Tom Scott and Tom First founded Nantucket Nectars in 1990 as a small side-business on Nantucket’s Straight Wharf. A peach fruit juice drink that Tom First discovered while visiting Spain inspired him and his partner to embark upon the journey of building their juice company. After only six years, the two entrepreneurs built a business that was generating $29,493,000 per year in revenue and $969,000 in EBITDA. With remarkable success came exciting opportunities, as well as challenging decisions.
Specifically, Tom and Tom were faced with the dilemma of taking the company down one of three roads including: taking the company public via IPO, selling the business, or continuing to grow and run the business independently. Tantamount to these decisions, the founders had additional questions on their minds — How should the company be valued? How could they ensure price maximization? How would the negotiations be handled? Could they engage potential buyers without existing employees find out? At the end of the day, the decision was more personal than anything.
It’s never easy for an Entrepreneur to rationalize “selling out” after they’ve spent so much time building and developing their baby. Nevertheless, it’s often the best decision. In this paper I will explore the Pros and Cons of selling Nantucket Nectar, along with how to determine an appropriate value for the company. The first option to be explored was remaining independent. One of their concerns was management involvement of any potential strategic partner, or buyer. Tom and Tom wanted to run the company, if possible.
If they remained independent then they would still be the autonomous owners of Nantucket Nectars and they wouldn’t have to worry about listening to anybody else telling them how to operate, or grow the company. Also, a benefit of remaining independent was the preservation of the company’s brand which was built upon two entrepreneurs, Tom and Tom. They used their story as part of the branding and the market enjoyed it. Selling out could create some negative public relations. Remaining independent was an opportunity to remain in control of their public image.
Independence isn’t entirely positive, though. A negative aspect of remaining independent would be the lack of distribution support — their growth capabilities would be limited. In contract, if they were to sell to a larger organization with robust infrastructure they could enlarge their footprint more rapidly. Another con of remaining independent would limit the founders from entering into new ventures that might be more appealing to their sense of entrepreneurialism. Remaining with Nantucket Nectars, to some, could be stifling. Regardless, it would certainly limit their ability to grow from within.
Capital was less readily available to Tom and Tom and the support of a larger scale investor could bring some immediate excitement. Another con of remaining independent is the insulation against catastrophic events, or litigation. As a small, independently owned business there is typically more risk involved from a litigation standpoint. Although companies are insured, the sheer expense of seeking legal counsel has a greater negative impact upon smaller businesses than larger conglomerates like Tropicana, or Pepsi, who have large departments of in house counsels.
The second option available to Nantucket Nectar is to sell the business. In reviewing their financial performance (see Exhibit 1), we notice that the business has had several years where they were profitable. Their EBTIDA was strong over the past two years (1995 & 1996), thus making them more marketable. From a seller’s perspective, this might be n favorable time to sell. Also, a benefit of selling is the immediate influx of cash that would be available as a result of the buyout. Tom and Tom would have financial independence which, for an entrepreneur, can be the greatest state of being.
This would afford them both an opportunity to regroup, reenergize, and focus on new business ventures. Many entrepreneurs enjoy the early “start-up” phases of the business cycle. Of course, selling a business has its drawbacks, as well. First, the buyer often requires that the management team from the acquisition target stay on board for a specific period of time and achieve certain key performance indicators before receiving the entire payout. Often, there is a lump sum delivered up front, and then incremental payouts upon achieving KPI’s. This could be
frustrating to Tom and Tom, as they would relinquish all of their independent decision-making powers and have to take the back seat as employees. Typically, this is not a comfortable position for entrepreneurs to take. Also, Tom and Tom built up a loyal and talented staff of employees at Nantucket Nectar. Acquisitions are typically driven by synergies and, as a result, certain employees could be terminated in pursuit of cost savings. Finally, Tom and Tom would have to deal with the fact that their company culture would be at risk. Often, the buyers culture engulfs that of the company being acquired.
The third option available to Tom and Tom is taking the company public, or an IPO (Initial Public Offering). The most obvious advantage of going public is that Nantucket Nectar would have an immediate influx of capital available due to the sale of its stock. With excess capital available, they could purchase assets for distribution and manufacturing, invest in advertising and marketing, and continue to fuel the expansion of the business. Going public also creates a type of currency in the form of its stock that Nantucket Nectar can use to make acquisitions.
In addition, they will likely have access to capital markets for future financing needs. As is typically the case, Nantucket Nectar’s debt-to-equity ratio will improve after the IPO, allowing them to obtain more favorable loan terms from lenders. Another benefit of going public is that Tom and Tom may be able to retain a certain degree of control. If they opted to sell common stock to venture capitalists to raise money rather than doing an IPO, the purchasers would probably require some decision-making authority. As entrepreneurs, Tom and Tom would have a hard time relinquishing decision making authority.
1 Initial public offerings have negative aspects, as well. First, going public is not inexpensive. Multiple areas of expertise are required to execute the process, including lawyers, accountants, and consultants. This could get expensive for Nantucket Nectar. Another disadvantage of going public is that public companies operate under close scrutiny. The prospectus reveals substantial information about the company including transactions with management, executive compensation and prior violations of securities laws.
This may be information the company would prefer to keep private. In my opinion, the most difficult thing for Tom and Tom to deal with would be the decision-making process. From the case study, we see that they are informal, salt-of-the-earth individuals. Taking the company public would mean that they would have to become more formal and less flexible due to the shareholders. They would no longer have complete control of the company. They would have to share in the decision making process2 VALUATION
As an adviser to Nantucket Nectar, there are several approaches that can be taken toward determining the worth of the business. Ultimately, the value of the business is whatever a buyer is willing to pay for it. From a negotiating standpoint, Tom and Tom need to determine what they believe is the value in order to set an expectation upon engaging in negotiations. Multiple companies are expressing interest due to the boom in the New Age beverage market and Nantucket Nectar’s competitive advantages. The first thing to understand when determining the value of a business is their brand equity.
Nantucket Nectar has a lot of value in the brand they’ve created and the value drivers, as determined by Tom and Tom, are listed in Exhibit 2. Nantucket Nectar created a fun and memorable story — the “juice guys” are unforgettable. The value drivers go beyond financial figures found on the P&L, balance sheet and cash flow statement. They are the intangible assets that management has built on their own — also referred to as Goodwill. Goodwill is seen as an intangible asset on the balance sheet because it is not a physical asset like buildings or equipment.
Goodwill typically reflects the value of intangible assets such as a strong brand name (ie Nantucket Nectars), good customer relations, good employee relations and any patents or proprietary technology. 3 These intangible assets can be the most important valuation drivers to consider when placing a value upon a business. I used several methods to determine the value of Nantucket Nectar. First, I utilized the Market Approach. The Market Approach is a multi-step process. In the initial step, we compute the average Price-Earnings (P-E) Ratio for as many similar businesses as possible.
Then, you multiply the average P-E Ratio by next year’s forecasted earnings. I used 26. 9x (see Exhibit 3) as the P-E Ratio and multiplied it times $2,234 (see Exhibit 4), which is Nantucket’s forecasted earnings for 1997. The value equals $60,094,600. This would be a good starting point for Tom and Tom to being their negotiations. The second method I used is the Capitalized Earnings Method which is the Net Earnings divided by the Rate of Return. However, I used the forecasted earnings for the upcoming year, $2,234,000.
I used a discount rate of 12% based upon the rates utilized in the Discounted Future Earnings model (see Exhibit 5). If we divide $2,234,000 by 12% it gives us a value of $18,616,667. More than likely, this is the number that an investment bank would place upon the business, as a starting point for negotiations. I also calculated the book value of Nantucket Nectar, and then integrated “goodwill” for the value drivers in Exhibit 2. The book value is $12,747,000, however I don’t believe the goodwill is correctly accounted for. This need to be reevaluated.
Nantucket Nectar would be selling their business, on a large part, due to their intangible brand value. This could justify a 2x or 3x multiple times book value, to arrive at an adjusted book value rate. My recommendation to Tom and Tom would be to sell their business and use the Market Rate approach towards determining the value. I think this is a fair way to view the business because it helps to frame the perspective in a similar light to other companies who have follow a similar course within the same business segment. I would not advocate an IPO due to the scrutiny the shareholders will place upon the business.
I believe selling the business presents an ideal scenario because they could negotiation the level of involvement they want in the future while, at the same time, they would have enough cash to pursue other entrepreneurial ventures. Exhibit 2 — Value Drivers (determined by founders) Great product: great tasting, all natural product Ability to exploit small, rapidly changing market opportunities Current Management Team A more appealing story than any other juice beverage company (great material for a company with a large marketing budget and more distribution power) Value of the brand: quirky, eccentric and memorable
A stabilizing cost structure Geographic expansion capabilities: current sales base and future sales base Access to the