What Is Valuation?

As stated earlier, a valuation is the monetary value placed on an asset or enterprise. The brand founder and other parties decide it when pursuing a transaction involving the exchange of capital and/or ownership. Brand founders also typically calculate a valuation prior to pitching their companies to investors or acquirers. There’s no definitively correct valuation figure. Coming up with it is part art and part science.

Personal care giant Church & Dwight has revealed it’s acquiring TheraBreath for $580 million. How did the parties establish that price? Understanding the answer to that question is critical to understanding the valuation process.

Valuation Drivers

Qualitative and quantitative considerations drive valuation. The relative importance of qualitative and quantitative considerations shift depending on the stage of the company.

TheraBreath has been on the market for almost 20 years, providing it a lengthy track record of quantitative data such as historic sales performance, margins and repeat customer rates. Therefore, quantitative factors were likely central considerations for the valuation. TheraBreath’s net sales for the trailing 12 months ended Sept. 30 were $86 million, and its earnings before interest, taxes, depreciation and amortization or EBITDA for the period were roughly $27 million, with a 31% EBITDA margin.

In 2022, TheraBreath’s annual net sales are expected to grow around 15% to $100 million, while adjusted EBITDA is expected to be $36 million. Though TheraBreath is widely available in North America though Target, Walmart, CVS and Amazon, international business represents less than 10% of the brand’s net sales. Church & Dwight expects to expand TheraBreath’s distribution internationally.

On the qualitative side, characteristics like potential, internal talent and a brand’s “it” factor play roles. TheraBreath is a hit with younger consumers. The brand may not have the patina of cool direct-to-consumer oral care brands like Quip or Floe. Still, it’s become a sensation on TikTok, partnering with influencers and showing up in thousands of shopping haul and review videos. TheraBreath’s hashtag has 66.4 million views. The brand is appealing to Church & Dwight because it rounds out its thriving oral care portfolio, which includes leading brands Arm & Hammer, Oragel and Waterpik.

Valuation Approaches

There are two main approaches to valuation: the multiple method approach and the discounted cash flow (DCF) approach. The multiple method is by far the most popular, especially for valuations of early-stage companies. With the multiple method, a benchmark is applied to key financial variables. It’s broadly applicable to companies at different stages. The DCF method assigns today’s value to future free cash flows. The method is applicable only to companies with historic financial information and a steady outlook.

The quantitative and qualitative factors outlined in the previous section contributed to TheraBreath’s $580 million price. The acquisition contains the benefit of a cash tax shield valued at $85 million. Minus the tax shield, the deal is priced at $495 million, making it an impressive 13.7X multiple based on the 2022 EBITDA of $36 million. For founders aiming for deals, knowing which valuation drivers at what points are most relevant to their brands is crucial. They should focus on identifying and improving on them.

Benchmarks or Comps

For pre-launch or early-stage brands, seed or series A rounds, looking to recent deals in a sector can inform valuation. Of course, multiples used in deals where companies have generated tens of millions in revenues should be heavily discounted as comps for a very early-stage brand. Comparators or comps will always be imperfect. Expect benchmarks to be challenged. The chart below outlines recent beauty/personal care acquisition deals in which the valuation used was publicly available or estimated by industry experts.

Early-stage investors caution founders not to inflate valuations, particularly in seed rounds. On a recent Beauty Independent In Conversation webinar, Odile Roujol, founder of FAB Ventures, a venture capital firm with gen Z skincare brand Bubble, gender barrier-busting skin specialist Good Light and sexual wellness marketplace Bloomi in its portfolio, says, “I’ve seen some founders in the seed stage become obsessed with the valuation number. It’s not good for the next round, which will be the most important one to build a company.”

The goal is to leave enough room in the valuation to have a series A round be attractive to investors. Lately, that goal has encountered market pressures that can lead to valuation spikes. Pat Robinson, managing director at consumer brand investment fund CircleUp Growth Partners, says he’s seen “billion-dollar-plus funds that are used to investing hundreds of millions are now coming down and looking at a company in the low tens of millions and doing a historical growth round.”

He advises founders enamored by pushing up the price in a seed round to think through what that means for performance in the long term. He warns, “You’re going to have to perform really, really high to not only just clear that to raise the next round, but also to just keep growing a successful brand.” Ultimately, the best way to achieve agreement on a valuation is for founders to seek out investors who share their vision and strategy for their brands.

Other Considerations

The valuation process is often influenced by industry trends. In a crowded market, Ashleigh Barker, Director at independent investment banking firm Michel Dyens & Co. says that investors are always looking for a brand that’s truly differentiated. Aspects that investors are now focused on include product formulation, especially those backed by real science, and winning distribution strategies. She details that “DTC is still essential. Brands need to demonstrate their ability to effectively capture the digital customer without spending a ton of cash, and from there, how are they retaining that customer, especially in categories such as ingestible wellness and skincare where there are often high replenishment rates.” Gross profit margin, which is sales minus your COGS or costs of goods sold, is something Barker has seen investors zero in on now that many brands launch direct-to-consumer with plans to enter retail in the future. Can a brand’s margins survive its expansion to omnichannel? “If you’re a digitally native brand, you’re able to keep all of the profit when you sell to your customers,” she explains. “Once you sell to retailers, from Sephora to your local beauty store, they are going to take up to 60% of that sale, diluting the gross profit margin you once had, yet they are also key for growth when done right.”

Barker advises founders to focus on their profit margins from day one, and believes many founders spend more money than they need to early on. She says, “You don’t want low quality ingredients. You don’t want low quality packaging. There is a balance to grab the consumer’s attention and still earn their trust in a credible way. It’s better to start with something that is financially sustainable so when investors do come in, there is ample room for growth; from entering new distribution channels which will impact gross margin, to investing in quality ingredients and packaging and everything else in between that will create a winning business.”