The Pet Industry

Anatomy of a Pet M&A Deal

There’s hardly a day goes by we don’t hear about a pet company being bought, sold, or capitalized. We are so fortunate to work in a growing, vibrant, and desirable industry, and as such there is a great deal of interest from buyers for pet companies with a good story to tell.

The process of selling a business is a mystery to most business owners, given that it is usually a “once-in-a-lifetime” process. I recently completed the successful sale of a client’s pet company and made some key observations over the eight months I worked with the seller.


It’s not like selling a house where you just list the property and wait for buyers to come to you. In my experience, be prepared for the process to take between six to twelve months. In general, the timeline is broken down as follows:

One month to gather all the information needed by your Investment Banker (Ibanker) to prepare the Confidential Information Memorandum. The CIM is the marketing document that communicates in writing and pictures compelling reasons why your company is one they would want to purchase for top dollar. I’ve seen them as short as 12 pages and as long as 65+. In my experience, the most effective CIM’s are ones that combine words, graphs, tables, and photos.

One month to prepare the CIM. There will be multiple drafts, and you will get ample opportunity to give feedback during the process. The most compelling CIM’s are the ones that have the ability to communicate your company’s personality into the document. While the CIM is being built, your Ibanker is also in the process of putting together the buyer’s list – over which you will have final approval.

Two months to contact buyers execute NDA’s, send out the CIM’s and host conversations. At the end of these two months, you will hopefully have several non-binding offers (often referred to as Indications of Interest). Usually the seller and Ibanker host a chosen number of potential buyers – the ones with the most compelling IOI’s, to meet in person. These Management Presentations give buyers and sellers face-to-face time to assess cultural fit, relay key information about your company, and answer additional questions from the buyer

Two months to choose a suitor from the group who came to the management presentations and get a deal closed. After the management presentations, buyers who are still interested will put together a more formal offer (Letter of Intent) which will outline the terms of the deal and the timeline to get it closed. During these two months the buyer will conduct thorough due diligence to verify the information presented in the CIM and other documents. Depending on the type of buyer and the size of the deal, this process can result in very large accounting and legal bills. Buyers will spend a great deal of money during this process as well. The buyer of the deal I just worked on spent hundreds of thousands of dollars on accounting, due diligence, and legal fees.

Be prepared for deal terms to possibly change as you march towards the finish line. For example, what if you have a product recall or get dropped by a large customer? Or on the positive side, you just landed a new SKU in PetsMart? These material changes can positively or negatively affect the deal between the time the LOI is signed and the deal is closed. That’s why it’s important to have a talented and knowledgeable group of advisors on your team – attorney, accountant, and investment banker. They quite possibly will make or break your deal in the event it takes a last minute left hand turn.

Significant accounting assistance will be needed to successfully complete a deal. I’ve seen financial document requests numbering 100+, and as the CEO, you don’t have the time (or perhaps the expertise) to gather this information yourself. If you don’t want this person to know you are selling the company, you can always tell him or her that you need this information to raise investment capital.

I recently worked on a deal where we literally didn’t know if it was for sure going to close until the week before it actually did close. Lots of late night and weekend phone calls and emails! As I mentioned above, things can change at the drop of a hat and deals can disintegrate into thin air overnight. Short of making a major equipment purchase or a new C-level hire, keep on trucking along as if the deal isn’t going to close. That way, in the unfortunate event it does fall apart, you won’t have experienced erosion of revenue or loss of momentum.

Let’s face it, people love to gossip in the pet industry! Most companies do not want their employees, vendors, or customers to know they are for sale in the event it spooks them into an undesirable reaction. While I do not advocate out-and-out lying, I do recommend you have an answer prepared that skirts the question when you are asked if you are for sale. Something along the lines of “gosh, I’ve been hearing for years that we are for sale. Isn’t it crazy how rumors get started in this industry? I guess at the right price, anyone is for sale!”

This summary skims the surface of the ins and out of an M&A transaction. Truth be told, the process can range from fairly simple to highly complicated depending on the size and complexity of your business. Regardless, in the current “frothy” pet industry M&A environment, you have every right to expect a professional class of service, a competitive multiple, and a timely transaction.

Carol Frank of Boulder, CO, is a former CPA and the founder of four companies in the pet industry. As a registered Investment Banker, Carol specializes in pet industry Mergers and Acquisitions as well as strategic advisory services in the areas of licensing and channel strategy. She can be reached at

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“Made in China” May Be a Thing of the Past

Partnering with Chinese manufacturers has been a significant factor in the explosive growth of the pet industry over the last 15 years.  I don’t know what % of hard goods are made in China, but I’ll be it approaches 75% or more.  When I owned my pet company, Avian Adventures, we moved our production from Mexico to China after realizing that I could save 40% AFTER SHIPPING by having my products made there.  Similar stories in our industry abound.  China has been an integral part of our industry for years, but that trend may be coming to an end in the next several years.

From 1979 to 2009, China enjoyed an “economic miracle.”  Their explosive growth was unique because of its sheer magnitude and longevity.  However, for many reasons related to demography and economics, that era of break-neck economic growth is over.  According to George Friedman of, we are entering the Post-China World.

Friedman has been tracking this evolution for over two decades.  His view has recently been validated by Paul Krugman, the New York Times  columnist, who wrote in July 2013:  “The signs are now unmistakable:  China is in big trouble.  We’re not talking about some minor setback along the way, but something more fundamental.  The country’s whole way of doing business, the economic system that has driven three decades of incredible growth, has reached its limits.  You could say that the Chinese model is about to hit its Great Wall, and the only question now is just how bad the crash will be.”

Obviously China will continue to exist and perhaps prosper, but China’s place in the world will be filled by other nations with even lower wages and other advantages.

In the 1950’s “Made in Japan” meant cheap, shoddy goods but, by 1990, Japan had reached a pint where its economic power now rested on superior products powered by advanced technology.  It had to move away from high growth to a different set of behaviors.  Today, China is confronted with the same sort of transition.

China’s growth surge was built on a combination of labor costs that were far below Western wages and aggressive lending policies by Chinese banks, even as businesses have been failing due to increased inefficiencies in the Chinese economy.  Now a huge dilemma has emerged:  If the Chinese banks continue aggressive lending to failing businesses, they will trigger inflation.  Inflation, in turn, will increase costs and make exports less competitive.  If they stop propping up failing businesses, unemployment will rise, which is seen as a massive social and political problem.

What does this mean for today’s pet product manufacturer?  I believe it means one of three things: 1) They can continue to keep their production in China and pass along the inevitable price increases to customers or take a lower margin;2) They can explore moving production to the United States.  As we’ve seen over the last few years Made in the USA has become increasingly important to pet product consumers.  If a manufacturer can find a way to get the product produced here and not pay more than a 20% premium to do it,  the move could prove a very wise decision; 3)  If they truly desire to have the lowest cost product, they will have to move their production to a lower-cost labor market.

But who will fill the gap made as China inevitably shifts away from the bottom tier of manufacturing?

Obviously there is no single country that can replace China.  Its size is staggering.  That means that its successor will not be any single country, but several countries.  In answer to that question, has identified “the PC16.” *  These are the 16 emerging countries that are best positioned for explosive growth in a “Post-China World.”  They are:

  1. Tanzania
  2. Kenya
  3. Uganda
  4. Ethiopia
  5. Sri Lanka
  6. Indonesia
  7. Myanmar
  8. Bangladesh
  9. Vietnam
  10. Laos
  11. Cambodia
  12. The Philippines
  13. Peru
  14.  The Dominican Republic
  15. Nicaragua
  16. Mexico

Taken together, these countries have a total population of just over 1 billion people and have the requisite capabilities for significant growth in early-stage industries such as garment, plastics, footwear, etc.

It will be interesting to walk around Global Pet Expo in 2024 and see which of the above countries will fill out the phrase “Made In __________.”

* For more information on and the PC16, visit:

Carol Frank of Boulder, CO, is the founder of four companies in the pet industry. As a Managing Director at SDR Ventures Investment Bank, she is a registered Investment Banker and leads the team in executing pet industry transactions including mergers and acquisitions, capital formation and strategic advisory services.  She is also the owner of BirdsEye Consulting, the consummate source for pet sector consulting expertise.  She can be reached at

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Pet Company Valuation: Zuke’s sold for HOW MUCH???

by Carol Frank, Managing Director, SDR Ventures

The pet industry is abuzz with rumors surrounding the huge multiple paid by Nestle for Zuke’s Pet Treats. A variety of very reliable sources have told me that the valuation multiple ranged from 12x to 15x EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization). Given transactions I have been personally involved with recently, I have no doubt this range is accurate.

Three Leg Concept

When I talk to consumer products companies about valuation, I like to use the analogy of a three-legged stool. If a company exhibits the qualities demonstrated by all three legs, they will likely command a premium multiple. The legs are:

1. Strong gross margins (typically over 50%).

2. Double digit revenue growth for at least the past 3 years.

3. Strong brand – The more recognizable the brand, the higher the premium.

Why did Zuke’s command such a high multiple? 

Zuke’s, in addition to having all three legs, also produces a highly desirable consumable product with an excellent reputation for Made-in-USA treats. In general, consumables command higher multiples than hard goods. Additionally, the fact that there are very few desirable acquisition opportunities, coupled with ready and willing buyers with a tremendous amount of dry powder (cash waiting to be invested) likely added to Zuke’s valuation multiple. Finally, Nestle is a strategic buyer (one already in the pet industry), so it can quickly integrate Zuke’s with their current infrastructure. Nestle was willing and able to pay a higher multiple because it can realize an immediate return on its investment through economies of scale.

For hard goods companies that exhibit all three legs of the stool, valuation multiples generally range from 7x to 9x EBITDA. Kyjen, which was acquired by Riverside Partners last summer, was rumored to have sold for about 8.5x EBITDA, representing a premium price for a hard goods business. Especially considering Riverside is a financial buyer (a private equity firm, venture capital firm, family investment fund, etc.) who looks to maximize return my minimizing purchase price, an 8.5x multiple is unusually high.

A general rule of thumb when it comes to valuations is, “the larger the company, the higher the multiple.” Why? In practice, it is just as much work to buy a company producing $1 million in profit as $10 million in profit.

In addition, there are a significantly higher number of potential buyers for a larger business, because there are not many private equity groups interested in businesses generating less then $2 million in EBITDA. The higher number of potential buyers, the more likely the selling process will result in a bidding war, which can drive up the price.   I am currently engaged to sell a highly desirable pet company with a great brand, margins, and growth, and the interest from both strategic and financial buyers has been incredibly strong. I call it the classic case of Economics 101 – too much money chasing too few goods.

What if your company has only one or two legs?

Generally speaking, a consumable company with decent margins, but a less than desirable brand or growth would be valued at 6x to 8x EBITDA, while a hard good company with the same profile would be valued between 4x and 7x EBITDA. A non-consumable company (toys, collars, leashes, bowls, etc.) that exhibit one or two legs would trade in the 5x to 7x range. These multiples are for dog and cat oriented companies, while other pet categories would likely transact at slightly lower multiples.

Please remember that these are high level general estimates, and that each situation and company is different. There are many, many factors to consider when discussing valuations of pet companies. However, at the end of the day, I like to tell my clients that your company is worth what the market will pay, which is why it is valuable to go to market to find out exactly what it is worth. Yogi Berra once said, “In theory there is no difference between theory and practice; in practice there is.”

Carol Frank of Boulder, CO, is the founder of four companies in the pet industry. As a Managing Director at SDR Ventures Investment Bank, she is a registered Investment Banker and leads the team in executing pet industry transactions including mergers and acquisitions, capital formation and strategic advisory services.  She is also the owner of BirdsEye Consulting, the consummate source for pet sector consulting expertise in licensing, executive recruiting; and advisory services.  She can be reached at

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An Insider’s View of the Pet Product Distribution Landscape

I recently completed a research project to study the current and future landscape of the pet product distribution industry. Questions to be answered revolved around the active M&A activity and what does it mean for independent retailers, small distributors and manufacturers.  It must be a hot topic, because there seems to be a lot of demand for this information!

Combining my personal experience as the former owner of a pet product distribution company, my experience as an M&A advisor in four pet distributor transactions, as well as interviews with numerous industry insiders resulted in some fascinating discoveries.  There seemed to be great concern, particularly among the small independents and niche manufacturers that our industry would end up with just one giant distributor to buy from or sell to, creating a monopoly of sorts.  Fortunately that does not appear to be happening anytime soon.

Below are some key highlights from my report.

The Players

Phillips Pet Food & Supplies (“Phillips”) and Animal Supply Company (“ASC”) are the two largest national pet distributors, with Central Garden and Pet coming in third.  The consolidation in pet distribution has been a fast and furious battle between Phillips and ASC.  ASC, a Halifax Group portfolio company, has completed six acquisitions in fiscal year 2013 alone.

While consolidation in the industry has been aggressive, there is still an influx of smaller, niche-type distributors that serve a need for both their customers and the manufacturers who need a way to get to market. According to Steve King, President of Pet Industry Distributors Association (PIDA), the current pet distribution landscape is two-tiered.  There are major distributors like Phillips and ASC distributing larger, more established brands and smaller niche players that serve the needs of the newer and smaller brands that need a way to enter the market.

 How healthy are the Independents?

Given the amount of competition that exists for pet products, the well-operated independent pet stores have held their own remarkably well.  According to the newly released 2013-2014 APPA National Pet Owners Survey, independent pet specialty stores gained some ground on the pet superstores in 2012. Seventy-six percent of dog owners reported that they shopped at a local independent pet store last year, up from just 62 percent in 2010. Similar gains were reported among all pet ownership segments.

In addition, the results of PIDA’s 2013 Industry Size Survey show that distributors’ revenue is increasing.  This implies that the independent retailers the distributors service are growing. The survey results revealed that members did more than $3.3 billion in sales at wholesale in 2012, compared with just over $3 billion in 2011. This translates to $4.45 billion in retail sales, assuming a blended margin of thirty-five percent. To put this number into perspective, Petsmart, with just over 1,200 stores, generated $6.4 billion in net sales in 2012.

Petsmart and Petco have been part of the pet retail channel for twenty years.  The price disparity between the independents and big boxes is now relatively insignificant.  It is the ongoing trend towards the humanization of pets that has assured the continued success of the well-operated independent pet retailer.  Pet owners are seeking the personal relationships with knowledgeable store owners or well trained staff to ensure they select the best possible product for their pets.  Most new products start with being introduced in the independent retailer, and then if successful, the big boxes will want to pick it up.  So the role of the independent is critical!  High touch customer service and strong product knowledge is the signature of the well-operated, independent retailer.

How big a threat is E-Commerce?

As is the case for all traditional retailing and distributing, e-commerce is a substantial threat.   Cleveland Research expects pet e-commerce to grow 38% in 2014. and their pet site (WAG) have gained and will continue to gain market share.  Especially when they can deliver customers purchases within 30 minutes using drones!  However, it remains to be seen if consumers will adopt the online model for pet supplies or if independent pet retailers (and big box pet retailers) will remain the preferred channel for purchasing.  Independent pet retailers’ product knowledge is a distinct advantage over online shopping.  Consumers may continue to seek advice and education regarding the best pet products for their pet and purchase those products at the store.  It is critical for independent retailers to offer a drop-ship program to their customers to remain competitive.  As such, there is a substantial opportunity for pet distributors to provide these drop ship programs to their independent retail customers that will in turn, create loyalty with the retailer.  And while the major e-commerce players, like WAG, are doing their own fulfillment, there is an opportunity for pet distributors to offer drop ship programs for smaller online retailers.

Many distributors have already taken this knowledge to heart and offer a robust drop ship program to both their retail stores and websites.

To date, one of the biggest challenges with pet supply e-commerce is that the largest volume items (dog food) are the most expensive to ship.   None of the major e-commerce retailers (WAG, Pet Flow, Pet Food Direct) are profitable on these products, but they have been successful in buying market share and are moving large volumes.  It remains to be seen if they will continue to keep dog food as a loss leader in order to retain and grow their customer base.

The Future of the Pet Product Distribution Landscape

Most pet industry distribution experts agree that the pet product distribution landscape will reach maturity in the next three years.  Phillips and ASC will each have a national footprint.  It remains to be seen if there will be a handful of smaller multi-regional players, such as Pet Food Experts, that together can provide manufacturers an alternative to Phillips and ASC; or if two national brands will dominate.  However, all the consolidation will create an opportunity for entrepreneurial distributors to exit the food business and focus on niche consumables and bring new products to market.  These niche distributors are a very important part of the pet industry as it allows smaller, innovative manufacturers an outlet to bring their products to market.  The pet industry is FULL of “better mousetrap” inventors.

Carol Frank of Boulder, CO, is the founder of four companies in the pet industry. As a Managing Director at SDR Ventures Investment Bank, she is a registered Investment Banker and leads the team in executing pet industry transactions including mergers and acquisitions, capital formation and strategic advisory services.  She is also the owner of BirdsEye Consulting, the consummate source for pet sector consulting expertise in licensing, executive recruiting, market research, and sales channel advisory.  She can be reached at

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A Crystal Ball into our Economic Future – a morning with Economist Brian Beaulieu – 2.0

345057-money-crystal-ballTwo years ago I wrote one of my first APPA e-update columns about the predictions of one of the U.S.’s foremost economists, Dr. Brian Beaulieu, Executive Director of the Institute for Trends Research (ITR). At the time, he predicted continued growth for the pet industry, which I am happy to say was an accurate statement. All in all, he was pretty spot on about his predictions. Last week I attended the 2013 Denver CEO Forum and heard Dr. Beaulieu speak for the third time about the future of the U.S. and World economies.

Highlights from his presentation:

U.S. Economy:

The US is the world’s largest economy, followed by China and then Japan. We are #1 and will continue to be #1. The opportunities are fantastic. There are currently 316 million Americans and we will grow to 420 million by 2050.

Brian says the next few years look pretty good, but in 2018-2019 there will be economic distress. He feels the rest of 2013 will be rock solid, by mid-2014 there will be some rough waters, but rising again in 2015. He wants us to make sure we are going into new markets and/or gaining market share.

One of the most compelling pieces of information he gave is he believes there is a 90% probability that the stock market will decline in 2014. Brian says that the downturn will be sharp and short – approximately 35%.
This leads me to think it makes sense to lock in our gains at the end of 2013/early 2014, then perhaps jump back into the market after it turns around – end of 2014, early 2015. He recommends being very light on bond fund investments for 2018 and 2019 and going into bond ladders instead of a straight bond fund.

Other tidbits on the U.S. Economy:

  • He is not anticipating hyper inflation
  • When it comes to taxation, Brian expects that taxes in the US will be going up faster then elsewhere because he doesn’t anticipate solutions to our budget and debt issues. (I wonder where he got that idea?…..) The #1 ways to deal with those issues is to raise taxes.
  • Think about retiring or selling your business in 2017 and to start positioning it for sale now, because there will be quite a recession following 2017. The next opportunity to sell is 2029
  • The competition for highly skilled workers will be fierce. Businesses will be hiring people away from other companies at record rates.
  • Between 2030 and 2040, he thinks there will be a depression. Ways to avoid this:
  1. Buy hard, inflation proof assets like real estate and commodities.
  2. Avoid bond funds.
  3. Get into careers that are wrapped around people.
  4. In an age of inflation, pursue a career in harvesting and preserving natural resources.
  5. He suggests we learn three languages: 1. Proper English; 2. French – the language of the intelligence. 3. Dealer’s choice


Brian is very high on Mexico, and urged us to have more exposure to the Mexican economy. Recently they have taken strong action to reduce obesity by considering a tax on “junk food.” Perhaps their new attention to healthy eating will extend to pets as well and will result in a surge in sales for the vast array of health and wellness oriented pet products produced by U.S. companies.

Brian thinks that exporting U.S. made products is one of the Top 10 opportunities in the next few years. The New and Improved Panama Canal will be opening in 2015, resulting in a significant increase in outbound and inbound shipping capacity. That, combined with a more competitive manufacturing environment and the surge in demand for U.S. made products makes this strategy a sensible one.


ITR predicts a 17-20 year trend of rising interest rates. They are only going to go higher from where they are now. In addition to buying inflation-protecting assets, he recommends that you borrow NOW! His tongue-in-cheek comment was: “If for some reason you sleep through the night, you haven’t borrowed enough. Borrow once now, then stop. But don’t go into debt if you are within 10 years of retirement.
Brian recommends finding a way to do business in the “counter-cyclical” or largely unaffected areas of:

• Energy Distribution
• Water Distribution/Conservation
• Exports from US
• Vocational Education
• Health Care
• Food
• Mexico
• Housing
• Funeral Services
• Alcohol
• Security
• 3-D printing
• Natural resources (harvesting/conserving)
• Entertainment

Finally, he is still very bullish on the pet industry. His advice is to focus on high end products with strong brands, strong IP, and solid margins versus a commoditized product. If you don’t protect your competitive advantage, you will get pulverized during the upcoming inflationary period because if your product is a low margin commodity, you won’t be able to support increasing prices even though your costs are increasing.

“It is not necessary to change….survival is not mandatory” – Jonathan Demming

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