Stuart Rose, partner, Mirus Capital Advisors
It is common knowledge that when selling a business three primary factors determine transaction multiples: size, growth, and profitability. But size and profitability can only take a company’s multiple so far. It is growth—rapid projected future growth—that can turn a 7x to 10x EBITDA multiple into a 20x EBITDA multiple.
So what key characteristics drive potential growth? There are five when it comes to the value of a growing company:
- Strong brand
- Complementary product lines
- Industry disruptor
- New category
- Legal barriers
Strong Brand: Quality and Quantity?
A strong brand by itself doesn’t lead to an outsized multiple, but what the company does with that brand is vital. Increasing distribution or integrating technologies between the acquirer and the target can lead to strong future growth. Two key examples illustrate the value of brand.
Appliance maker Viking was acquired by Middleby for 2.8x sales or 44x EBITDA. According to Middleby’s CEO, “This acquisition strategically positions Middleby as a leading manufacturer in the sector with a top brand. The acquisition of Viking allows us to integrate our own patented technologies that will have a huge appeal to consumers for their residential kitchens.”
When General Mills acquired Blue Buffalo, a manufacturer of natural food for dogs and cats, for 6.3x revenue or 25.6x EBITDA, General Mills’ CEO said, “The Blue Buffalo team has built a terrific brand that is leading the transformation of the U.S. pet food market and continues to generate top-tier growth. This acquisition adds a compelling new growth platform to the General Mills portfolio…”
Complementary Product Lines: A Match Made in Heaven?
New product lines that are a logical or natural fit allow the acquirer to fill perceived gaps or expand distribution. A 2012 acquisition of Teavana by Starbucks closed at 3.1x revenue. At that time, Starbucks’ CEO commented that “Teavana’s world-class tea authority, coupled with the romance and theater of the retail experience that is the heart and soul of Starbucks heritage, will create a differentiated customer experience and business opportunity that delivers immediate value to shareholders. This complements our existing Tazo brand and gives us the unique opportunity to create a two-tiered market position.” But even with the best fit, the romance doesn’t always last. Starbucks closed its Teavana stores in 2017.
Industry Disruptor: The Next Amazon?
There are almost too many examples to count in this category, including ecommerce ravaging old-world brick-and-mortar retailing (Amazon) and on-demand technology upending the taxi and hotel industries (Uber and Airbnb).
But disruptors aren’t always new companies. For example, Toyota invested in Uber at a valuation of 6.7x revenue and its executives noted that “This agreement and investment marks an important milestone in our transformation to a mobility company as we help provide a path for safe and secure expansion of mobility services like ride-sharing that includes Toyota vehicles and technologies.”
A slightly different disruptor is SodaStream, a maker of beverage-carbonation devices that was acquired by Pepsi for 5.3x revenue or 26.0x EBITDA. Said PepsiCo’s CEO, “PepsiCo’s strong research and development capabilities, global reach, design and marketing expertise, combined with SodaStream’s differentiated and unique product range position SodaStream for further expansion and breakthrough innovation.”
New Category: Sky-High Valuations?
While related to industry disruptors, a new category can displace an old category or create a new one. The most obvious new category today is the cannabis industry, which has a multiple based on revenue and EBITDA 2 years in the future. When looking at multiples today, the numbers are outrageous. The median Enterprise Value (EV)/revenue multiple for public cannabis companies is 87.9x revenue.
Legal Barriers: Can You Find a Loophole?
Legal barriers also present the opportunity for outsized valuations. Franchise laws, patents, and copyrights enable legal monopolies with tremendous pricing power or protection from competition. For example, it is not unusual for distributors to sell their rights to beer brands for multiples of gross profit. And biotech research firms routinely trade at multiples that anticipate sales years into the future.
Conclusion
Most companies cannot consistently grow at 30% per year for years on end. However, if there are structural reasons why a company can do so, it’s possible to capitalize on that and gain an outsized valuation multiple. Proving the likelihood of continued future sales and earnings growth convincingly can lead to a valuation two or more times the typical transaction.
Mirus Capital Advisors is an investment bank.
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