How to build a successful food & drink business

On the evening of the 20th of April 2017 we hosted an audience of food & drink manufacturers at every stage of their life-cycle, from pre-launch and start-ups through to more mature businesses and internationally recognisable brands. We gave them access to a panel made up of Philippa Sturt, a corporate and commercial specialist solicitor, Dipali Buch, a corporate finance accountant, Rowena Price, a leading trade mark attorney, and John Eastaff, investment director at Peter Jones TV – all of whom are hugely experienced when it comes to launching, growing and making sure food & drink businesses arrive at their desired outcome. We have summarised the key takeaways from the event below. If you wish to discuss any of the issues raised in this article, please contact the head of our Food & Drink group, Rowena Price via rowena.price@gje.com, and keep up-to-date with our future events by visiting our events page.

The UK food and drink industry is worth £26.9 billion, more than the aerospace and automotive sectors combined. There is a big opportunity here, but entrepreneurs need to ensure that they are set up to take best advantage. If you want to secure investment for your food and drink business, to expand into new markets, or to ensure you get the best possible valuation at exit, you will first have to negotiate a whole raft of branding, legal, and financial issues.

Getting started

Planning is absolutely vital. Many people start businesses because they want to do something they love – especially in ‘lifestyle’ sectors such as food and drink – but they always have a clear mission and goal in mind beyond that. Before doing anything else, you need to know your product, your market, and your competition – really know them. That knowledge will form the basis of a solid business plan that keeps you focused on your mission and what you need to do to accomplish it. It will encourage you to think about things you might not otherwise have thought about, the challenges you might face, and – more importantly – how you will overcome those challenges.

One of those challenges is, more than likely, going to be intellectual property. This should be an integral part of your business plan from the very start. It’s vital to understand what intellectual property your business is built on and how to protect it. Do you have any patentable inventions? Maybe. Do you have a brand that’s worth protecting? Almost certainly.

Other early challenges are likely to concern finance. The eligibility criteria for EIS and SEIS can be complex, so it’s best to get assurances from HMRC before embarking on your business journey. Meanwhile, many entrepreneurs will significantly underestimate the rate at which their business will burn through cash. Make sure your financial plan is clear and sound at the outset, including allowances for contingency, to avoid grounding your business before it even has a chance to take off.

Branding

In food and drink in particular, branding can be everything; it should be central to all commercial strategy. One of the first things you should do is identify where the real value and impact of your brand lies. It might not necessarily be your product name, packaging, or flavours – the investors who backed Levi Roots and his Reggae Reggae sauce, for instance, bought into the founder’s colourful character and his evident passion for and expertise in his product just as much as they did into the product (perhaps even more so).

The brand value lay in Levi himself – his character and lifestyle – hence his plentiful television appearances and successful books. His investors realised this and moved quickly to secure trade marks not only on Reggae Reggae sauce and other product names, but on the Levi Roots name itself.

Establishing – and adequately protecting – a strong brand early on in your business journey will help attract the investment you need to continue to scale. The brand is the platform from which to grab investors’ attention, and the thing they are going to buy into – more so than the product itself. In order to attract investors to help you scale up in the future, it’s essential that you are working on getting your brand established early on so you have a strong platform from which to approach them. It’s the same should you come to sell your business. Chances are, the acquirer could easily enough make your product just as well themselves – what they want is your brand, and the credibility and customer loyalty that comes with it. As John Stuart, former Chairman of Quaker Oats Ltd. said, “If this business were to split up, I would be glad to take the brands, trade marks and goodwill and you could have all the bricks and mortar – and I would fare better than you.”

Protecting your brand

If your business starts to see some success, you can expect all sorts of people to come out of the woodwork to claim some connection or other – or, potentially damaging to your continued success, some conflicting IP ownership. It’s important to be proactive and secure protections on your IP, and also to have searches of third party IP performed as early as possible, to avoid potentially expensive conflict.

Trade marks, for instance, are not a mere administrative job. Failing to run the right clearance checks before finalising your brand name, logo, colours, etc., or neglecting to apply for a trade mark altogether leaves you vulnerable to challenges further down the line that could force you to rebrand – potentially sacrificing all the recognition and goodwill you have built up. Sometimes you might get away with filing a trade mark application later on in your business journey, but sometimes you won’t. Why take the risk? If you come into conflict further down the line, the financial and reputational cost can be ruinous.

Just filing early won’t necessarily ensure you avoid conflict, though. The key is to complete all of your ‘freedom to operate’ due diligence early and thoroughly, making sure there is nobody else out there with the same brand (or one sufficiently similar) who would be able to prevent you operating in a certain market segment or geography.

Meanwhile, when it comes to patents you should think long and hard about what and whether you seek to protect. A recipe, for instance, might constitute a patentable process, but the patent filing process requires the content of the patent application to be published before you have any guarantee it will grant. If your patent application fails to grant, if you don’t keep up the renewal payments to keep your granted patent in force, or if your competitors don’t believe you are prepared to enforce your rights, they could then take your ‘secret sauce’ and make the product themselves. So it can pays to keep such trade secrets, well, secret. Unlike patents, which can only provide protection for up to twenty years, trade secrets can potentially provide a perpetual advantage – Coca Cola, for instance, has never patented its famously secret formula.

Practical Tips

  1. Pick the right mark at the outset
    1. Don’t pick a brand name that just describes the product – it’s very unlikely that you will be able to register and protect it
    2. Pick a brand name that is distinctive – it’s good for marketing, and easier to protect
    3. Don’t pick a brand name that clashes with someone else’s – it will cause huge headaches, and potential financial cost, further down the line if you are challenged
    4. Do run your own checks (such as informal UKIPO and Google searches) early on, and then employ a professional to run more detailed checks – the investment of time and money at the outset is well worth it
    5. Do know your market and competitor brands – it will help you avoid conflicts
    6. Do look outside your immediate product category for potential conflicts – clashes across segments (such as beer vs wine, soft drinks vs alcohol, sweets vs savoury snacks) can still be problematic
  1. Common misconceptions
    1. Don’t assume everything is okay because you’ve registered a domain, social media handle, or even a company name – none of these guarantees freedom to operate, even if you get them first
    2. Don’t assume you own the copyright over your brand logo and other designs, just because you paid a designer to create them for you – you don’t, unless there was a contract in place or they later assigned you the copyright
    3. Don’t assume common law rights are a substitute for registration – they’re not, especially for new companies with limited sales, limited and/or localised goodwill, difficulties in proving rights, etc.
    4. Don’t assume that there’s no need to register your brand because your business is all about the product – you need to recognise yourself as a brand-led company and protect your brand, your key asset, accordingly, as it’s what you’ll be using to secure investment or a hefty exit valuation
  1. Have a plan – and make sure it matches your business plan
    1. Keep revisiting your IP protection as your business plan evolves – ensure you have the relevant protections for new markets, etc.
    2. Identify your key markets early and carry out trade mark due diligence and filings accordingly – even if you don’t yet actually operate in those markets
    3. File broadly, not just for current products – you should always be thinking about possible future expansion and diversification
    4. Keep your professional advisers in the loop – they will be able to help define and implement your strategy, and to help manage budgets
  1. Good housekeeping
    1. Make your IP portfolio look as neat as possible – ensure the ownership of trade marks is assigned to the same individual or individuals, etc.
    2. Make sure trade marks are owned by your company, not individuals – this will reduce the risk when it comes to securing investment or pursuing a sale
    3. Be careful when changing logos, and watch out for other companies doing the same – registrations become cancellable over time if they’re not used as registered
    4. Keep records of how you’ve used and promoted your trade mark – these will be useful if you are ever challenged
    5. Have a clear business plan, including an IP strategy – and be able to explain it to investors or acquirers
    6. Don’t let problems with IP slow down or become the focus of an investment or acquisition deal – if issues need to be resolved, resolve them now to avoid taking a substantial hit on your valuation
  1. Be ready to defend your brand
    1. Don’t put up with copycats – they will only dilute your brand and its (and, by extension, your company’s) value
    2. Don’t be afraid to bring in the professionals – handling disputes directly can work well in the first instance, but take advice early on, and instruct professionals to act on your behalf if you start to feel out of your depth
    3. Don’t be scared – most cases never go to court
    4. Do be pragmatic – what sort of outcome would you count as a ‘win’, bearing in mind the potential costs involved in a protected dispute

Exit

Don’t ‘wait and see’ when it comes to preparing for an exit – you should be running your business at all times as if you are ready to sell, so that an acquirer could knock on the door and see that you are immediately ready for the due diligence process. There is, however, some basic housekeeping you should be revisiting regularly – ensuring that things such as your financials, employment contracts, IT licences, and other systems are in good shape. You should also be constantly reviewing the kind of deals that are being done for businesses similar to yours to get an idea of the sort of valuation you should be targeting.

Usually, a business will reach a point at which a substantial amount of additional capital is required to sustain growth – to invest in the people and the infrastructure, to evolve the product, or to grow market share. You might find competitors are ahead of the game in terms of winning new customers and generating revenue streams, and you run the risk of being left behind. In general, the timing of an exit comes down to your own assessment of the market and opportunities before you.

Valuation isn’t rocket science. It’s simply the point at which ‘what the buyer will pay’ and ‘what the seller will accept’ meet. Failing to secure adequate protection for your brand, or to identify and mitigate potential challenges, probably won’t cause an acquirer to walk away from the deal entirely – after all, the problems will probably be solvable. But it will significantly chip away at the valuation, as there is less value left in the brand, and more time and money will be needed to resolve the issues.

Of course, if everything’s in order you’ll still want to make sure you’re getting a fair deal. Look at what companies in your sector are achieving. Value means different things to different people, and different acquirers place different valuations on the same business – if an acquirer can ‘pick up’ your business and integrate it into their existing business in the same field, chances are they might be willing to pay a premium over an acquirer who has to keep your existing infrastructure in place to keep the business going. Healthy valuations are supported by companies that can demonstrate they are on a trajectory to building a sustainable and profitable business. Fast-growing and innovative companies usually have windows of size and trajectory that create the right conditions for acquisition, or they shoot past and go on to become a public company.

If you wish to discuss any of the issues raised in this article, please contact the head of our Food & Drink group, Rowena Price via rowena.price@gje.com. See here for more food & drink related articles and keep up-to-date with our future events by visiting our events page.

Gill Jennings & Every LLP are a specialist intellectual property law firm based in London. Our patent and trade mark attorneys provide commercially focussed advice on legal protection for innovations and brands to companies ranging from start-ups to multinationals. We have a team of patent and trade mark attorneys who specialise in advising clients in the food & drink sector.