Hi all, not sure whether to post here or the investments board,
I am helping my friend who operates an adventure tourism company get funding from investors. I am currently trying to help him with the valuation part which he can pitch to investors. But I am just finding the industry to be a bit vague. Some of the main issues I have are lack of comparables and the metrics to focus on while justifying the valuation. In order to simplify the process, I am probably going to just apply a multiple (either revenue or net income) or do a DCF and try to come to a reasonable number.
I was hoping to get some inputs from the AF community to see whether there was any other way I could work on this. To give you some numbers, the last 5 years have generated revenues between $500k - $900 (previous year revenues) and they look likely to touch the $1m mark this year. Net profit margins have ranged between 3%-7% of revenues. Funding is expected for $500k, for 20% equity. The founder believes the company can expect to generated 10% growth in revenues in the future with 15% margins due to scaling up and offering of new products and services. Fundamentally, the company seems strong, with an experienced management team who have been present since the beginning, operating in a niche space without many competitors (maybe 2-3 in the region, but not exactly having a similar set up), a large marker share, and brand recognition. It has never also incurred a loss, even during the recession time.
To be conservative, he feels the pre-val. of the company to be around $2m (based on assumptions and intuition). I am trying to quantify this. Do you think this is a reasonable valuation number for a company for those above numbers and description? I know its probably not enough data to come to any conclusion, but it would be great to hear your inputs. I would be happy to take this offline and share the financials as well.
there are a few comps you can look at. thomas cook, tui, transat etc. i don’t know any of the small names. but overall, the industry isn’t selling high from my data. the company’s margin is expected to double from historical margins with a 10% growth will be hard to pitch imo. stabalize margins should be in the area of 3-7%. anything more usually comes from a lift in consumer spending activity which in this environment might be hard to pitch. currently the state in tourism companies generally is weak and 2million is probably on the high range. he might be able to pitch for 1.3 million given your info.
Ummm… your job is to raise funding at the highest possible valuation i.e. this is a sales pitch, not trying to get into some theoretical argument of what’s the right valuation or terminal margin or multiple for this company. Remember that first. What you need to do is figure out what IRR will the investor expect from this type of investments? There is no definite answer and depends on what your read is of the prospective investors, other than to saw that 10% or whatever WACC you come up with based on public company comps will be too low. With this in mind your job is to figure out with a $2m pre $2.5M post money valuation, what exit valuation is required to generate this return and then cross-check with the founder’s plan to see if it indeed seems achievable. Define your exit strategy, how are the investors expected to be paid back, as this is probably the most important part of the sales pitch. Remember you are not here to find the right valuation, your job is the justify the valuation. Asking on this forum what people think the reasonable valuation is I think a waste of time as majority of the people here have no idea how to value start-ups (this is not meant to be degrading to people on this forum, as even Warren Buffet would have no clue), and probably less than 10% of people here have experience with venture capital.
I understand your point but I don’t want to provide a figure where investors would be wondering whether he has any idea of his business or not. But I thought $2m would seem reaonable looking at the company is/has been operating and the future growth projectios.
But I think like you said, more than just harping on only the financials, it will be a good idea to work on the other parts of the pitch, like the exit strategies, the pay-back details etc.
I work for a boutique in Canada that specializes in valuation and corporate finance for private mid-markets. For a company this small, there is going to be a SIGNIFICANT liquidity premium and a discount for lack of control.
In my experience, a buyer paying a multiple of 2 x revenue with historical margins that slim is unlikely. Totally a general rule, but the metrics for companies of this size are more like 3x to 5x EBITDA or a 20% cap rate, minimum.
Also - dealing with companies of this size, I would consider but generally disregard public comps. Going to be extremely difficult to draw meaningful comparisons based on size and risk profile.
One concern - you stated they had a large market share and this is a niche market. Where is the growth coming from?
Sorry, I was travelling. Wrt to the last bit, the state where they operate predominantly generates revenue via tourism and tourism related activities, and growing in traffic as well. There are many small players that provide a few individual services (rafting, trekking etc). These guys have a whole supply chain of all these capabilities and also have their own lodgings, camp sites, etc. So they are able to attract revenue from clients not just for the adventure services, but also have a revenue stream from their hospitality services. Plus, they have gotten into parnerships with some major names and travel agents that will provide them an exclusive traffic of people booking through their sites (this happened recently). So, in other words, ther growth is coming from all the exclusive channels of tourism traffic I would say, and probably set to increase as well. Plus, a lot of aggresive marketing is being done as well.
Hope that answered your question. I can clarify further if needed.
Try Pratt’s Stats for transaction multiples for companies of this size. Generally, 15-20% discount rate for normalized growth is reasonable. If you’re projecting accelerating growth, a higher required return may apply.