Firstly, you will need some investment
If you have an ambition to build a national/international FMCG brand and exit in approx 5 years, you need to invest ahead of the curve to land-grab distribution and drive brand awareness. (BTW, everyone starts off thinking 5 years and often end up selling (if ever) about 10 years in. I did… twice!)
You will certainly need more cash to effect this investment than your business is likely to throw off - especially in the early years. Therefore, you will need to raise funds. Definitely bootstrap initially, right up to when you've got your product tested, target consumer properly understood and your marketing playbook figured out. Then raise funds to accelerate growth with your exit firmly in sight.
Your growth trajectory can be significantly accelerated by "smart money" in the form of value-added input and contact leveraging. An industry-relevant accelerator is one good way to achieve this, but beware, try and find one which is driven by entrepreneurs, they will know your mind and be able to relate to your challenges better. Symbiosis between shareholder (or accelerator) and entrepreneur can be an effective way to drive growth and result in a mutually beneficial exit. One important point; make sure you achieve alignment with your (main) shareholders re your exit plan.
Once you have a plan, how do you maximise exit value?
Get help – engage with one of the specialised corporate advisers in the Food & Beverage space. You wouldn’t try to sell your own house yourself so don’t sell an even more valuable asset – your company – without professional help.
Build your business in the context of what a likely suitor will want to see (whether a trade sale or to private equity).
It’s all about growth
The standard rule of thumb is that a business needs to have reached revenues of £8.0M - £10.0M to be interesting to a potential trade buyer. However, this is only a rule of thumb and there are good examples (especially over the last 2-3 years) where Big Food has looked with interest at businesses below £10.0M. However, to attract interest, at any revenue, you need high growth.
What sort of growth?
Revenue growth is the most important of all. Above 50% YOY is a golden benchmark (and as a result, the exit multiple is more likely to be > 2.0 x Revenue)
But gross profit should really be > 30% (or this is clearly demonstrable in short order). Average rate of sale needs to be increasing too and ideally in the top quartile of your category. This can be tricky if you are growing distribution and adding lots of new (potentially less-optimal) stores. (Note: Low rate of sale (RoS) and revenue growth based on distribution alone is a red flag.)
What about innovation?
Strong new product development (NPD) which moves quickly into RoS growth (and doesn’t cannibalise from existing SKUs) is good. NPD that fails is worse than not doing any, as it can undermine confidence and may result in retailer buyers questioning every new product you subsequently release. So, be selective and be as sure as possible it is going to work. A trade buyer will likely be more interested if you are doing a specific range very well and are smashing it out of the park, vs doing 5 things reasonably well and they are all growing at an average pace.
Do I expand overseas?
Almost always, it is better to choose one overseas territory and execute well in this market rather than spreading broadly over a few separate (and, worse, strategically disconnected) markets. Success in one market demonstrates an understanding of that market and development of a “marketing playbook” to successfully drive trial, brand awareness and grow RoS.
Being meaningful in one international market (e.g. £1.0M) is better than being irrelevant (e.g. £100K revenue p.a.) in 10. The later only demonstrates that you can flog stuff to distributors. The former demonstrates that your brand actually has the capability to engage both consumers and retailers. A trade buyer will only give you credit for (and therefore include in the price) international reach if you are present in a meaningful way.
Multiple of revenue or of EBITDA?
Basically, just focus on revenue. If you really want to sell in 5 years, a successful growth strategy is all about revenue growth. However, the business also needs to have a healthy gross margin (see above).
If you sell the business in Year 5+ no buyer will care what your EBITDA was in years 1 to 3. You won’t get any credit for making £250K EBITDA in Yr 2 of your existence. And you don’t need to. However, you will receive lots of credit (and it will be reflected in the price) for having higher revenue at exit. Therefore invest (wisely) in initiatives which will deliver revenue growth.
Second-guessing what a suitor might want…
Some trade buyers will prefer A, some will prefer B. Don’t however, chose A over B based on what a potential suitor might prefer. Choose it because it is right for the business. Ideally, whatever you do, if you can do it better, cheaper or in a more innovative way to the competition, that will provide a USP/ competitive edge. When the time is right, the suitors will ultimately take care of themselves.