Whether you’re looking to raise a round of capital or sell your company, it’s important to understand how to value your company. The best way to value a company is to research comparable transactions in the market. We’ll take a look at Fortune Brands’ acquisition of Skinnygirl for an easy-to-follow example.
Revenue Estimates
We first develop revenue estimates to determine whether or not this transaction is in fact comparable to the company we are valuing. Revenue estimates are also helpful in creating financial forecasts. In other words, you can use comparable company data to project your own company’s growth.
We estimate revenues for Skinnygirl by gleaning press releases and researching prices.
We know a case of Skinnygirl costs $125. This is likely not the dollar amount received by Skinnygirl, but we will use this for our example. The sales volume for 2010 and 2011 can be found here. A Skinnygirl executive stated that Skinnygirl was 2% of Fortune Brands’ total sales in 2013. A press release noted that sales were down 26% from 2012. From this data, we arrive at the estimates below:
2010 = $18,881,250
2011 = $73,250,000
2012 = $68,000,000
2013 = $50,000,000
Valuation Estimates
When companies are acquired, there are two main components—up-front payment (in cash or stock) and contingent consideration (commonly referred to as an earn-out). An earn-out is a payment that is contingent on future performance, such as sales volume. If the acquired company hits all sales goals, it will get 100% of the earn-out.
I took a look at publicly available documents to determine the acquisition price of Skinnygirl. It was announced in 2011 that Fortune Brands (now Beam Suntory) would pay a maximum of $28 million in an earn-out to Skinnygirl. According to SEC filings, they made the following payments:
Q1:12: $2 million paid out for 2011
Q1:13: $8 million paid out for 2012
Q1:14: $6 million paid out for 2013 (estimate)
At the beginning of 2013, there was an $18 million balance on the earn-out. At the end of the year, it was stated that there would be a $12 million benefit due to revised sales volumes. SEC filings noted, “The substantial decline in Skinnygirl is largely due to the substantial decrease of the U.S. ready-to-serve spirits category in 2013.” In plain speak, Skinnygirl did not meet the earn-out requirement, so $12 million was reversed in the books. We estimate the earn-out payment for 2013 at $6 million.
The 3 year earn-out yielded $16 million, instead of $28 million.
In the 10Q for the first quarter of 2011, it was reported that Net cash used in investing activities for the three months ended March 31, 2011 increased to $72.7 million primarily due the acquisition of the Skinnygirl cocktail business. This tells us the price was at most $44.7 million ($72.7 million – $28 million). With a revision to the earn-out, the final price was at most somewhere near $60 million ($44.7 million + 16 million). We can cross reference this number by looking at other comparable transactions.
In March of 2012, Fortune Brands paid $605 million for Pinnacle vodka and Calico jack rum, which reportedly sold 3.1 million cases of liquor in 2011, which would equate to $297 million in sales. That gives us a revenue multiple of 2x. Skinnygirl reportedly sold 151,050 cases in 2010 with revenue of $18.8 million.
Based on 2010 sales, Skinnygirl would be valued at approximately $37.6 million.
Optimizing Your Acquisition
In this example, $12 million was left on the table when sales in 2013 dropped drastically. I believe sales were driven in large part by Bethenny Frankel’s ability to stay in front of, and connect with, her audience. Unfortunately, 2013 was the year she left Bravo for Fox and went through a nasty divorce. 2013 was also the year that her fan base turned on her. I don’t think this is a coincidence.
When your personal brand is your corporate brand, it is critical that you are presenting yourself in a consistent manner. It pays to keep your dirty laundry behind the scenes and by all means ignore the trolls. I’m not claiming it’s fair, but it’s reality. No pun intended.
Image credit: CC by Dave Dugdale
