ready to take on their legacy,” Wheeler says.

When evaluating potential investment opportunities, private equity firms tend to look for several key criteria. For example, they need to know they are buying a business that has a good, solid team in place, says Graham Gillam, managing director in the Business Services Group at Harris Williams, a Virginia-based investment firm. “Private equity can help in a variety of ways, but they are not operators of the business,” he says. “If you don’t have that team in place, it’s less likely they may look at you as an independent investment.”

Then, private equity will look at not only how a business is performing but also its place in the market and its potential. “They are looking for businesses with platform potential. It’s a team or a reputation or a place in the market they can build around. They have to see it as a business that can be something special if they invest in it,” Gillam adds.

And, of course, making sure there’s alignment when it comes to culture is important. “If you don’t find someone that’s aligned with the culture, they won’t be happy,” Wheeler says. “And managing a business with unhappy employees is no fun for anyone.” In other words, expect due diligence to be a thorough and essential part of any deal. 

A detailed and open approach to due dilligence can prove beneficial for both parties. “Working with a PE company, you will know your business better than you have ever known it,” Fink says. “They have ample amounts of intelligent analysts looking at every piece of your business. They don’t know your business like you do, but they do know business — and what they are looking for in terms of data.”

What Private Equity Sees 

A variety of factors continue to attract private equity companies to the supply chain segment of the foodservice industry. For starters, the overall foodservice industry is one that consumers continue to value. “It’s so cliche, but it’s true: Everyone has to eat. It’s a pretty defensible category in good times and bad,” says Wheeler. 

Foodservice is also a diverse market. “It’s a massive market for a company to play in,” says Gillam. “The products have myriad end markets, including various forms of restaurants and all the institutional segments.”

Another reason PE finds members of the supply chain attractive is their unique but impactful value propositions with their customers. “In many instances, dealers can become an outsource of the supply function for the operators,” Gillam says. “The distributor often plays an important role in introducing new products and solving challenges the operators are facing.” And while many products tend to be viewed as commoditized, this level of service provides a value that operators often have difficulty pricing. 

“This is an industry where restaurant operators don’t have big margins,” Wheeler says. “But if you provide value to your customers, you will build a moat around your business.”

Gillam points to packaging as a specific — and often under the radar — example of how distributors frequently add value to their client relationships. “A takeout-heavy restaurant can’t operate without those products, but they also don’t have space to store all of them,” he says. “So, the supplier becomes integrated into their customer’s business to help support the high-velocity consumption of these products. The distributor develops a very entrenched position within these customers, and there’s a notion of stickiness that we like to see.”

Continuity is often a key consideration for private equity firms as they explore potential investment opportunities. “At Trivest, we only invest in founder- and family-owned businesses,” says Jacob Roche, principal at the company. In 2017, Trivest formed the Innovative Foodservice Group when it recapitalized B&J Peerless Food Service Equipment and Beltram Foodservice Group. Since then, Trivest has continued to develop the company through multiple acquisitions and various other forms of investment, including data tracking, management of key performance indicators, enhancing the company’s systems, adding talent to the team and more.

“There are a lot of businesses that have done the hard work: building a company, developing customer relationships and so forth,” Roche adds. “It’s an industry that’s been around forever, and these companies have long-standing histories. Plus, distribution is pretty stable, which we like.”

While some business owners have a desire to sell, they do want to know their legacy will remain intact and the new owners will take care of their people. “We make certain commitments to the founders of the businesses we work with,” Roche says. “We will not mess with the culture or turn everything upside down on day one. That’s not our strategy. We have had a lot of success building on what is already in place.”

In fact, the private equity buyer often wants leadership to remain active within the business, and whether those individuals wish to continue to work within the company can influence a firm’s decision to invest. That’s because the vision and institutional knowledge owners and management bring to the table remain key elements in most successful marriages of private equity companies and the businesses in which they invest. “It has to be a good business, but we don’t know it as well as the person we are buying it from. So, the first thing you have to do is listen,” Wheeler says.

Building a comfort level takes a concentrated effort. “We spend time with the employees prior to closing to get to know them and identify opportunities for the business,” Roche says. “If we do our jobs well, the employees are going to understand we know their business and are going to help them grow.”

Those growth plans can include incentivizing the management team to work with the new owners and help grow the business before eventually transitioning it to the next buyer, Fink says. “They are encouraged to have the right people in place, the right intellectual property, technology and more.”

Of course, not every marriage between a business’ owner-operator and private equity investor works out. “Some business owners may not always be thrilled to hand the keys to someone else and continue to run the company,” Fink notes. 

Other factors may impact a deal’s success as well. Both parties may not be clearly aligned on expectations and targets as they are laid out, and the data used during the due diligence process may not have painted a clear enough picture. “Every company wants to maximize their selling price, and every PE investor wants to get the best deal they can,” Fink adds.

PE Brief

Two industry-related private equity transactions in recent years involved substantial dollar amounts:

• $969.4 million: Private equity firm Vestar Capital Partners completed the sale of Edward Don & Company to Sysco Corporation in November 2023 for $969.4 million.
• $350 million: TriMark’s lenders, Ares Management, Oaktree Capital Management and Bayside Capital, completed a $350 million cash equity investment in TriMark in January 2024.

Money Pressure

One of the common private equity stereotypes is that investors place tremendous pressure on their investments to maximize their return at all costs. Not everyone sees it that way.

“We have the luxury of taking the good of the private equity industry without some of the handcuffs traditional private equity has. In some cases, their business is to buy and sell businesses,” Wheeler says. “We can build businesses the way we want. It’s less about the number of years we own it, and instead it is about answering the question, ‘Are we still the right owners for that business? Can we still help that business grow?’”

Along those lines, expectations will vary by company. “There’s all sorts of flavors of private equity,” Gillam notes. “What differentiates private equity and makes the best investors are the ones who take a long-term approach to value creation.”

In some ways, working with private equity benefactors is like being part of a publicly traded company. “You’re held accountable, and you should be,” Fink says. “But having spent half my career in publicly traded companies, I did not find the private equity environment to be more demanding than the publicly traded companies in terms of returns. You agree on what needs to happen, and then you execute to it.”

But there are a couple of differences between private equity owners and publicly traded companies. Private equity incentive plans tend to be very focused, and the leadership team tends to agree up front on the goals, Fink adds. “You are not publishing your results to the outside world, but you still are accountable to your owners,” he explains.

When compared to working with publicly traded companies, private equity ownership may offer more flexibility should the need arise. “In the midst of a challenging year that requires an additional investment, it can be harder to get that approved in a publicly traded company,” Fink says. “In a privately held company, you can make your case, and it can be a little easier to get that approved because they don’t have to explain it to the Street.”

While private equity firms may focus on long-term prospects of the company they acquire, they will most likely sell it down the road, and that will shape their approach. “Most likely, they are going to sell it to another private equity investor, and they will want to see you are investing,” Gillam says.

Adds Roche, “From the investors’ perspective, a business that is growing because it’s been invested in and cared for is much more interesting than a business that is highly profitable but only because of cost cuts.” That’s why he says he spends 80% of his time on developing strategies for growth, understanding how to reach that growth, and identifying what investments are necessary to achieve it.

Driving for Scale

When making an investment, PE firms often start by asking a simple question: How can we drive more value? The investors often look for ways to “augment their offering to help them grow and take share,” Gillam notes.

One example of adding value is enhancing the technology the sales teams can access to facilitate smoother customer support and other business administrative services that play a key role in a well-functioning company. With manufacturing-specific businesses, the PE firm might seek to invest in equipment that can help modernize production. “Most private equity companies have a deal with a freight provider, IT company, insurance company, etc. They can really come in and help you be efficient,” Fink says. “In my experiences, we were able to get assistance that suppliers recommended by the private equity company. That really gives you scale.”

Scaling a business has the potential to benefit distributors in a variety of ways. “In many instances, you can start to unlock new customers that were previously not available to you,” Gillam says. “And your position with your suppliers becomes so much more important. Because you have a bigger book of business, you can drive better deals.”

With scale comes other benefits, including meaningful footprint consolidation, better route management and more efficient distribution systems. “Many of these businesses drive extraordinary value simply because of their scale,” Gillam says. “Some of these opportunities are unachievable until you get to a certain size.”

One thing’s for certain: Private equity will remain a presence in the supply chain for the foreseeable future. “Absolutely, you will continue to see interest in the space. Which pockets will draw interest will continue to evolve over time,” Gillam says. “I would expect to see interest in M&A activity even in a choppy market. The reality is that private equity has an enormous amount of dry powder, and there remains a very compelling playbook that shows how to create value. We remain bullish about the segment long term and its fundamentals.”