Market Transaction: Business Valuation
Food and Beverage Packaging Company
123 Main Street
Anytown, USA
The subject company manufactures flat and stand-up pouches and provides packaging services for the food and beverage industry.
Demand for food and beverage pouches in the United States is projected to grow at a reasonably strong pace of 5.9% per year through 2011 to $6.9 billion in revenues. This relatively recent addition to food and beverage packaging products allows manufacturers to promote new products and boost sales for more mature lines. As a result of features like excellent visual appeal, product differentiation ability, increased portability, re-closeability and freshness protection capability, the market for stand-up pouches has expanded rapidly. We have also seen healthy gains in the demand for flat pouches in a variety of applications. Increased production can be attributed to faster line speeds, the addition of features such as spouts and/or zippers, enhanced retortability, and microwaveability of the product.
One factor that may slow demand is the unwillingness of food manufacturers to invest in the capital-intensive equipment required to produce the pouch packaging. However, this same hesitancy to invest may result in an increased demand for the packaging company's business. As demand for pouches rises, manufacturers may contract with the subject company to produce pouches instead of producing them in-house. It appears that the subject company is positioned to maintain and grow revenues in the next several years despite the fact that a slowing economy may limit growth in excess of the industry.
This transaction involved a privately held contract packaging company which was acquired by a group of investors within the industry. The acquisition included existing management. Presented below are the salient details of the transaction. As can be seen, the acquisition target had revenues of roughly $9.6 million and earnings before interest, taxes, and depreciation of approximately 14% to revenues. The subject company has been operating for approximately fifteen years. Its customer base included two internationally known food and beverage companies which constituted over half of its business.
Most of the value paid for the acquired company was allocated to the tangible assets of the company including production equipment, working capital and real estate. The deal value stated below includes all types of invested capital. There was some goodwill or intangible component of the deal value implied in the total. Potential intangible assets of the subject company included the existing trained workforce, brand equity, existing customer base, proprietary knowledge and processes, as well as some trademarks. As illustrated below, the acquired company's performance includes a recent softening of business over the prior year due in part to the cyclical nature of its downstream consumer products.
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