Valuation Comps

[WIndsor Street Distilling]

I'm finishing up my business plan and having a major problem finding comps to defend my valuation.  Everything I find is publicly traded and either too good or too bad to appear realistic.  Any ideas on how to properly valuate my business and any leads on some comps I can include for my investors?

[Foreshot]

3-5 times earnings. Unless you have something magical it's unlikely you're be able to go above that.

If you're going for distribution as a major source of income & you have no experience stick to the low end. Distribution is about marketing/sales more than anything else. Lots of bad products sell as well as good stuff because of marketing.

If you're going for more of a local distillery/pub: Smaller town keep it lower, bigger town or tourist area then give it a little more.

If you have any local breweries with a similar business model you can ask them what they would value it at. You will be somewhat close.

And most investors that know what they are doing will ignore your numbers anyhow. Until you've been in business a few years your numbers are a guess.

[Hudson bay distillers]

curious 3 to 5 times earnings over what period of time , one year , first year , first 3 to 5 years combined , or a fiscal year averaged out over a number of years . and are you talking about actual earnings or projected earnings based on what your equipment can produce in a given time period . 

[Foreshot]

One year of expected earnings. Most investors want 20% or higher returns of their initial investment. That means 5 years or less. Most look for 3-4 meaning 25-35% return. It's hard to break the 3-5x earnings model unless you have very high earnings or there other extenuating circumstances that could lead to better than expected returns. Once you get beyond family and friends investors aren't really generous. You might get 1 year to get things up to speed, but it probably won't last much longer than that. They will expect something year 2 and beyond. If you get a good guy you might be able to do convertible debt bonds. It can lower costs the until they are converted.  In the US it keeps the debtor higher if there is a bankruptcy so some investors prefer it. The vast majority of investors consider only the cash returns. The increase in value of the company is normally not considered in their calculations. The increase in value is their reward for the risk they undertake. You can argue 'til your blue in the face. Investors don't care.

I will admit I am a bit jaded after dealing with startup companies, your experience may be better.

[Hudson bay distillers]

thanks foreshot that is some great real world information , obviously this isnt the first time you have worked on this . good stuff 

tim 

[Glenlyon]

Unless you are starting rather large operation with a really big capital investment, and you've had previous corporate experience handling investors - I recommend staying away from investors. They can be fickle and expensive to keep and can quickly derail your vision with their own.

Instead, if you are small - go to the bank. It will be harder to talk them into giving you money, but the terms and conditions are much clearer and easier to meet and exceed at.

Best yet, self capitalize and stay out of debt altogether. You'll quickly discover reaching a profitable position will be much easier to achieve and best of all, you won't have to give the profits away once you start earning them.  

 

[Glenlyon]

Once you are up and running, get the accountant to value the business. It will cost you about $10k, but you get defensible documentation and valuation.

[Glenlyon]

Another under utilized source of capital if you are short is business equipment leasing. The interest can be higher, but not always and you get to deduct the entire cost as a business expense. Which can be very helpful the first few years. As well, once the lease has expired you can usually make a small payment and then own the gear outright. We've used this technique very effectively with several enterprises. 

[jbdavenport1]

Echo the comment on equipment leasing. We leased our stills which left TONS of cash in the bank account. Yes, interest rate is a little high but we are not going into opening our doors 'cash poor'. It has been a true life saver as we've encountered numerous unforeseen delays and costs That if we had bought our stills outright, we would have been scrambling to meet these unforeseen costs.

[Southernhighlander]

Leasing is a great idea and several of our customers have done that.  We have 2 leasing companies that we work with. 

Just so everyone knows and can take advantage of it if they want.  Under the new tax laws which have been so advantageous to distillers, you can depreciate your equipment 100% the first year that you own it, if you like.  This is for businesses who purchase their equipment outright.  This is a great time to purchase equipment.

http://distillery-equipment.com

http://moonshine-still.co

http://triclamp.co

 

[admiralty]

+`1 on jbdavenport1; I kind of went the other way and have had very little debt, etc. but bankrolling the rest of operational expenses has been tough and caused slower growth and product development. Which was a fairly big mistake.

Banks won't loan on grain or grapes or whatever but they'll be happy to hold a note on equipment.

[Foreshot]

I should have stated that the key to getting beyond the 3-5x range is making it so that an investor has little risk or has to do little to manage the business. If an investor can drop a load of cash off at your door and then get a good return with little or no activity then you can ask for a higher multiple. This would mean having a business that has solid experienced management, been around a while (3-5 years minimum), strong balance sheet/cash flow, with little likelihood of something negative on the way, and good growth prospects.  If an investor will need to be an active part of the business other than being on the Board of Directors they will want a better return for their time spent on the business.