Baker Tilly Capital, LLC
Authors: Eric Kroll, Cory Wendt,
Michael Milani, Benjamin Martin
As the food and beverage industry grapples with shifting market conditions and growing regulatory challenges, staying updated on critical trends and optimal strategies is essential for long-term success and adaptability.
Key factors such as mergers and acquisitions (M&A) and the Inflation Reduction Act (IRA) present significant opportunities. Additionally, sustainability efforts and Environmental, Social and Governance (ESG) initiatives similarly create new opportunities for growth. And don’t count out the potential effects of the 2024 election – that is a critical area to keep an eye on in the near future.
With those themes in mind, here are some of the most effective strategies for navigating these issues and capitalizing on emerging opportunities in 2025.
Mergers and acquisitions
In the third quarter of 2024, the food and beverage industry experienced a notable spike in private equity transactions, with 149 deals completed, marking the highest activity level since 2017. This uptick reflects a trend toward strategic consolidation and an optimistic outlook on interest rates.
As inflation levels stabilize, many acquirers are attracted to the potential for growth through the acquisition of high-quality assets that promise incremental sales increases.
The M&A outlook for the industry remains positive, bolstered by a stabilizing global economy, a strong U.S. stock market, reduced inflation and interest rates, and expectations of a friendlier regulatory environment. Additionally, banks and private credit funds are offering abundant debt financing, adding to the overall optimism.
Looking ahead, several factors could fuel continued M&A activity in 2025. These include the retirement of Baby Boomer business owners, private equity firms’ need to sell portfolio companies to provide returns to investors, non-core divestitures, and matching valuation expectations.
Food and beverage companies should take advantage of these favorable conditions by considering strategic acquisitions or divestitures, where appropriate. Of course, successful outcomes will depend on understanding current valuation trends and aligning business goals with the broader market landscape.
The Inflation Reduction Act (IRA)
Unlike previous tax frameworks, the IRA allows both for-profit and not-for-profit organizations to benefit from tax credits. There are three primary methods for utilizing these credits:
Direct use: Owners can apply credits against taxable income, which is particularly advantageous during profitable years.
Transferability: IRA tax credits can be transferred to a purchaser, creating flexibility in areas such as asset ownership and project management.
Direct pay: Tax-exempt organizations can receive a payment equivalent to the credit, which is not much different than a tax refund.
A key component of the IRA is the section 48 investment tax credit, which is especially beneficial for manufacturers (including food and beverage companies). This credit, starting at 6%, can increase up to 30% if projects meet certain standards, such as complying with prevailing wage and apprenticeship (PW&A) requirements.
Projects that commenced after Jan. 1, 2023, are eligible, with additional bonuses available for using domestic content and establishing projects in energy communities. For example, a $10 million project with $8 million in eligible energy property can yield credits up to $4 million, depending on compliance with the various requirements.
Food and beverage companies should consider actions before the year end or early into 2025, the IRA will remain effective for the next eight years. However, energy property values will soon shift to be based on carbon efficiency versus project type.
For companies seeking to preserve the current benefits, it is essential to start projects under the existing rules. At least 5% of eligible costs should be incurred, or physical work should begin to meet safe harbor provisions. Maintaining proper documentation, such as contracts and purchase orders, is also essential to qualify for these benefits.
Meanwhile, PW&A compliance is crucial for securing the 5x multiplier on the investment tax credit under the IRA. These standards, which are based on the Davis-Bacon framework, must be adhered to by contractors to avoid penalties. Companies must also be prepared to substantiate claims when filing for credits, especially if they plan to sell or transfer the credits.
Environmental, Social, and Governance (ESG) and sustainability
As we move into 2025, the ESG and sustainability landscape is shifting from voluntary to mandatory reporting, requiring companies to integrate sustainability disclosures with their financial reporting.
This transition is driven by new regulations, such as the California Climate Accountability Package and the EU’s Corporate Sustainability Reporting Directive (CSRD), which will mandate extensive reporting and controls by 2026. Businesses must adapt by improving procedures, engaging stakeholders, and ensuring they provide accurate and auditable data, particularly around climate risks and Scope 3 emissions.
For the food and beverage sector, 2025 will bring opportunities as the EU taxonomy is adopted by European investors, allowing U.S. companies to align with environmental themes and attract European investment.
To capitalize on this, businesses should align their operations with these themes and strengthen investor relationships. Furthermore, revisions to carbon-neutral standards and net-zero goals will provide new avenues for companies to set credible environmental targets and engage stakeholders through renewable energy credits and offsets.
2024 election impact
The outcome of the 2024 election will have significant consequences for the food and beverage industry, particularly in areas like deregulation, trade negotiations and potential tax reform.
Deregulation could reduce costs for businesses but has the potential for negative consequences including supply chain disruptions and decreases in consumer confidence; the potential for regulatory changes is already leading to scrutiny from advocacy groups. A focus on domestic energy production has the potential to lower expenses but may diminish incentives for renewable energy projects. Changes in international trade policies as well as labor and immigration laws could disrupt the market in multiple ways and could result in decreased operational efficiency.
Many provisions in the Tax Cuts and Jobs Act (TCJA) are scheduled to expire at the end of 2025, absent Congressional intervention. While Republicans, who swept the 2024 elections and will have a unified government for the next two years, are generally united in their desire to extend current law, it won’t be a simple process. The potential expiration of the TCJA may require adjustments, necessitating careful tax planning.
Proactive planning is critical for food and beverage companies moving forward. More than ever, businesses need to carefully review their operations, processes and growth strategies to remain adaptable to regulatory changes and evolving market conditions.
In summary, whether navigating M&A, leveraging IRA incentives or aligning with sustainability goals, food and beverage companies must stay agile and informed. The team at Baker Tilly is here to support you in closing out the year strong and setting the stage for continued success in the year ahead. Contact us to explore customized solutions that drive lasting growth.
Disclosures
The commentaries provided are opinions of Baker Tilly Capital, LLC and are for informational purposes. While the information is deemed reliable, Baker Tilly Capital, LLC cannot guarantee its accuracy, completeness, or suitability for any purpose and makes no warranties with regard to the results to be obtained from its use, or whether any expressed course of events will actually occur. Baker Tilly Capital, LLC is a registered broker-dealer, Member FINRA and SIPC.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
