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Need advice
We presented our products and a business plan to a venture capital group. They like the products and have offered a sales point at a new clinic to try out our Rescue Cream. Of course we will accept. I’ve been asked how much we value the company at, what stake we offer, and for a five year plan.
I am going to base the plan on what Lush did during its first 5 years, because we have a similar business profile and intent. But it is the other two questions that bother me. Due to the somewhat sensitive nature of this, message me if you can advise. -
8 Replies
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@Belassi Maybe you already know this, but a good rule of thumb is to take your EBITDA and apply a multiple for this based on your industry. This will give you the enterprise value. Check this out:
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/vebitda.html
I used to work for a PE firm and IME this was pretty accurate. If I were you, and the business has some substantial worth, you probably want to engage with a company familiar with process to help you assess your enterprise value and help you with negotiations. I’d also suggest not selling a controlling stake unless the PE firm is offering more than just money. -
So the value of the company is based only on current earnings? I don’t take into account the 4 years of R&D time and materials, possible value of the brand and its support sites, anything like that?
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Yes, the value of the company is based on a multiple of current earnings and future projected earnings/cash flow. All of those past activities are reflected in the current value, which is some multiple of current earnings and projected future earnings … that’s what investors are betting on and buying.
Be aware that PE investors are going to be looking for an exit strategy, so taking PE money also means that at some future point in time, they’re going to be looking to sell the company so they can cash out their equity position.
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OK I am getting on with this. I am seeing an ex student of mine tomorrow who was involved in startup advice with the TEC, and I have contacted another ex student who is a high powered lawyer with commercial experience.
My main problem at the moment is estimating the financials since I have no retail experience to speak of. I need to estimate how much our first store will make in the first year.
Location: San Pedro, Nuevo Leon, Mexico (the most wealthy suburb in the whole of Latin America)
Type of store: similar to Lush; hand made soaps, but also very upmarket skin and hair care.So I downloaded and examined the Lush financial statements (latest 2014) and what I found was, that the LEAST profitable was their ONE store in Brazil. Now that store made sales of 70K (sterling pounds) last year.
Bearing in mind that Mexico’s economy is much stronger than Brazil’s, my question to the forum, is:
Do you think I should adopt this 70K pounds amount as projected sales for our year 1, when I talk to the Venture Capital company again? -
Sounds like this is going to be viewed as a pure start-up, so using a LUSH store as a model is not a bad idea. L’Occitane would be another good model.
Honestly, your best bet would be to open a store on your own, run it for a year to prove the model and then seek capital.
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Thanks Mark. I don’t have the financial reserves to finance the store for a year myself. I have quite a lot invested in the lab and raw materials / packaging. L’Occitane, interesting thought, it’s a local competitor. Lush in the UK make a lot of money from their stores. I notice that they are avoiding the USA though they are in Canada and - to my horror - I see they are beginning here in Mexico.
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This is a bit off topic but have you seen the Nuance line by Salma Hayek? She’s done a good job of featuring her Mexican heritage by the addition if a few key ingredients (tepezcohuite, blue agave, mamey, etc). The packaging is pretty decent, too.
The fresh and natural aspect of Lush’s brand positioning combined with the perceived authenticity of Hayek’s Nuance (sharing traditional Mexican beauty secrets) seems like it could be a winner.
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No, but I will check it out. Thanks for that. Yes, the concept of using Mexican natural ingredients is strong with us. We use mamey oil (better than Argan: a relative), aloes, tepexcohuite, and several other plant extracts.
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