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Build a Business Worth Buying brings you candid conversations with industry leaders, M&A experts, and successful founders. Learn advanced strategies to scale, optimize, and prepare your business for an acquisition—because building a business worth buying starts with smart decisions today.
Aaron Alpeter [00:00:05]:
Welcome to Build a Business Worth Buying, the podcast where seasoned entrepreneurs, M and A experts and world class operators share behind the scenes stories of building, scaling and selling remarkable businesses. I'm your host Aaron Altier and every week I sit down with people shaping the world of acquisitions. Founders who cashed out buyers with both strategies and advisors who help make deals happen. This is not a podcast for beginners. It's for those who know the grind and want actual insights to make their next big move. Get ready to take notes, rethink your strategy, and hear untold stories of what it takes to build a business worth buying. Today's guest is Nick Papaniklau whose experience cuts across being a founder, investor and an operator with a really rare vantage point where he's able to see the entire consumer life cycle in the alcohol space. He's been a longtime operator of different brands and was the head of M and A for Pernard Ricard.
Aaron Alpeter [00:00:52]:
In 2022 he co founded the no Sleep Beverage which operates on an investor accelerated model. Nick also invests and advises in early stage consumer companies, bringing both founder empathy and investor rigor to the table. He's not just interested in starting brands, he's interested in building businesses that either exit successfully or generate real meaningful dividends. Today we'll unpack what he looks for in the opportunities he evaluates, how he helps them grow, and what he believes it really takes to build a business worth buying. Nick, thank you so much for being on the podcast.
Nick Papaniklau [00:01:22]:
Aaron, it's a pleasure to be here. Thank you so much.
Aaron Alpeter [00:01:26]:
So I want to dive right in. You've been a founder yourself. You've done lots of M and A work as well. You've been on every side of these transactions in this space. How did that experience shape how you went about building no Sleep Beverage?
Nick Papaniklau [00:01:40]:
Yeah, so it's funny Aaron, I actually started two companies about 15 years ago. Just rewinding it back even further than the no Sleep Beverage days. I would say I did almost like the reverse route from what I see happening today more and more, which is people starting in the corporate world and leaving to go enter the world of entrepreneurship. I started in the world of entrepreneurship and fortunately had some great learnings. Unfortunately not a big financial success with the brand that I had, but that luckily or fortunately brought me to a company called Pernod Ricard where as you mentioned, I was there for about seven years and I think that's given me perspective that maybe others don't have. Starting in the world of entrepreneurship, going to the corporate world and now coming back into the world of, let's say, entrepreneurship in bc. And I think, in short, I would probably say that positioned me very well in the corporate world to sort of put myselves in the shoes of the entrepreneurs, as I was one, right. So I understood their pain points, their ups and downs, I could speak their language.
Nick Papaniklau [00:02:40]:
And yet now coming back into the world of entrepreneurship, my experience in the corporate world, where I know how they think, how they talk, how they value brands, how they look at strategic value, add their valuation models, gives me another unique perspective to actually help advise founders today. So I think that sort of dual experience has really positioned me well. And I think the one other thing I'll mention is being an entrepreneur, I think gives you a lot of empathy. You mentioned the word empathy early on, and I think that's a pretty important word for us because we can sort of be empathetic on both sides of the equation to the entrepreneurs and sort of the daily burn and turmoil that they go through, but also empathetic to the large strategics, what they look for, how to make it easy for them during an M and A process, how they think about integration, all of that. And I think that best positions us to help founders today.
Aaron Alpeter [00:03:30]:
Yeah, I want to go a little bit deeper on that. When it comes to empathy, I can understand a lot about how it makes sense to be empathetic as an acquirer, to really understand the difficulties that the founder has gone through and the investment they've made in just time and energy and personality. Talk to me about the empathy that shows up when you are a brand thinking about what an acquirer cares about.
Nick Papaniklau [00:03:53]:
I mean, I think that too often founders sort of think like, if I create an amazing brand and it's hitting the right financial metrics, this will be acquired. And yeah, that's often true. And acquirers, depending on their white space, opportunity or how badly they need that brand, or that opportunity, may be willing to pay and pay up to do so and not be too concerned about many other aspects of the business, business, the people, the processes, how that all works. I think when you can put yourself in the shoes of the acquirer and have empathy for what they have to go through, have empathy for the teams that then need to integrate and operationalize the business, then you start to think, how do I make this easy? How do I, for instance, create a brand marketing playbook that's repeatable and scalable? I can drop this thing off on some marketing person's desk at the, the large company, the large acquirer, and they'll know what to do with it. How do I have my books in order, my accounting systems, how do I have all those processes and reporting tools in place that a strategic can pick up where we left off or where the founder left off and do so very easily. So I think empathy from that perspective makes sort of the acquisition and the integration easier. And therefore I think in theory, by definition should increase the value of the opportunity because as an acquirer, you're going to go brand A and B, they're equal on everything else, except one is prepared to exit and integrate into our system and the other hasn't thought at all about that. There's a difference.
Aaron Alpeter [00:05:15]:
Is that exit prep like a PDF or a word doc where they say, here's what I do for the next couple of years, or is it something a little bit more thoughtful?
Nick Papaniklau [00:05:24]:
No, I mean, I think it can be. It can be. I don't think there's like a playbook for what that looks like. I think it could be anything from, you know, Excel spreadsheets that show sort of white space opportunities from that brand's perspective. Here we penetrated 70% of the market in these accounts, in this zip code, this 30%. We didn't have the resources to. We didn't have a national chains person or we didn't have enough people in that geographic area. If you take this and simply plug it into your system, here's the incremental value you can create, here's how to do that.
Nick Papaniklau [00:05:54]:
Right. Things like that. I think that is where the thoughtfulness and sort of the intention of the brand will really pay off during an acquisition.
Aaron Alpeter [00:06:03]:
Yeah, it kind of sounds like part of what you're saying is that you have to know your business, your numbers, your current operations so well that when you're in the due diligence piece, you're not trying to pull that stuff together. You're saying, okay, if you were going to buy. So if I was you, here's the questions I would ask, here's the more things that I would do. Do I have that right?
Nick Papaniklau [00:06:22]:
That's exactly right. And then, and then you're again, you're asking sort of what format? I mean, again, just things like reporting, you know, Are you using QuickBooks for accounting? Are you doing this in an Excel spreadsheet? Do your numbers, can they be easily reconciled? Or do we dig a layer deeper as the acquirer and find out that something doesn't match up what you've historically reported is accurate? Like that's going to create a mess. So yeah, of course you Want to be thinking, having that empathetic hat on and thinking how if I were in their shoes, how would I be thinking about buying a brand and making it easy for me to integrate that brand?
Aaron Alpeter [00:06:54]:
Yeah, talk to me about alcohol specifically because it is such a highly regulated industry. I mean, there are some states where there's only one place you can buy this stuff from. And so are the nuances there different when you're in such a highly regulated space as opposed to maybe a traditional CPG business?
Nick Papaniklau [00:07:13]:
Yes, they absolutely are. And I can speak sort of broadly compared to other CPG industries, obviously specific to beverage alcohol, but not always knowing the difference with how it differs from other CPG categories. But the regulation side is absolutely one of them. So if you think of the US market, it is not one big market where you can apply the same rules for brick and mortar across 50 states or the same rules for DTC, you just can't. Every state has its own regulatory environment. A quick example, you know, you go into a New York grocery store, you can't buy liquor there. Right. You go into grocery stores in other states, you can buy liquor there.
Nick Papaniklau [00:07:49]:
So even understanding those nuances and going to the acquirer, the potential acquirer, prepared to answer those, I think is important. In other words, don't go in saying if you just copy, maybe you're in five states at the time, but you're really trending very well and an acquirer likes you for that. And you say if you just copy our model in these five states and pump it out to the other 45, it's going to work the same way because it will not. Right. There's different distributors in each state, different regulatory environments. You know, some markets are very chain heavy like a California. Other markets are very open and independent operated like a New York state. So you got to be prepared to understand how that regulatory environment should inform your own strategy and your own exit.
Nick Papaniklau [00:08:31]:
Again, integration plan.
Aaron Alpeter [00:08:33]:
Do you find that the high level of regulatory burden, if you want to call it that, has an impact on the types of deals that get done? I imagine that there's economies of scale here just from a regulatory perspective or compliance perspective. And so is this a situation where if I'm starting a company, it's almost inevitable I'm going to be able to create a long term alternative to the big guys out there. And, you know, everything's kind of geared toward an exit to a strategic at some point.
Nick Papaniklau [00:09:04]:
Yeah, I mean, what I'd say is I might, I might answer the question a little bit differently from how you asked it. But I think. Does the regulatory environment inform or affect M and A? Absolutely. I mean, I think that there are things as simple as you talk about comparison to other CPG categories. Health. Everybody's jumping on the better for you bandwagon today. And even in beverage alcohol, is that legal to do? It's not. There's a massive gray area.
Nick Papaniklau [00:09:31]:
But if you create a brand and as an entrepreneur, you probably can get away with this, you're under the radar from the ttb, the regulatory bodies, the state liquor authorities. You create a brand that is claiming certain health benefits. By the way, even if they're true. We use pomegranates and antioxidants, you know, whatever it is that might be true. And you go to an acquirer, that acquirer is going to walk away so quickly from you because they know the penalties for advertising or promoting or being associated with health benefits in beverage alcohol are pretty severe that they'd rather not put themselves at risk. So. So I do think that regulatory environment imposes a lot of sort of other burdens on a brand as they think about if, or rather if their objective is to actually exit to a large supplier, a large strategic absolute.
Aaron Alpeter [00:10:15]:
Yeah, man, that's such a great example. And it, you know, I can imagine more than one occasion that founders thinking, hey, we're doing great. We're doing 10, 20 million bucks. We should be, you know, gearing up for next at some point. And you're just like, why can't I sell this thing?
Nick Papaniklau [00:10:29]:
Absolutely. We came across brands when I was at Pernod Ricard USA running the M and A team where there was maybe a religious, you know, like a cross associated with it or something. And there's just the appetite for doing anything that, whether it falls into that black and white, this is illegal, or just the gray area, I think a lot of acquirers will just run from that because they don't want to be associated with it. So.
Aaron Alpeter [00:10:51]:
Interesting. And so when it came time for you to think about leaving that M and A practice and coming in and doing no sleep beverage, what were the unique, I guess, gaps in this industry that said, hey, I've got unique insight here. As a founder, as an M and a person, that led you to want to start your accelerator model as opposed to traditional VC or studio.
Nick Papaniklau [00:11:12]:
Yeah, yeah, no, that's a great question. My. My answer might surprise you because actually the original insight came about when I was an entrepreneur myself. So this is back in like 2009-2012. I was working on launching a brand I launched it 2012, 2013, I joined Prenorica by 2015. Within those first two years of launching it, I had the first big insight which is this industry is so freaking difficult with lots of regulatory hurdles. What we call a three tier model where you have to by law sell to a distributor who then sells to a retailer, like a chain or a restaurant who then sells to the end consumer. So that's why referenced earlier, even the DTC laws are very different state by state in beverage alcohol.
Nick Papaniklau [00:11:51]:
But my insight was there's such a bottleneck of new brands coming to market and it's all controlled. You know, all has to still funnel through this regulatory environment and these distributors are these three tiers to get it to the end consumer. And insight number one is I can't make this on my own, but if I team up with a portfolio and get some level of scale and by teaming up with a portfolio, that could be teaming up in more of a loose alliance, it could be teaming up with what are called importers in the industry who import many brands and have 100 different brands that they sell to different distributors. Some way or means to obtain scale was critical to me because if you have more brands, if you've got more volume, more revenue, a distributor, suddenly you might not be 10,000th on the distributor's list, you might be 100th on the list. And I'd rather own 1% of share of mine than.001%. Right. So that might seem sort of not like a big issue, but it is. There's such a bottleneck with distributors that you have to get share of mine to really help help them move the needle for you.
Nick Papaniklau [00:12:52]:
That was insight number one. Now interestingly, when I went to Pernod Ricardo two years later, you could argue we had one of the massive, one of the biggest portfolios in the, in the world. We had a lot of share of mine from distributors. And I think I was very grateful to spend seven years there because it gave me that different perspective where I, where I came in a bit naive saying with this scale, with this portfolio, we should be able to sell anything we want. And that's a little bit of a misconception as well because what happens, particularly if you're focused like I was, on the early stage side of things, even within the setting of a large corporate, right, those small brands that we have, no matter how better for you, how on trend, how sexy, how high growth, how cool, how craft they are, is still going to get a lower priority than the bigger brands in your portfolio. Because those are the brands that pay the bills of your sales, of your thousand person sales force across the country. They pay the bills of the distributors, they move the needle for the distributors. So you end up in this weird dynamic where you've got that entity with all the sort of scale and power and portfolio that you need, but it's not always fit for purpose for small brands.
Nick Papaniklau [00:13:59]:
So that's pretty long winded. Aaron, I'm sorry I went into so much detail there, but the insight for no Sleep Beverage is the combination of those two things. How do you have sort of an entity that has some scale, has a portfolio of different categories and different price points, but now can work with smaller distributors, can work with groups that are more appropriate for early stage high growth brands rather than sort of large incumbent brands? If you're will.
Aaron Alpeter [00:14:23]:
No, that's really interesting. You're saying that scale is good, but scale for scale's sake is almost a detriment, right?
Nick Papaniklau [00:14:29]:
Exactly. You nailed it. That's it. Yeah.
Aaron Alpeter [00:14:31]:
Talk to me about how did you guys get it right? I mean, is there a maximum size that no Sleep should be at in order for it? Because obviously if you're like, okay, let's go forward and we're $100 billion company, you probably won't be able to do the things that you're able to do now. And so do you think about it that way in terms of there is scale here and we don't want to grow beyond a certain point.
Nick Papaniklau [00:14:52]:
We do. I mean, I'll think of it first from the number of brands perspective, from a size of business perspective. It's a very complex answer because again, it depends which market you go to. And while I appreciate, and we currently do tend to work with smaller distributors, more mom and pop distributors, there's a point where you outgrow that and you might have so much more room to grow in a state that you can do. You might be in Texas, let's say, and you outgrow a distributor that's mostly focused on Austin and San Antonio and you've got a lot more work that you can do, value that you can create. You don't need the strategic do, but you're limited by that distributor's geographic coverage, their capabilities. Right? So like that's an example where of course you do need bigger scale and scale for, for larger brands. But we think of it more from a, the number of brands perspective.
Nick Papaniklau [00:15:36]:
Let me say more what I mean there, I think that there's an element of, you know, if you walk into a total Wine and more anywhere in the country. And, and you say, I've got my new, you know, 99 organic tequila. And this seems like the next growth avenue within tequila. I'm just totally speaking hypothetically. And they say, that's great. We've got two 99 organic tequilas already. You're SOL right now. If you can go in with a 99 bottle of organic tequila and a 50 bottle of American whiskey made from an heirloom grain that they don't have, and a vodka filtered through this, you know, whatever filtration system that they don't have, and blah, blah, blah, the list goes on.
Nick Papaniklau [00:16:15]:
Suddenly, your chances of getting a sale and your foot in the door go up dramatically. In other words, when you look for the opportunities as a portfolio or when you think about giving more opportunity to yourself as a portfolio, you want to have enough brands that you can cover a few different categories, a few different price points, a few different consumption occasions. That gives you a leg up with a, with a retailer and a distributor. Now, the flip side of that is also true. If you are selling really, you know, super premium products and it's all about, let's take an agave, a tequila or a mezcal product. And you know, your salespeople really have to be trained well on how the product's grown, the terroir, the provenance, all these aspects of the story, you just can't physically do that. Well, if you've got 20 products in your portfolio, right. You're not going to be able to speak as eloquently on so many categories.
Nick Papaniklau [00:17:06]:
So there's sort of a mix for us where we think, you know, somewhere between six to ten brands gives you enough scale, but we have enough bandwidth to actually properly sell and sell convincingly to retailers. And I think back to how your question started. You know, when do you max out? I think we max out when we, when we sort of hit the right KPIs, things like velocity rates and retention rates in enough markets, but haven't done masterfully what the large acquirers do. And what do I mean by that? Again, they are very good at, you know, national distribution. They're very good at chains, they're very good at the costcos and targets of the world that we're not good at and we don't want to be good at, but we'll work with your local chain, a regional chain, a state chain, and get that level of penetration. And we always want to leave enough meat on the bone that an acquirer says, great, I can take what they took what they did and replicate it or scale it up. Because I've got more relationships across the country with more retailers and distributors, essentially.
Aaron Alpeter [00:18:03]:
I think this is a really interesting insight because very rarely do I hear someone say we want to cap the number of brands or the size of business that we want, because we understand that we are playing a very specific role where we're going to take these new and up and coming brands, accelerate them to a point where they're then ready to go on to the next thing. I think that's a, that's a really mature and insightful way to look at things. I imagine that you probably get inundated if you wanted to, you could probably add 30 brands tomorrow. How do you go about assessing whether or not you want to take on a brand? Because in some ways you're, you're kind of making a bet that they're going to work out and they're going to take up one of your coveted spots. So how do you assess them?
Nick Papaniklau [00:18:44]:
Yeah, I mean, you can imagine a lot of it is probably similar to many other, you know, entrepreneurs that you've talked to or VC funds. I mean, obviously the founders are critically important to us. I think far more important than the idea or the liquid or the packaging. But we want to make sure we sort of start, I think you could say, I think Charlie Munger used to say this, Warren Buffett's partner. Right. If you've got a problem, start with the outcome and work your way backwards. Right. So again, if you start with the acquirers portfolios and think about where are the most white space opportunities, not at one acquirer's portfolio, but across the landscape of potential acquirers.
Nick Papaniklau [00:19:22]:
And you sort of lay that out on a landscape of like, here are the five biggest opportunities I see across the 10 largest acquirers. And as long as the, what we would call size of prize is big enough, meaning it shouldn't be a white space that, you know, might be a $10 million market, that you might grow to $100 million market, it should be much bigger than that, several hundred million to make it worth it for us. As long as there's enough opportunities like that that are big enough, that's sort of the way we start and then work our way backwards to say, okay, now let's go out and find brands and talk to entrepreneurs that are targeting that same white space. And just really quickly, I mean, white space again can be a category perspective. You could have a strategic that is very whiskey focused and they've got no agave that's white space. You could have something that's a price point perspective. We are a very premium portfolio, but we want a premium eyes. We want to go super premium, ultra premium.
Nick Papaniklau [00:20:15]:
We want to go higher in price point. Okay, that's a white space opportunity. It could be, it could even be geographic. When I was at Pernura Card, we ended up doing a deal with a brand because they had a, they were overweight in one market. Let's just, let's call it Massachusetts, where Pernod Ricard was underweight in that state. So yes, we liked the brand, we liked the founders, but we might have liked just as much, if not more the fact that that could bring us new capabilities, new channels, new accounts in a state that we were under weighted in.
Aaron Alpeter [00:20:44]:
It almost sounds like you are not just assessing a brand to say, is there potential here? But you're going and saying, let me look at the strategics that are out there. What gaps are in their portfolio that are likely to, you know, going to be on their radar in the next three to five years. Did I hear that right? Is that the level of detail that.
Nick Papaniklau [00:21:00]:
You'Re going into that 100%. You nailed it. And again, that that might be very obvious today if you look at existing categories. But to your point, you have to be mindful of what are the new categories. Nobody was looking at Mezcal ten years ago. Right. We were fortunate at Pernod Ricard where we did think there was a spark there and it would get to be a big enough category. So we moved pretty quickly.
Nick Papaniklau [00:21:18]:
But I think you sort of have to be thinking of existing landscape. And just like you said, what might be the categories in 2, 3, 5 years that are big enough that a strategic will then be looking and if we're well positioned there? Yeah, I wouldn't say we've distilled it down to a science, but we've brought a level of science in when many other people are thinking about just brand and creating the most powerful brand, which is important part of it too, but it's a combination of the art and science for us.
Aaron Alpeter [00:21:44]:
That's really fascinating. Do you find that it's more of a you're reading the tea leaves better than they are and so you're able to have a better hypothesis? Or is it the fact that they have to have companies of a certain size in order to add that in their portfolio and there's just nobody that's that size? And so because you're operating again at a smaller scale, you've got more options, you can kind of pick one scale to the point, then basically serve it up to them on a silver platter.
Nick Papaniklau [00:22:10]:
Yes, it's the latter. You nailed it. I mean, I think that the large strategics in beverage alcohol, particularly in spirits, you know, for 10 years or so, we're making bets on pretty small early stage companies, companies doing 2 to 5 million in sales. And these are, you know, multibillion dollar revenue companies. And I think that they got fatigued with doing that. That's a lot of sort of headaches and founders they have to deal with, with earnouts or majority investments in. And what that resulted in is after sort of 7, 8, 9, 10 years of doing this. A lot of the strategics today have now said we're going to go bigger.
Nick Papaniklau [00:22:47]:
It just doesn't make Sense to do 10 brands at a $2 million revenue number. Let's do one brand at a $20 million. Right. And I think that's what's happened. What that's done is created an even bigger gap for us because beverage alcohol does not have many institutional investors. It's not a robust and historic play for institutional capital. In fact, many investors have sort of vice clauses that prohibit them from looking at alcohol, tobacco and firearms. So this gap that always existed I think has gotten even bigger.
Nick Papaniklau [00:23:17]:
If you're a founder, you can access friends and family if you're lucky. And that's how you raise around. And there's pretty much not much where one group, there's a few others out there, not much institutional capital. And then you got to wait or be lucky enough to keep getting friends and family rounds until a strategic comes to you. If you can hit 15, 20 million in sales, that's not an easy thing to do. So we're absolutely filling that gap today. That's become more, more apparent than in previous years.
Aaron Alpeter [00:23:42]:
That's super fascinating because even the numbers you're throwing out there, if I'm used to working in cosmetics, for example, $20 million. Yeah, that's a good seed round. It's pretty easy to do, I guess. When it comes to beverage alcohol in general. Is it a situation where because the regulatory burden is so high to get in and because of those three layers of sales that you talked about, it's that much more difficult to claw those things out. Or is it the fact that these billion dollar large strategics just they can't find anything else that's smaller than that? Right. So they just have to go for those 20 million?
Nick Papaniklau [00:24:19]:
Yeah, I think there's probably some element of like winner takes all. It is so difficult because of that regulatory environment you alluded to because of the distributor bottleneck that I mentioned earlier to break through that when a brand breaks through it is highly sought after by, by all the strategics usually. And so getting to that point is sort of the point where you know that you're, you're going to be interesting to them. And unfortunately there's a lot of sort of what we call tail brands behind that. Right. Only, only 1% of brands actually depends how you look at it. But 1 to 5% of brands really break through and that's get somewhere between 10,000 cases and 100,000 cases. Most brands hover around 2,000.
Nick Papaniklau [00:24:57]:
When I say a case, that's a 9 liter case. Right. Most brands hover around 1, 2, 3,000 and never get to the 10,000 case mark. So that is absolutely a challenge many face. And when they get there, they're of far more interest to a large acquirer.
Aaron Alpeter [00:25:13]:
That's interesting. And I guess for you you're in the business of picking the ones that are going to break through. If they've already broken through, it's probably too late for you. So what do you look for to say yeah, this one's probably going to do it? Is it something where you have 10 options and it's your expertise and what you guys are able to do that you think is the unlocking piece or is it something else about the business, the founder, the formulation that that puts them over the top for you?
Nick Papaniklau [00:25:38]:
We look at sort of tangible things and intangible things are measurable and unmeasurable. We are very, very bullish on retention rates and I think that's a KPI in the industry that, that often gets ignored. People look at growth sort of for growth's sake, let's just keep growing. It's almost like the VC mentality of the last 10 years until now, where people are now looking for more profitable growth. It's been grow at all costs. We never like that mentality. We've always been focused on retention rates. Why? Because that shows stickiness.
Nick Papaniklau [00:26:07]:
That shows that if you're retaining in 80% of your accounts, okay, now that's something we can buy into. We can add some gasoline to the fire and increase the velocity at those accounts or we can go out and find another thousand accounts and replicate that 80% retention rate. We see brands all the time that come to us with a 40 or 50% retention rate and you sort of have to like ask them the question like look, I'm not trying to be rude here but you realize that next year you will have lost a 50 retention rate means you've lost 50% of your accounts. One out of every two accounts you sold to is gone. Is that a good. That's not sustainable. That's not going to be a build a business we can grow. So I think that's absolutely one thing.
Nick Papaniklau [00:26:45]:
You know, I mentioned earlier the founders, of course I think the ideas is important, but it's all about execution. And I think we usually think that the idea sort of needs to solve for something. But if you've got a founder who can sort of measure traction in these KPIs and honestly assess whether a brand is working or not, pivot maybe the package, the label, the messaging, whatever it may be, if they're not hitting the right KPIs and essentially make sure that the founder is constantly trying to solve product market fit to see if his or her brand actually solves an unmet need in the industry. So the last thing I'll say is we actually are, much to many people's surprise, we're not too concerned about the liquid. Like the liquid has to be good enough. But that's table stakes. Like most people, you know, it's really hard unless you're a true connoisseur to know the difference in 89 point whiskey and an 84 point whiskey. Right.
Nick Papaniklau [00:27:46]:
The liquid has to be good enough. Then more important than the liquor to us is sort of the functional USP the reason to exist, right. This is why somebody would sort of rationalize the purchase. It's, it's made with this heirloom corn in this bourbon or it's distilled 10 times in this way and filtered through this measure. Right? Like that's functional things, that's important to us, more important than the liquid. But the most important to us is, is what we call the emotional or share of heart we call it, where basically the brand has to be solving for, for, for, for a universal human need, if that makes sense. You think of beverage alcohol, particularly premium spirits. You know, we're emotional human beings and people drink usually for emotional reasons.
Nick Papaniklau [00:28:32]:
They're drinking to reward themselves, they're drinking to celebrate, they're drinking to impress people at a bar. They're drinking to be romantic with their partner. And so if a brand can't sort of speak the emotional language of how they're helping somebody fill that need. I know this sounds sort of like geeky, but brand is super important to us and the brands need to be solving for some unmet human emotional need.
Aaron Alpeter [00:28:56]:
That Makes perfect sense when you say it out loud. I imagine if you talk to 10 founders, 11 of them will say, oh yeah, we do that. We've got a great brand. How do you guys separate what you think actually has legs and has that potential exit velocity versus just another nice brand?
Nick Papaniklau [00:29:13]:
I think probably the biggest thing is I don't really like the word authenticity because I feel like whenever people talk about it, they talk it as an aspirational thing. How do you be authentic? I mean, if you're trying to be authentic, you're probably not being authentic because being authentic is just being, it's just being you. Right? So we don't like the sort of brands that talk about and try to be authentic. What we like is consistency. Right? And I think that's what's often missing in the brand world. People get, get, get lazy or maybe they think that the brand isn't working before they've really exhausted sort of all avenues. If a brand is consistent and represents the same thing over and over again and brings that to life in their brand world, that's what resonates with us because that's ultimately what's resonates with consumers. You know, you gotta have, you can have great branding.
Nick Papaniklau [00:30:01]:
We talk about this a lot too. You can have great branding and not be a great brand. In other words, your package, your design aesthetic, that could all look really cool and be spot on for your brand purpose or for that emotional need I was talking about. But if you don't bring that to life through parties, through samplings, through activations, through how your salespeople dress, through how they talk, the consumer ultimately can read through it. So your tone of voice, you know, as I say, the people, your sales team, how they look, how they act, how they position the brand, how they bring it to life, that all needs to resonate and be consistent. So consistency is the big word for us there.
Aaron Alpeter [00:30:37]:
Makes sense. How important is, I guess, the fundamental profitability metrics or unit economics when you're assessing these brands? And I imagine that's a different answer from when you're getting it ready to be sold to a strategic versus when you're first looking to invest. But you know, how important is that compared to the other elements that you shared?
Nick Papaniklau [00:30:56]:
Yeah, it's important, and maybe I'd say it's a little more important in today's environment for us. But again, I don't think we've changed that dramatically since the environment has gotten tougher with inflation and interest, borrowing rates and things like that. I think we've Always been focused on, on profitability and sustainable growth. So no, we're not investing in brands up front that are all profitable. When they're doing, you know, 2 to 10 million in sales, it's usually unlikely that they are profitable. But we want to see that the margins are good, that the way they're spending is, is, is somewhat being measured. And the two biggest spends in our industry are A and P, advertising and promotion. So your marketing dollars and then usually your head count, which is very often heavily weighted towards salespeople.
Nick Papaniklau [00:31:40]:
You're building a sales force to sell this across six states, 10 states, 20 states. And they need to be thinking smartly about that. And if they haven't, and they've, in other words, grown just for growth's sake, they've hired people in a new state because they thought it might sell there, or one distributor asked, you know, should express some interest, that's not a good way to think about it. So we are very, we have our own, what we call our proprietary KPI scorecard. We will look at things like the retention rate I mentioned earlier. If you're not hitting success in your home markets or your existing states, why in the world are you thinking of expanding? That's our philosophy. So we'd rather double down on what's working and fix what's not working than think about expansion.
Aaron Alpeter [00:32:20]:
Yeah, I feel like that message is so important because so many times I'll meet founders or brands who just assume they can grow their way out of their problems. And you know, it can be really difficult, especially when you're a younger brand, to be like, well, I just got to be national, I just got to, I got to do all these things that pivot, you know, what's your advice to those types of brands when it's like, yeah, you know, you're young, you're trying to figure these things out, but at some point it's worthwhile saying, look, you're going to be a half a million dollar business in this location until you can figure out X, Y and Z and then you can grow to get to 5 million or 10 million.
Nick Papaniklau [00:32:57]:
It is really, really hard, Aaron. And if you have advice or no other entrepreneurs or investors that can help us there, please let us know. Because it's a challenge. I mean, I think it is so easy. Look, it requires a lot of patience, right? And it's so easy to just say, but wait a minute, I can open a new market and I'm going to generate, you know, 5, 10% more on my top line. Why not do it, but you got to have that patience. And you can, I mean, I guess one thing that we've done with entrepreneurs is actually sort of model it out and you start to see like, look, the average salesperson doesn't pay off until you're 3, 4, 5 usually. So think about that.
Nick Papaniklau [00:33:31]:
You've just added another fixed cost with SGA Headcount. Now you're going to add other costs on the marketing side, when again, you haven't shown that your marketing here is, is optimized or the most efficient, right. Then you got more working cap needs, you got inventory needs, you got to get that product to market. Working cap tie up like all these things you can, you can financially model out and say, this is the effect of it. Is that worth it for 5%, you know, top line line gain. And I think that can be helpful for entrepreneurs to see. But there's no question that being patient is, is really hard. So we just got to keep pounding it in.
Nick Papaniklau [00:34:07]:
And we use the expression a lot. We say deepen before you broaden. Deepen before you broaden. That applies to geographies, it applies to accounts. Don't go to another chain if you haven't mastered while you're working with Total Wine and More or Bevmo or whoever it is, focus on winning where you are first before expanding.
Aaron Alpeter [00:34:24]:
That's really, really hard advice though, right? Because on the one hand, if there are two options out there, and I've tried one that's not working, and there's another thing here that I haven't tried, that could be better. Logic to some extent would say, go try the other thing, see if that's easier. Right. And there's always this tension between, you know, if you, if you keep running at the brick wall over and over, eventually maybe you'll get through. But how many broken bones we have before you get there versus oh, there's a door. Let me go around this way. So how do you help people determine if they're running into a brick wall or they're, they're running into a door?
Nick Papaniklau [00:35:00]:
Yeah, well, first, by the way, you try to get the alignment up front. So when we invest in brands, we usually have a high level, what we call our value creation model. And we want to make sure that they're aligned to that. But number two, we'll fund it or make sure that us and other investors coming along as part of the investment will fund it with enough capital to sort of avoid that issue of patience or like, can I keep making the same mistake over and over again? So you sort of have to have that buy in and here's the capital to support it at least for the next 18, 24 months. And everybody needs to be aligned with that up front. But you're right, and I don't claim that it's a perfect solve or solution for this because I think inevitably things don't always work how they're written out on a plan, on paper. And I think a lot of times founders do get that, well, this didn't work three times. And it's like, yeah, but, you know, the average person needs to see a brand 10 times in real life before they actually remember even the brand name.
Nick Papaniklau [00:35:52]:
So you got to keep doing it. And here's why we agreed to give you the money to keep doing it. It's a challenge, but that's one of the ways we've been able to de risk it.
Aaron Alpeter [00:35:59]:
Yeah, that makes sense. Do you guys have a different criteria when you say, hey, we're just going to put capital into this business versus we're just going to do operational consulting or expertise? Or is it always a blend between the two?
Nick Papaniklau [00:36:13]:
Yeah, I mean, I think that. So first of all, capital is, I guess, the required part of our model. We are venture capitalists, at least today at heart, that's what we're doing. That's what the core expertise is. So every brand we get involved in, we invest in. What I mean by that is we've got a consulting arm. We're not going out and finding businesses to consult with just to pay our bills. We only like to consult if we've invested.
Nick Papaniklau [00:36:37]:
So we've invested in eight brands. I think seven have chosen to work with us on the consulting side. So is it a prerequisite? No. Do we prefer it? Yes. I think most founders, at least the ones we like to work with and that have worked with, are cognizant and intentional enough to sort of know, I'm really good at 7 out of these 10 things. But, you know, here's where I'm bad at. Can you help? And there's usually pretty good alignment on. Yes, we can bring in some, you know, sales expertise to help advise on your commercial growth strategy, or we can bring in a branding expert if you want to do a repack of your bottle.
Nick Papaniklau [00:37:15]:
Right. So having all those discussions up front I think helps a lot, but it's not a we prefer. It gives us greater conviction in the investment, but it's not a prerequisite to make the investment. To do the consulting, in other words.
Aaron Alpeter [00:37:27]:
Yeah, I can imagine that if the default gate is, do we want to invest in your business? That makes the consulting conversation a little bit easier. Because I can imagine that there are probably situations where you're like, this could be a really good consulting client for us, but there's no way we're putting money into the business right now.
Nick Papaniklau [00:37:46]:
I think that's absolutely right. Look, from the founder's perspective, it can be a challenge too, because we're giving them money, and on the consulting side, they're paying us as consultants. So some of that money we don't charge our LPs a management fee, by the way. So how we pay our bills is actually from the brand fees that come to our consulting group. But you can imagine that a founder might say, wait a minute, you're giving me 750,000 or a million dollar check size, and then you're taking back, I don't know, I'm making it up 100,000 over the next 12 months. That doesn't seem right. But the reality is, and we can justify it by what I just said to you, that if we did not consult with them, we wouldn't have given them as much money. So we usually overcompensate so that after paying us, they'll still have more than if it were just a passive investment.
Nick Papaniklau [00:38:30]:
We'll give you $800,000 or we'll give you a million and a hundred thousand comes back to us in consulting fees. Why do that? That's not to manipulate and force them into consulting with us. It's because now we know that we've got a greater chance of success, or our belief is because they're listening to us, because they're paying for our advice. So that's where sort of the rub is. But we think we've solved it with the. Solved it by allowing us to sort of put more money into the ones that we actually consult with.
Aaron Alpeter [00:38:54]:
That's a really interesting model. Is that kind of your plan for the foreseeable future as well?
Nick Papaniklau [00:39:01]:
So yes and no. I mean, we'll keep going with a venture fund the way that we are, and the brands that want to consult with us, we'll keep doing that. What we found, and I'm going to say something maybe a little controversial, but I guess hopefully it's okay since I consider myself a founder myself. Look, there's a beauty and, and a danger to all founders, I think, you know, the vision that the founders have, the purpose, they started a brand, you know, that's not something we can replicate. We're not naive or, or maybe Arrogant is the word. Enough to think that we can come up with 10 brands, like I said earlier, eight, six to 10 brands that all resonate and have clear founder visions and clear brand stories and purposes. That's really hard to do. So we know the founders are instrumental to what they do, but you do sometimes get this catch 22 with like a founder that, that might think they are the vision, you know, the Steve Jobs type of character and they've got a new route to market or a new proposition that is so revolutionary and, or disruptive and we can sort of see the writing on the wall.
Nick Papaniklau [00:40:06]:
Not that we know everything, we learn a lot from founders, but if we made the mistake, it's what you said, you know, running to the brick wall 10 times and thinking or the definition of insanity is doing the same thing over and over again and expecting different results. Like guys, we did this 10 times or 100 times and we made the mistake every time, don't do it. And the founder still does it because they think somehow it'll be different this time. That's the biggest pain point we've discovered with our model that we're still minority investors. We don't have control nor do we want control because we, we can't have those 10 brands with under our control. But that's the pain point. So to answer your question on where we go next, what we're contemplating is sort of a, what I call more of a roll up strategy, probably with a smaller number of brands, but these would be brands where we keep the founders on in a critical capacity. Actually it's very similar to what we did at Prenor Ricard.
Nick Papaniklau [00:40:55]:
Majority investments with the founders were still on. They were incentivized to grow the brand but their tasks were very clear. They were no longer running, doing 360°, you know, business operations. They were focused on two or three things very well. That's the direction we're probably going because we think that'll allow the founders to really unlock their potential while allowing us to add some real value add and scale and muscle that they can't do on their own. So stay tuned for that. We haven't raised money yet but, but hopefully we'll start doing so in the coming months here.
Aaron Alpeter [00:41:26]:
Yeah, that's a really interesting evolution and it almost sounds like what you talked about earlier about having those operating systems, those playbooks ready for an acquirer. If you are integrating the backend to some extent, you've got those repeatable frameworks, you've got those things that are like hey yeah, this is great. We'll just be able to kind of move these brands off into their next owner when they're ready.
Nick Papaniklau [00:41:47]:
That's right. And now it just becomes a lot easier because rather than telling 10 founders, here's this great accounting or bookkeeping firm, they know beverage alcohol, they know how to classify things. We've worked with them for a while and two say they'll take it and the other eight say no. They got their own accountants, that's harder to sort of extract value or get synergies from. Whereas if you're running the brands, and now you say everybody works with this, this one group. We've got, you know, we've got our three preferred marketing and branding agencies, you know, we've got our preferred distributor, as I mentioned earlier, where we can put all brands to. And get more scale, more share, share of mind. That's a real benefit.
Aaron Alpeter [00:42:22]:
Yeah, for sure. You know, I kind of want to come full circle on this because you were a founder and then you were at a strategic and now you're a founder working with founders again. How has your understanding or appreciation of risk changed over the course of your career?
Nick Papaniklau [00:42:39]:
That's a great question. I would say dramatically. I think I remember telling my girlfriend, now wife, when I started my own brand, very nonchalantly, not arrogantly. I think it was naively, well, I'm probably going to sell this thing in five years. That's the route that most of these entrepreneurs do. Of course, that's because you only hear the success stories. You don't hear the 99 failures. So I think my appetite for risk, or maybe my naivete, put me in a position which was a great one, to launch a brand and not think about all the risks associated with it.
Nick Papaniklau [00:43:09]:
I think now, obviously the experience of knowing how many brands we looked at at Prenora Car, you know, we had an excel sheet with 1500 brands, something like that. Right. A lot of opportunities we were looking at, you could sort of see pretty quickly, you know, just how, how unlikely the chances that most of those were even get a meeting with us. It just, we knew without, you know, just on paper that it wasn't going to be a fit. Gave me great appreciation for the very low success rates. Right. The brutally hard or the brutally high failure rates. And I think now coming back into the role I'm in, I feel like I'm in a really good place because it's come full circle where, as I say, we don't have everything feeling figured out, but we use the word de risk.
Nick Papaniklau [00:43:51]:
We de Risk, a lot of it. So if we can take our chances of success from the 1 to 5% historical success rates to maybe 15, 20, 25%, I mean, that is a big compounder or exponential force on your returns. And that's our belief here.
Aaron Alpeter [00:44:08]:
Yeah. As it comes to, I guess I'll call it your maturation of risk throughout your career. Are there things now that you see as just major red flags that you're just like maybe 15 years ago you would have been like, oh, yeah, you can work through that, or maybe you'll be the exception. It works out that now you just say, look, this is too competitive. This is too much of a risk. I guess I'm trying to get at is if there's anything you could tell wannabe founders right now to stay away from these things or change something or go do something different, if you're, you know, showing these red flags, what would you say?
Nick Papaniklau [00:44:43]:
Yeah, yeah. I don't think I'm going to be repetitive with this. I'll be specific here, but sort of piggybacking off what I said earlier, I mean, one of the things, again, my ne. My naivete, like, I would look at the acquisition multiples that is in every investment banker deck or every entrepreneur's deck and think like that's the norm when reality, that's the 1%. Right. So I think the appreciation today is now going, when that founder shows up and shows you his casamigos, George Clooney 20 times revenue exit multiple, right away you're able to go, first of all, that was a crazy multiple in the best of times for beverage alcohol, peak beverage alcohol multiples. And in this environment, that's just downright delusional or crazy. So don't go to people that are pretty experienced on the investing M and a corporate side and show them the 0.0001% of the likely outcomes.
Nick Papaniklau [00:45:34]:
Right. Be realistic. Tell me These are the 99 brands that nobody talks about that got done at a fraction of the multiple, or these are the brands that haven't sold but have done pretty well that we think we can mirror and scale to. Like that is believable. So I think that's sort of the number one thing. Don't come to us either with your own naivete or trying to pull the wool over our eyes. Like, we don't, we don't know this stuff because we still see it every day. Casamigos multiples in like every deck we.
Aaron Alpeter [00:45:59]:
See how much of that 20x was George Clooney and how much of that 20x was just peak market, hard to say.
Nick Papaniklau [00:46:08]:
And that was purchased by Diageo, a competitor of ours. So I can only speak from the outside, but first of all, the first thing to mention is George Clooney was only one face. I'll be at a pretty face at that that was involved in that deal. There was also Randy Gerber with W Hotels, W Bars and Michael Meldman with Discovery Properties. I think things like that were just as instrumental, with no offense to George Clooney, maybe even more instrumental, I don't know, in getting the right distribution, the right influencers, the right people drinking it than George Clooney and his sort of following has been. But there's definitely an element that that was peak multiples. I think if you ask people at Diageo, they're all still very happy with the return. So while everybody was sort of shocked at that multiple like that, pretty sure insiders have said Diageo made their money back in a multi much shorter time than people anticipated.
Nick Papaniklau [00:47:01]:
Could that happen today? I don't know. I mean we're skeptical. I certainly think the celebrity movement has jumped the shark. People talk about the Casamigos one. I have a spreadsheet with 64 tequila celebrity owned tequilas, Tequila alone, right. And I think people know maybe two or three of them. So it's tough.
Aaron Alpeter [00:47:21]:
That's funny. As we're wrapping up now, we've always got two questions. We like to end with our guests on build a business worth buying. And the first one is what is the best example of a moat that you've seen a business build?
Nick Papaniklau [00:47:36]:
I think in our industry it's brand. It's brand. I mean there's nothing we've seen that can really disrupt the three tier system, circumvent the regulatory environment. Relationships can help, but everybody has relationships. Brand is hard to replicate. As I said, good branding maybe relatively easy or easier to do. Good brand a lot harder to do. And I think the brands that have done that well are the ones that usually bring, I mean even Casamigos.
Nick Papaniklau [00:48:05]:
Great example again, like the name house of friends FBI advertisement was George Clooney and Randy Gerber around the campfire on their motorbike like it spoke to this concept of like this, you know, this moment of social interaction with best friends enjoying a drink. That's an emotional brand world. That's not unique to them, but they owned it very well and they were consistent with it. So I think brand is probably the biggest moat in beverage alcohol or at least in spirits.
Aaron Alpeter [00:48:32]:
I'd say that's Great. And if you had to give a piece of advice to a founder who was listening to this podcast said, man, this guy has been really inspirational. I'm going to go start my beverage alcohol brand today. What advice would you give them to do something to help them build a business worth buying?
Nick Papaniklau [00:48:51]:
Yeah, I'll say really quickly. It's funny, I think some founders talk about, like, building a brand for 100 years. They're never going to sell. I don't know if that's, you know, little posturing or they're sincere about it. And others that are like, I prepared this thing to flip in three years or five years, and it almost seems like those are like two opposite ends of the spectrum. And our view is no, why can't you include sort of both aspects of it? You know, build a brand that could last for 100 years. That's great. That's music to our ears.
Nick Papaniklau [00:49:18]:
Right? Something that lives beyond the founder that could go to be sold to another strategic and would still have brand relevance. But also back to what I said earlier, be prepared to sell. What does that mean? Have the right KPIs in mind, have the right processes, have your accounting systems in order. Think about the post acquisition integration plan to help the acquirer. So to us, it's sort of the balance of those two things. Build a brand to last forever, but build a brand ready to flip because ultimately that's what you and your investors probably want. And I'll just lastly say that idea of working your way from, from five years from now and working your way backwards is probably the best way to do that.
Aaron Alpeter [00:50:01]:
Nick, this has been a fantastic episode. Thank you so much for joining. I've learned a ton and I'm sure listeners have done as well. And thank you all for tuning in as well. And we'll have you back next time on Build a Business Worth Buying.
Nick Papaniklau [00:50:14]:
Aaron, we'll have to have a drink at some point too.
Aaron Alpeter [00:50:17]:
Sounds good.
Nick Papaniklau [00:50:18]:
Thank you for having me. All the best.
Aaron Alpeter [00:50:24]:
Thanks for joining me on Build a Business Worth Buying, brought to you by ISPA Consulting. I hope today's conversation gave you real insights into scaling smarter, selling better, and thinking like a strategic operator. If you found value in this episode, make sure to subscribe, leave a review, and share with someone who's building their own sellable business. Until next time, remember, the real win isn't just building a business, it's building one worth buying.