Ingredients 2026 Midyear Update: An Attractive Sector for Buy-and-Build M&A

Accretive Add-Ons of Smaller Players

While the total addressable markets (TAMs) within the ingredients sector often exceed several billion dollars, the landscape is fragmented with many “mom-and-pop” companies with small market shares. Despite the attractive industry tailwinds and strong growth outlook, these smaller players are sometimes less sophisticated. As a result, investors can often acquire the business at an attractive price then quickly professionalize operations and improve the margin profile. Immediate professionalization allows investors to execute acquisitions that are accretive to the larger platform while also capitalizing on the target’s strong topline trends, unique capabilities and existing customer relationships. By giving the acquired businesses access to greater resources, the acquisitions often supercharge organic growth.

Acquisitions to Expand Capabilities, Geographies and Customer Relationships

Many foodservice and industrial companies require a broad array of ingredient capabilities and are constantly looking to outsource R&D and consolidate their suppliers. By acquiring additional capabilities through M&A, an ingredients platform can become a one-stop shop and serve a broader range of customer needs, resulting in unique ingredient solutions, sticky customer relationships and cross-sell opportunities.

M&A can also extend a company into a new geography. Acquiring a regional player often provides access to long-tenured partnerships with local restaurant chains or foodservice providers, unlocking a new regional and sticky customer base.

As customer relationships within the ingredients sector are typically very sticky, the new customer sales cycle can be lengthy, and it can be difficult to penetrate a new customer account organically. Acquisitions of companies who have their own tenured customer relationships can provide immediate access to a new customer base. Penetrating a new customer base provides the opportunity for additional cross-selling opportunities and expansion into additional channels, both of which greatly expand the TAM.

Value-Add M&A to Supercharge Growth, Drive Scale and Optimize Margins

With greater capabilities under a collective go-to-market strategy, ingredients players can effectively cross-sell their offerings with no incremental investment. Presenting existing and new customers with additional portfolio capabilities allows for the opportunity to “land and expand,” driving topline growth while further entrenching customer stickiness.

In addition to revenue synergies, M&A can often provide ample opportunity for cost synergies by optimizing procurement, rationalizing facilities and removing redundancies. With increased facility production and an expanded footprint, the platform can benefit from greater operating leverage with limited incremental fixed costs.

Evolving Assets into a More Diversified and Valuable Platform for an Eventual Exit

Financial sponsors that own ingredients platforms will find significant value in M&A by evolving the business into a more diversified platform. Shifting an operating strategy toward more value-added solutions such as increased R&D capabilities and more-collaborative solutions drives multiple arbitrage and long-term value creation.

Expanding coverage and footprint can additionally boost the appeal of an asset by diversifying end markets and mitigating customer concentration, if it exists. The next owner of the platform will benefit from a diversified business across customers, channels and capabilities, which further expands the TAM and ability to cross-sell.

Buying Down the Entry Multiple

By executing on accretive M&A opportunities during a hold period, an investor “buys down” their entry multiple. This strategy is possible because of the fragmented nature of the industry, the large TAM and the many “mom and pop” competitors. For example, if an investor acquires an ingredients asset at a higher valuation multiple, acquiring targets below that level blends down the multiple for the combined business. When assessing how aggressively to value the main platform, investors will take into account how actionable the M&A pipeline is, the likely valuations and the timing of integration.

By “buying down” the multiple during the hold period and establishing a platform that is more attractive to the next buyer, the investor can exit the business at an attractive multiple and generate a very strong return.