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Nantucket Nectars Case Study

Historical financials (pg. 2 top, exhibit 2). This usually refers to income statements from the current year going back at least 5 years. They are used to tell a story, usually in the case of an IPO, of great growth and a rosy future.

Valuations (pg. 2 top, exhibit 3). In this reference,  Valuation(s) refer(s) to the worth or price of all the stock of a company. It is usually based on a multipleof one of the following: gross sales( usually used for an established company when to do so is the norm in an industry);  projected sales (this is usually used for a start up that has no sales yet) or net income. In many respects this is the same as the discussion of P/E, provided the company has earnings. In new companies, the rate of growth might be much higher than for established companies whose products are further along the product life cycle. In the case of the former, the seller would want to use a higher multiple or multiplier to determine value.

Undercapitalized (pg. 2 middle). To be undercapitalized is the opposite of well-financed or well capitalized. The effect of undercapitalizationis to experience cash flow problems, (ie. not having enough money to meet the payroll) lack money to buy new equipment or advertise, etc. Cash flow refers to the net income available in a company after adding back non cash items such as depreciation. Companies will do a projection of cash flow monthly or more often to determine if they have enough cash on hand to pay the bills. Companies will arrange lines of creditwith their banks to smooth out their cash flow which can be affected by an imbalance in receivables (monies to be received from purchasers of a company�s goods or services) versus payables (monies owed others by the company for materials or services rendered).

�600,000 in exchange for 50% of the company� (pg.2 bottom). This would imply a valuation of 1,200,000 for the whole company.

Slotting charges (pg.3 bottom). Manufacturers often pay food stores fees to obtain shelf space. This takes place first because 1 or 2 manufacturers were originally willing to pay it, and second because there is more competition than actually shelf space.

Compound annual growth rate (pg. 5 Table A). The compound or compounded annual growth rateis an often used form of measurement of growth for a variety of items, ie. sales or return on investment, etc. It is a higher measure than simple growth. For example, a growth rate of 15% per annum, not compounded, for 5 years yields a total growth of 75%. Selling 100 cases of juice in year one, grown 75% after 5 years equals 175 cases sold in the 5th year. In a compounded scenario, a 15% annual compounded growth rate would yield approximately 200 cases sold in year five.

CAGR (pg.7 Table C). This acronym stands for Compounded annual growth rate.

�selling Snapple to Triarc for 300 million.� (Pg. 9 top).  This means that Quaker Oats took a loss of 1.4 Billion dollars. The 300 million was not on top of what Quaker had paid for it.

�Egan�had aggregated 55% of the company due to follow on investments which permitted early operating losses� (pg. 9 middle). This means that Egan�s 50% had increased so that he now owned 55% as a result of putting up additional money to cover additional operating costs during periods the company did not have a positive cash flow, i.e. make money.

�Deserved a premium for the brand� (pg.10 top). A premiumfor the brand (in this case brand means company) would mean using a higher multiple than would be used in other companies in the business in valuing the business.

Proformas(pg. 10 middle). A proforma is an estimate or projection of future income and expenses. Companies also produce cash flow proformas or projections.  An estimate of valuation would usually be called an appraisal. Appraisals performed by licensed and certified appraisers usually take into account several methods of valuation. The case refers to three methods that the founders wished to use which are also two of the three methods appraisers use: discounted cash flow (also known as the income approach); comparable acquisitions (also referred to as comparables, or comparable valuations), and trading (in this case another form of comparablesin which stock price and multiples are compared against similar companies)The third method appraisers use is called the replacement cost method. This refers to what it would cost to replace the systems, equipment and operational start up costs to equal the current operating company. In real estate, it is the replacement cost of the structure including land acquisition and all associated costs to do so.

�the difficult question is, how do we figure out what the value of Nantucket Nectars is to someone else� (page 10 middle).  Achieving the highest valuationfor a company (the enterprise value-see exhibit 11 pg. 20) starts with presenting the historical financial statements of a company (exhibit 13, pgs. 22-26), then using the best examples of a high valuation process for similar companies through their IPO�s or selling price. It continues with a convincing projection of its future growth rate using plausible financial assumptions(items such as rates of growth, discount rates, and sales� multiples).

Tom Scott and Tom First were entrepreneurs and for about 9 years worked tirelessly performing many of the core operational activities required to manage their company. When the time came for them to decide on how to grow their company, my decision to negotiate an agreement to sell all or a portion of the company stock would have been based on 1) raise capital to support the business’s strategic plan, 2) align new management to perform day-to-day operational and administrative tasks, and 3) pay me a substantial amount of cash so I can pursue other ventures.

Nantucket Nectar’s revenue was a growing rapidly and the brand was receiving well deserved recognition and publicity. And the company’s strategy and dedication to high quality was proving to align well, and was timed well, to the healthy trend of newly emerging beverage industry. However the company’s cost for premium ingredients and operating expenses were very expensive and was leaving the business with net losses during the first 8 years.

Considering the company was receiving unsolicited acquisition interests from several well established beverage companies, many of whom had established supply chain and distribution networks, it would have been a good time to receive premium pricing for shares in the company boost the company’s growth strategy. If I was Tom or Tom with a vote to decide which direction the company should go I would have chosen to sell a portion, or all, of the company to one of the beverage companies like Ocean Spray or Seagram. The purpose of this sale would be raise capital to support the business plan and growth strategy of the company, plus free me from the day-to-day operational activities and allow me to pursue other ventures.