Rapid growth in the food and beverage (F&B) sector, particularly in casual dining, branded retail and premium consumer products, often places significant strain on corporate governance structures. This rapid growth is often the result of external investment which usually requires a shift in how a business is run with the introduction of a more structured and restrictive corporate governance approach in order to allow the investors to protect their investment. So, what sort of changes can founders expect to see when they take on external investment?
Board composition and investor rights
As F&B businesses scale, the composition of the board of directors typically evolves to reflect changing ownership and strategic priorities. While many start-ups may have a board made up exclusively of the founders or indeed just one founder making fluid decisions as they go, once external investment is introduced, particularly from private equity, the investors will typically require more formal board meetings to be held, the appointment of investor representatives and, in some cases, even independent non-executive directors.
Such arrangements are usually set out in shareholder agreements and the articles of association and commonly include the following rights for the investors:
- The right to appoint one or more directors
- Veto rights over key decisions (e.g. acquisitions, disposals, material contracts, changes to business strategy)
- Enhanced information rights, including regular financial reporting.
Investors in the F&B sector (compared with other sectors) are likely to seek a relatively high degree of oversight and require a more active role in significant business decisions, even if they are not majority shareholders. This is because within the F&B sector, operational performance can be particularly sensitive to cost pressures, supply chain disruption and changing consumer trends.
The challenge is therefore finding the right balance between investor protections, while not allowing the other directors to make important decisions in a fast-moving consumer industry.
Consequently, careful consideration should be given to the drafting of any governance documents, to ensure governance frameworks remain proportionate, effective and practical as the business grows.
Founder involvement versus institutional control
The transition from founder-led to investor-backed governance is often one of the most sensitive aspects of growth. Founders in the food and beverage sector are frequently closely associated with the brand itself, particularly in premium or lifestyle focused businesses, and may be reluctant to dilute control.
Institutional investors, on the other hand, are typically focused on scalability, risk management and maximising value on exit. This can lead to differences in priorities in a number of areas:
- Strategic direction with founders favouring growth through brand development or innovation, while investors may push for standardisation and improving margins
- Operational autonomy with founders accustomed to informal decision-making and may be resistant to increased reporting obligations and board oversight
- Exit planning with investors typically focused on shorter term results, whereas founders may take a longer-term view.
It is important to ensure these competing interests are clearly addressed through governance documents at the time of investment to clearly determine where each party stands. Mechanisms to achieve this may include:
- Clearly defined reserved matters;
- Weighted voting provisions;
- Procedures for board deadlock; and
- Exit-related provisions (e.g. exit intentions, drag-along rights or compulsory transfer events).
In practice, successful governance structures often recognise the value added by founders, particularly in areas such as brand and customer experience, while formalising and introducing structured corporate governance for the investor in financial and operational matters. The precise balance will depend on the relative bargaining power of the parties and the maturity of the business.
Practical considerations
There is no single governance structure that will be suitable for every F&B business. What works for a founder-led business with a handful of locations may be very different from what is needed following external investment or international expansion.
As businesses grow, it is important that decision making processes remain clear and that the respective roles of founders, management and investors are properly understood and defined. Governance arrangements should also be revisited from time to time to ensure they remain fit for purpose as the business evolves and grows.
For many high growth F&B businesses, the challenge is not introducing more governance but introducing the right level of governance. Striking that balance can help support growth whilst avoiding unnecessary complexity.
