M&A Value drivers

M&A Value drivers

What Drives the Value of Your Business? (Part 1 of 3)

(An Excerpt from the Q4 – 2013 Deal Hound: Pet Industry Newsletter)

The pet industry is one of the most active corners of consumer products, an already active industry, for mergers and acquisitions. When pet industry owners see companies like FURminator trade for a rumored 3.0x to 3.5x revenue, they ask themselves whether their business could be valued in a similar fashion.

This is a question any business owner should ask, especially in an industry where premiums are flying around so frequently. Generally, however, people oversimplify valuation metrics and apply them across the board to companies that happen to be in the same industry. An industry can be a driver of valuation, but there is usually much more. True drivers behind premium pet industry valuations in a company include intellectual property or defensible niche position, revenue composition, and margins and scalability. In this installment, we will focus on intellectual property and defensible niche position.

A brand, a patent, a process, or all of the above support the company’s ability to maintain and attract market share. The diagram below shows the market’s view on providers of goods and services. Keep in mind that there is overlap among these quadrants from time to time, but this serves as a good visualization.

Your solution either addresses customers that already exist or it creates a new customer base; similarly, you either make existing products/services, or you create new ones to service that customer base.

The lower left-hand quadrant is usually dominated by large players with plenty of capital and staying power to support marketing expense, competitive margin pressures, and organizational efficiencies that come with scale.

The upper left-hand quadrant is rare in the pet industry. For the most part, the existing customer base is the constituency of owners of a specific type of pet that your product addresses. A player in this space is taking existing solutions and attracting customers that would not otherwise be users of the solution. An example might be DogVacay. DogVacay innovatively attracts both dog owners who would otherwise kennel their dogs, and also dog owners that would not otherwise kennel their dogs. Thus, the dog kenneling category does not have access to a significant part of DogVacay’s customer base. This is an incredibly defensible position.

The lower right-hand quadrant is where many innovators land in the pet space. Sticking with the FURminator example, FURminator created a product that was simply “the better mousetrap” in the view of some consumers (enough to sell a rumored estimated $45,000,000 worth prior to the sale to United Pet Group). Pet grooming and de-shedding tools existed before FURminator, but those existing customers bought FURminator products, perhaps to replace some of the vintage players in the industry.

The upper right-hand quadrant is the unicorn. Very few companies come around in any industry that provides such an earth-shattering solution that it creates a new market altogether. Facebook did this in tech, Apple did it with the iPad, and Thomas Edison did it with the light bulb. Realistically, though, if you think outside the box, your business may only be a few degrees off from achieving this. If I had any specific ideas, I would not be writing this article, but you know your industry and your products, so think about how you can attract new customers to the industry with innovative products, and remember to invite me on your European Yacht Tour in 5 years.

Valuation Matrix

 

2018-02-12T17:33:14+00:00Maximizing Business Value, Pet Industry|