Southwest Ventures is considering an investment in an Austin,

Texas-based startup firm called Creed and Company. Creed and Company is in-

volved in organic gardening and has developed a complete line of organic products

for sale to the public that ranges from composted soils to organic pesticides. The com-

pany has been around for almost twenty years and has developed a very good repu-

tation in the Austin business community, as well as with the many organic gardeners

who live in the area.

Last year, Creed generated earnings before interest, taxes, and depreciation

(EBITDA) of $4 million. The company needs to raise $5.8 million to finance the

acquisition of a similar company called Organic and More that operates in both

the Houston and Dallas markets. The acquisition would make it possible for Creed

to market its private-label products to a much broader customer base in the major

metropolitan areas of Texas. Moreover, Organic and More earned EBITDA of

$1 million in 2015.

The owners of Creed view the acquisition and its funding as a critical element of

their business strategy, but they are concerned about how much of the company they

will have to give up to a venture capitalist in order to raise the needed funds. Creed

hired an experienced financial consultant, whom they trust, to evaluate the prospects of

raising the needed funds. The consultant estimated that the company would be valued

at a multiple of five times EBITDA in five years and that Creed would grow the com-

bined EBITDAs of the two companies at a rate of 20% per year over the next five years

if the acquisition of Organic and More is completed.

Neither Creed nor its acquisition target, Organic and More, uses debt financing at

present. However, the VC has offered to provide the acquisition financing in the form

of convertible debt that pays interest at a rate of 8% per year and is due and payable in

five years.

a. What enterprise value do you estimate for Creed (including the planned acquisi-

tion) in five years?