THE CASE:

The examination revolves around a company specialising in label production, which faced investor scepticism amidst a technologically dominated era around $2016.$

The company$$s robust stability and lucrative financial position, especially within the Basque region, where it is recognised as a market leader.

It consistently generates a minimum of $5$M in cash annually, showcasing its potent financial health.

Observation about the company:

$$ Extremely stable

$$ It hadn$$t grown

$$ Making a lot of cash

$$ Market leader in the Basque country

$$ It was generating no less than $5$M cash every year.

Critical Insights:

The company exhibits remarkable stability, albeit without significant growth.

It retains a dominant market position in the Basque country, generating substantial cash flows of at least $5$M yearly.

The venture's valuation was initially pegged at $16$M by the sellers, prompting an assessment of potential growth avenues and strategic direction.

In the due diligence phase, a noteworthy discovery was the company's exceptional gross margin efficiency: for every euro in sales, it recoups $95\%$ as gross income. After accounting for an EBITDA margin between $40-60\%$ and acknowledging a debt$-$free status for a year, the company's cash reserve consistently stands at $5$M$,$ translating to $350$K monthly, with a cash conversion rate of $90-95\%.$ This financial model is indicative of a replicable success blueprint across diverse markets.

Growth Strategy Dilemma:

The critical decision lies between fostering organic growth and pursuing acquisitions, with the latter recognized for its higher costs but greater efficacy in rapid expansion.

Adhering to a principle of minimising acquisition costs is crucial, considering the probable allocation of substantial funds towards acquisitions or capital expenditures.

Regarding acquisitions:

The strategy extends beyond mere financial investment to include assimilating new teams, ideas, growth potentials, and leveraging leveraged buyouts $($LBOs$),$ emphasizing a holistic consideration of operational needs.

Entrepreneurs typically underestimate the required capital, often needing triple the initially estimated amount to cover comprehensive operational expanses.

Financial Analysis:

If a $16$M investment is deemed insufficient for growth, an estimated $20$M might be necessary. Calculating the purchase price as $20$M divided by $1\mathrm{.}8$ yields an acquisition cost of $11\mathrm{.}1$M$,$ which, when evaluated against the conventional $8-14$ EBITDA multiple rule, appears costly$.$

The pivotal question becomes the feasible EBITDA growth needed to justify an $11-$times multiplier, with acquisitions highlighted as a primary mechanism for achieving such expansion.

Our analysis serve to unravel the intricate dynamics between acquisition pricing, operational investment strategies, and the strategic imperatives required to augment the company's value in a fiercely competitive industry landscape.

How much money does the company need? We need an acquisition price, the purchase price which is $16$M

If we need to grow the company. With $16$M$,$ is that enough?

Probably not enough... if the company is making $5$M every year, maybe we don$$t need it$.$

Worst case estimations: we might need another $4$M to amount to $20$M

Worst case scenario, nobody gives us that so we put everything in equity in capital.

If we divide the $20$M by the EBITDA of the company $(1\mathrm{.}8$M$)$

The multiple of acquisition would be $11\mathrm{.}1$

How do I need to grow the EBITDA from $1\mathrm{.}8$ to make my $3$ times money

$20$M multiply by $3=60$M

I need to grow my company no less than $8$M EBITDA in order to be paid the same multiple.

That means $11\mathrm{.}1$ multiplied by $8$

$=88\mathrm{.}8$

So $88\mathrm{.}8$ divided by $20$M that I have put is $4$ times!!

I need to grow the company no less than $8$M EBITDA in order to recover my $34$ times my money.

Is it likely that I can do that?

Difficult but not impossible.

The $8$M is an assumption that we made.

What is my investment criteria?

The multiple that I need to make cash on cash to my investors

For every Euro that I invest, I need to make $3/4$ euros back

This is rule that is self$-$imposed because we are taking a huge risk so we have to give a great return to our investors in order to be worth it$.$

If I pay expensive: $11,$ that would mean that we would need to grow organically very fast and well and in exponential way to grow and be paid no less than $11$ times to have my $3/4$ times my money.

That determines how we are going to grow.

Is it likely with our small company that we will grow my company $8$M

In order to make $8$M EBITDA, we need to make no less than $13$

Between $20-30$ double digit.

Things that must be taken into consideration:

HOW DO WE GROW THE COMPANY?

Sometimes companies make huge amounts of money but they don$$t necessarily grow

What are the challenges that I may have In the company in order to grow it and to make $3-4$ times my money?

Sometimes companies make huge amounts of money but they don$$t necessarily grow