Espresso: How To Actually Exit Your Food & Drink Brand for Millions - Giles Brook, innocent, Vita Coco

0:03Getting to an exit is very, very difficult. If I just take a step back, actually, I think my general advice to most startup stroke founders is, particularly in the early days, people seem to start thinking and worrying and get distracted by exit far too early. And actually, it's one of those things, if you concentrate on building the brand, the

0:25Giles Brook:business and the financials associated with the business wrong to say an exit take care of itself but the probability you're getting successful like exit will be strong if you focus on building the business now of course as part of building the business you need to also understand what constitutes and what represents you giving you the best chance to get a successful exit so that's definitely that's the first thing i'd say but just quickly those principles are sort of brand, brand, financial. Yeah, so we could have a long one on this today, but let's go through it all because I think it's really important to understand, right?

0:58So the world has changed as well. So the first thing I'll say every time is everybody just obsesses about their P &L, which is correct, right? So everybody wants to look for strong revenue growth. And you talk about compounded annual growth rates, so KGARs, and typically as a startup brand, you're going to want KGAR growth over a three year or five year.

1:18Giles Brook:Sorry, I'm going to be a three-year-old today. That's really dumb questions. Say that. Right, so this thing called CAGAR, which is compounded annual growth rate. Yep. All that does is that takes your growth rate, your average growth rate, over whatever period of time you want to select. So it could be a two-year, three-year, five-year. Three-year is probably atypical. So it will say that, look, typically, if you're growing at single digit over a three-year compounded annual growth rate, it's probably not attractive. but as a startup anything between kind of late teens up to a 60 growth rate on a compounded basis excites prospective buyers so i think the first thing to say on the p and l is obviously the revenue growth but if you're looking at me particularly when i invest in businesses today the number one metric i will look at on every single prospective um you know kind of investment document which they call again terminology information memorandum which is called an im yeah i learned that the other day the iron

2:19business disease be simple we can get onto that as well but that's another thing but the first thing i look at is gross margin rate okay because effectively the might you need to set up your value chain on your business that you're making a good gross margin and the reason why that's so important and just explain what gross margin is and again i'll keep it simple it's typically and again the big problem we have as well is that people are manipulating their definitions of gross margin rate because they're trying to hide some costs which should be in gross margin but they'll drop it elsewhere in the p &l right investors have wised up to that right there is only one definition of gross margin on traditional food and drink business i'll talk a little bit on d to c in a second but effectively gross margin is if you take your invoice price that you sell to your customer at if you take away promotional discounts okay which that gives your net revenue which then is that after you take away your promotional costs that That is what you call your turnover, and that is what you report to HMRC.

3:14You take away from there your cost of goods, what it costs you to make it, plus also your logistics, what it costs you to ship it to the customer. That then gives you your gross margin. There's also something called trade investments. For example, if you got a gondola end and paid Sainsbury's£10 ,000 for that gondola end, that needs to come into it. But that's what you typically call gross margin. The only slight difference is there's another thing, whether you call it gross margin 1, 2, 3, all various gross customers, is that when you've got a e-commerce or a D2C business or a business that is a hybrid channel, you also need to look at acquisition costs for consumers there because people can be spending between 10 % to 30 % of revenue getting consumers in.

3:57And that acquisition cost has to come in as well. So people need to look at that.

4:00Giles Brook:So a lot of people, they can sort of shove it under the carpet. It'll be dropped. It'll be hidden under gross margin in something like marketing or something like that, right? And I think it's really important that it's a clean definition. but just to give you an idea and so the number one thing i look at is gross margin right yep and i i kind of have a gold silver and bronze view that anything that starts with 30 i say is bronze anything that starts with a 40 is silver anything gets towards 50 i call gold okay and that's where you get excited because the problem is is that and again i you know i do feel for a lot of a lot of startups because you know had a huge amount of inflation the last few years the majority of challenge of brands of not being able to pass on the same level of inflation through to the retailers as the corporate guys, because either their brand isn't strong enough to put that inflation through to maintain the consumer demand, or else they've just not had, you know, the strength of business to be able to push it through as, you know, as much as some of the corporates have, you know, with the retailers.

4:59So the reason why the gross margin is so important is that if you don't make enough money at gross margin level, you don't have enough to invest in marketing, in people and in your overheads. And within overheads, you've got things like your processes and systems and all that. And the problem is you just continue running out of cash because if you're turning over 10 million pounds as a business, but you're making a 40 % gross margin, you've got 4 million then to deploy on the rest of the P &L. But if you're turning over 10 million, but you're only a 20 % gross margin business, you've only got 2 million then to deploy on the rest of the P &L.

5:33So you need to be making a strong gross margin business to generate cash for the business as part of the working capital cycle, but also to be able to deploy it and invest in the brand and in the business. And then the final thing, just before I kind of come off the P &L thing, is that the world has also changed when you're looking at exits, okay? So I would say when we sold bare, 70 % or 80 % of prospective buyers, we were talking about a revenue multiple alongside an EBITDA multiple.

6:06Giles Brook:If you go out and - just to find those quick yeah sorry i should have done that no no i'll be the baby here no no no sorry sorry so obviously the revenue multiple hopefully is quite explanatory so if you're turning over 20 million and somebody wants to pay is willing to pay you two and a half times revenue and by the way i'm saying two and a half times typically people will take the last 12 months the last 12 months prevailing revenue is what the run rate is okay so if i if you're doing a 20 million 12 month run rate and you somebody offered you two and a half times that that mean effectively you'd be selling the business for 50 million yeah what's happened though now is that and for various reasons it's about you know people wanted to see a proper business it's also the cost of borrowing all stuff like that 90 of prospective buyers will only now value a business on an EBITDA multiple because they're not prepared to buy or pay a high multiple against revenue for businesses is just hemorrhaging cash and losing money.

7:04They need to bring a business in that they feel can immediately start contributing to the wider group of what they're doing. And it's not surprising because a lot of the businesses that obviously are looking to acquire are listed. They have shareholders. They have courtly earnings that they've got to update with. And if they're bringing something in, it's got to very quickly step up and be able to contribute to the central group. So the big change is now, and one thing I'm talking to, because I've got just under 20 businesses now that I invest in myself, right? that's my portfolio one of the biggest messages i can give everybody is that you really need to start becoming what i call a proper business earlier than you would have done three five years ago if you want to get a successful exit you need to think about how you can become ebit dar positive and just to explain ebit dar right so ebit dar is earnings before interest tax amortization okay and that's effectively your net profit at the bottom so once you've taken your gross margin which we defined earlier you take your marketing costs off you take your people costs off you take your overheads off okay that's then the EBITDA right and typically you know again just to give people just a benchmark is that if I do bronze silver gold I'd say bronze is five percent EBITDA and above silver is 10 percent EBITDA and above gold is 15 percent EBITDA and above but the other thing that's really important what a lot of people don't realize is that you know I can tell you now right now in the market today the if I just talk packaged goods the average exit multiple for a challenger brand is between 1.9 to 2.1 times revenue and the EBITDA multiple is about 12 times okay it feels like we're going into like an economics lesson here doesn't it yeah but let me just explain why it's important so let's just take that 20 that 20 million yeah which i mentioned earlier and let's just say we're going to get this time we're going to say we're going to get two times revenue which is about average which would mean the business is worth 40 million but let's say that 20 million business yeah is only making 5%.

8:58Okay. So that effectively means that they're making 1 million. If you wanted to get the 40 million, but you're only making 1 million, that means you've got to get 40 times multiple on the EBITDA. It's not going to happen. People are going to look at it and go, okay, in very exception, it might do for various reasons. But that's why I'm saying that you've got to almost look at the two because let's just take that example. On that 20 million, and let's say it's two times revenue, which is the 40 million. at EBITDA level, if you're making, you know, 10 % EBITDA, that means you need a 20 times multiple.

9:34That becomes more realistic if you've got a really strong and hot brand.

9:38Giles Brook:You said out of your portfolio of 20. You're still awake now, by the way. Yeah, yeah, yeah. Apologies. I know it's worth people listening back to this. Thank God we're doing this first thing in the morning, mate. This was the afternoon. You need that. Double maths is when I always used to fall asleep. You need that Cortado there, don't you? Yeah, yeah, yeah. Fucking three of these. no but it's super super valuable because as i said as even out there's hula hand loki is all these as i say it's like exit el dorado in this kind of opulent um park lane hotel but and you can see that's where the end goal is but it's and i suppose what i want to chat today about is how we reverse engineer what they need to focus on now the world's changed now it's not based off revenue multiples yeah we're gonna we're gonna be in a much more advantageous position if we go off EBITDA, how do you kind of do that?

10:23Giles Brook:Or are some brands so far down the revenue land that they're kind of fucked? You know what I mean? I think for people starting up or in early stages, make sure you set your value chain right in the first thing. So what I mean by that is that, you know, I see too many brands set up and go, okay, I'm only making 20 % today, but I think I can get to 40%. Typically, margin only goes one way, because particularly if you're dealing with the supermarkets, they want more. And as you grow, you have to kind of invest more and more, right? So I think if you're starting up today, try and set up the value chain of a business where you know straight away you can make 30%, 40 % margin back from whatever the consumer price, what margin you need to give the retailer down to then obviously what your cost of goods are.

11:01Try and set up a model where you know you can make 30%, 40 % today is the first thing I say. For those who are slightly further down the journey, people just think it's growth, growth, growth, right? It's not. Be careful. It's not growth at any cost. And my advice is today is, and I've had this conversation with numerous of my involvements the last few days, sorry, the last few weeks, is if you came to me today and said, look, we can have a compounded growth rate of 45%, but make 5 % EBITDA over the next three years. Or I could have 30 % or 35 % growth rate over the next three years, but make 10%.

11:35I'd want the latter. i'd rather because 30 35 growth is with a tempest ebit dar in my mind today is much stronger than a 40 45 growth to the 5 ebit dar because people you need to rebalance the p &l and it's really important that people you know that you know that people have a balanced p &l and the bit that people forget as well is that if you don't have a good gross margin in the starting place you're going to continually be fundraising and fundraising and fundraising you just run out of cash the whole

12:03Giles Brook:time that's that's that's a sort of that's a war of attrition yeah mind and the soul yeah yeah who've gone through that is it's just it's that's where the fun sort of gets squeezed out of you absolutely but but going back to advice you said to me look the top three things right the number one thing that i want to explain to everybody is there's something that's more important so i when i talk about revenue um gross margin ebitda that's let's just call that p &l stuff right it's that as we said at the beginning now that's financials finance yeah let's go into the number one thing is brand okay yeah and that's what people don't understand right is that i've known businesses that on paper look absolutely exceptional because the p &ls are unbelievable but if anybody's going to acquire you they will spend sometimes six figures i.e.

12:46more than 100 000 pounds on conducting audits of your business but more importantly of your brand so they will do brand health surveys they will use very strong consumer marketing agencies and stuff to look at the categories you operate in and to understand how strong your brand is in those categories what are some of the metrics on those health uh so it will be um advocacy will be in there loyalty um you know will be it be in there i mean again when you get more d2c it's about retention um it's an acquisition cost there's loads of different metrics but it's basically it's your it's kind of something called the net promoter score right yes it's in the consumer world is would you recommend that brand you know to one of your friends to buy people will look at that brand and you know give you an example if you look at something like in coffee for example there's been some really good startups that have done a really good job and got to good revenue numbers but actually when you look at the number of exits in coffee there's not been many one of the big reasons for that is people are looking at that and saying look i think you've done a great job but if i look at you against the likes of you know espresso illy etc i can't ever see how you're going to play against those guys because there's such strong brands in that category

13:57Giles Brook:thank you so much for listening to that espresso i hope you enjoyed your morning coffee and are ready for the day let's be having your boy and please do subscribe follow the podcast share this espresso on whatsapp if you liked it and also there's a link to our newsletter in the show description i spend 15 hours toiling and writing this bad boy it's full of wonderful wisdom from the biggest names in food and drink. You're not going to get these in a business book. So please subscribe and thank me later. Hi there guys. Thank you so much for listening as always. It means the absolute world to me.

14:34Giles Brook:I need a really big favor. Please, please, please just hit the subscribe button on Apple or Spotify or follow. Ultimately it helps all of us bigger guests equals better conversations equals hopefully better insights for you, which means you can scale hopefully faster with a little less stress as well. So please hit that subscribe button and yeah, enjoy this episode.