Provided by Mergermarket
Dave’s Gourmet, a San Francisco-based producer of hot sauces, has fielded approaches by business brokers representing larger suitors over the past year, said CEO Dave Hirschkop.
Though these offers were turned down because “it wasn’t the right time,” the CEO acknowledged that the company’s goal for a potential exit is to reach the USD 25m to USD 30m revenue milestone. It would consider bidder approaches prior to that goal, he added.
Dave’s has a recognizable brand among consumers with products sold at a higher price point. Therefore, Hirschkop said, the company envisions an exit that garners a premium multiple of 2x to 3x sales. In the long term, potential strategic suitors could be B&G Foods [NYSE:BGS] or Conagra Brands [NYSE:CAG], he added.
According to a 2014 Mergermarket article, the company expected to be generating between USD 15m and USD 25m in revenue by 2019. Its 2017 revenue, however, fell far short of that goal and the company has pivoted on its growth strategy. While Dave’s generated around USD 7m in 2015 and USD 8m in 2016, it took a hit the following year with only USD 6.5m, he noted. The weak 2017 numbers were the result of an unsuccessful investment in marketing initiatives spearheaded by its vice president of sales and marketing manager, both of whom were hired in 2016.
The plan “didn’t work out and it just absorbed most of our profits,” he said, noting both positions were eliminated earlier this year.
Dave’s, however, is projecting YE18 revenue of between USD 7m to USD 9m and 15% EBITDA margins, Hirschkop said. In 2019, while it aims to surpass USD 10m in revenue, it also projects a dip in margins, to 10%, due to expected reinvestment expenses.
“We know based upon new retail authorizations this year that our sales are on track to achieve our goals,” Hirschkop told Mergermarket this week, noting it is cash flow positive. Over the next two years, its growth strategy will focus on new product launches and transitioning from traditional to digital marketing initiatives.
Meanwhile, the company could begin seeking its first round of growth capital—up to USD 5m—next year, said the CEO. It would be receptive to approaches from investment bankers starting in 2Q19. “I think that’s the time we’ll start evaluating if we need money or not,” he explained.
The funds will help Dave’s boost its newly launched snacking line as well as its digital marketing efforts, he said.
Around 18 months ago, Dave’s launched a healthy snacking division, called Dave’s Naturals. Last year, the division—which will focus on plant-based snacks that are vegan, non-GMO and gluten-free—launched four flavors of “overnight oats,” featuring chia seeds and dried fruit. It plans to launch a line of vegetable-based snacks by the end of 2018.
Dave’s items are sold in about 6,000 retail outlets, which it aims to grow to 10,000 by 2020.
Also around 18 months ago, the company launched a line of “creamy hot sauces,” for which retail sales will be close to USD 500,000 this year, he said. “Our brand is well-known in the hot sauce world, but this is something customers can use with higher turnover,” said Hirschkop.
Because it outsources its manufacturing to contractors, Dave’s only has a total of six employees. It has roughly 30 stock keeping units (SKUs), which it hopes to pare down to about 20 SKUs over the next year, he added.
Over the next two years, however, it will continue launching hot sauce and pasta sauce products. It also wants to increase brand awareness among customers by partnering with restaurant chains—such as Red Robin or Chili’s—that offer hot sauce condiments on their tables. Hirschkop said that Dave’s welcomes approaches from investors with those kinds of contacts.
“We’re probably in several hundred [restaurants], but that number really needs to be several thousand,” he said. “Cholula, a lot of their growth came off the back of being on every IHOP tabletop.”
Dave’s will not use M&A to grow because of failed acquisitions it made in the past. Bonsal & Lloyd’s flavored mayonnaise and Palette Fine Foods are two examples, according to Mergermarket. Both of those product lines have since been eliminated.
“We’re not particularly talented at acquiring,” he acknowledged. “We’ve done it on the cheap [in the past] and weren’t really ready to blow it up and invest in it.”
The company banks with Bank of America.
by Dayna Fields in Los Angeles