The value of pet food employees

In determining the valuation of a pet food company for a potential sale, don’t forget non-tangible assets, especially the people.

Part two of a series: The exit from Feed Your Pet Inc.

JoeZweiful, chairman of the board of directors, and Justin Case, chief commercial officer, meet to discuss what they have put on paper about the possible divestment of Feed Your Pet Inc. (FYP). According to Joe, indications are that the vast majority of the shareholders representing a vast majority of the votes lean toward selling. They assume the sale will be decided shortly and prepare for a presentation of their recommendations to the shareholders.


Joe: We’re facing challenging times, preparing the sale of the company that I always have regarded as my home and as my baby. That doesn’t make it easy to look at things from a distance.

Justin: Of course, my tenure with the company is much shorter, but I think I understand your feelings. It’s like seeing your children leave home when they have reached the age to fly out.  I am sure it will leave me with a sense of emptiness. Therefore, I think it is best to leave the valuation of the company to an outside expert who is experienced in our industry. That at least ensures the ideas about the selling price are not biased by our emotions.


Joe:  Excellent thought. I remember a time when an extremely well-performing pet food company was sold at a multiple of around 20 times EBITDA (earnings before interest, taxes, depreciation and amortization). That multiple all of a sudden seemed to become the norm in the industry, at least in the mind of selling owners who had difficulties in controlling their emotions. Needless to say that hardly any of them achieved this level of multiple. You said it before: if you dream, dream big. But let it not get out of proportion. We must also make sure that the non-quantifiables are taken into account when the valuation is talked through with the expert.

Justin: That’s a prerequisite. You know what I always say: our people are the biggest asset that we have and they don’t show on our balance sheet. We have a bunch of enthusiastic and committed people working for us. That has a value that we must emphasize when negotiating the sale.


Joe: There is another one that is of course difficult to quantify, as you rightly pointed out in your note:  how far can our brands be stretched and their image and positioning be capitalized on? You and I see a huge potential ahead of us and we can explain why, but how compelling is that story for possible buyers? We must make clear that this potential is there whether or not the company is sold. In other words, it is not dependent on the synergies that the buyer may bring. And anyhow, a sensible buyer will not easily be prepared to pay for the synergies that he brings. That’s like being offered a cigar from your own humidor.

Justin: Let’s go back one step, our people being our assets. I think they deserve a fair reward for bringing the company where it is today.


Joe: I actually have given this quite some thought, but couldn’t come up with a way to make things attractive on the one hand and not go over the top about it on the other. Do you have any ideas about this?

Justin: I do. First of all, all the associates need to have this reward; I mean, it’s not only for the upper echelon. And then I see a mix of tenure and current salary as the basis for the reward. For example, a one-year tenure gives 10% of the annual salary, five years gives 50% of the annual salary, etc. Is that fair, do you think? And another question is, can this be done without the people having to pay income or whatever other tax? Personally I think that would mean a great deal to them.


Joe: I like the simplicity of your reward system. When presenting this to the shareholders, we must have a reasonable estimate of the amount of money that would be involved. I will find a way to get some relevant figures, without giving away for which reasons I need these.

Justin:  On the business side, there is a recommendation that we also need to give to the shareholders: continue business as usual. Sometimes sellers have the feeling that by cutting costs in marketing and promotion, they boost the bottom line. That may be so, but buyers of the caliber we will be looking for will see through this immediately.


Joe: Fine. I think that we have covered the essential points for our presentation to the shareholders. They must leave the meeting room with the feeling of being taken into account, that their best interests will be represented and that we are also thinking about the continuity of the company, at least as far as the people are concerned. That means also the two of us. Do you have any idea what you want to do when the company is sold? I have, but I will not tell you because I do not wish to influence your thoughts.

Justin: Have no worries about that. For me it largely depends who buys. Is it a company where I can deploy my entrepreneurial spirit and have fun, or a conglomerate where I will be boxed in by neatly defined marching orders? Anyhow, let’s work on getting the presentation ready and worry about our own future later. I can be ready in a few days if that is necessary. Let me know when you can have the meeting with the shareholders.

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