From Bagel's to Flight Club compared to Tech value

Last Friday my wife and I took our eldest son on a mini tour of London with a number of stop off points (many free). We started off at the Bagel Shop in Brick Lane and ended up at the Flight Club in Victoria.

Without looking at the industry benchmarks I thought today how I would value similar businesses and compare with more my space, that is, technology businesses (although Flight Club certainly has some neat tech). A little bit of old school "management by walkabout".

1. Bagel Shop (Traditional Retail)

• Valuation Approach: Bagel shops I would expect to be valued using a multiple of earnings, often focusing on metrics like EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) or Seller’s Discretionary Earnings (SDE).
• Key Metrics: Revenue: Driven by foot traffic, location, and average sale per customer. Location: A high-traffic area significantly boosts value. Profit Margins: Lower margins compared to other industries, but repeat business is frequent. Growth Potential: Limited, usually constrained to local markets unless franchising is pursued. Industry Multiples: Small food and retail businesses often sell for 2-3x EBITDA or SDE, depending on profitability and local market conditions.
• My Customer perspective: The Bagel Shop claims to be there since 1855 and has a nearby competitor a couple of doors down. Even though I have worked in London much of my career and the East side while being in Fintech I had not yet bought a Bagel in Brick Lane. Salt beef from Borough market area and Salmon Bagels across London but first Salt Beef (gherkin and mustard) Bagel from Brick Lane. Unlike Brick Lane curry, I was not disappointed and very generous with the Salt beef. While claim of being oldest may draw 1st time customers survival for that length of time is by delighting repeat customers. As no space inside there is little "linger" time but plenty of street art to view.

2. Flight Club (Experience Destination)

• Valuation Approach: Experience-based businesses like Flight Club are often valued based on a revenue multiple, particularly if they are expanding or building a strong brand.
• Key Metrics: Customer Experience: Unique, hard-to-replicate experiences drive value .Brand Equity: Strong branding, especially for businesses that create a sense of exclusivity or trendiness, increases valuation. Recurring Revenue: Membership models, repeat bookings, or special events can provide consistent revenue streams. Scalability: Experience destinations have significant growth potential if they expand into new markets, license the concept, or franchise. Industry Multiples: Valuations are often 2-5x revenue, driven by the uniqueness of the experience, market demand, and scalability.
• My Customer perspective: in a recent story I read that happiness is not measured by material purchases but experiences served. Other than owning your own home I would certainly agree with that. Red Engine who own both Flight Club and Electric Shuffle do not disappoint. It was fitting that the "birthday boy" was winner of the evening's darts out of the five of us. My personal favourite darts game was Snakes and Ladders as won that - I would normally like Killer but my other son knocked me out with a treble. The service was fantastic. great atmosphere and brilliant venue design. After the darts we went into their outside garden and discovered their "musical phone box".

3. Technology Company (High Growth)

• Valuation Approach: Tech companies are typically valued based on future growth potential and are often valued on revenue multiples rather than profits, especially in early stages.
• Key Metrics: Revenue Growth: Fast-growing tech companies can command high valuations, even if they are not yet profitable. Intellectual Property (IP): Proprietary technology, patents, or innovative product offerings can add significant value. User Base and Network Effects: The size and engagement of the user base are critical, particularly for platform or software-as-a-service (SaaS) companies. Scalability: Technology companies have virtually limitless scalability since they are often not tied to physical assets or locations, allowing for global expansion with minimal additional costs. Industry Multiples: Early-stage tech start-ups may be valued at 10-20x revenue, while more mature tech firms may see multiples of 6-10x EBITDA or higher, depending on growth potential and market leadership.
• My perspective: from a value multiple "predictable recurring revenue with low churn" is very attractive to the investor. New customer revenue as well as additional revenue offerings to existing customers helps drive the hockey stick curve. However the product needs to be sticky by providing great service and products that the customer want. Breaking into existing markets where there already are a high number of options is challenging. Features provided to customers that they don't use or being tied into long contracts that they don't value is not the answer. You need to want them coming back for more year after year like the Bagel company.

Key Differences in Valuation Methods:

• Multiples: Technology companies typically fetch the highest multiples due to their scalability and growth potential. Experience destinations like Flight Club, with their unique offering, also see higher multiples than traditional retail, while bagel shops tend to have lower multiples due to their localized and smaller-scale nature.
• Growth and Scalability: Tech companies and experience destinations have more significant growth opportunities compared to a bagel shop, which is often limited by location and physical capacity.
• Risk and Reward: Investors accept higher risk for tech companies and experience destinations in exchange for higher potential returns. Bagel shops are seen as lower-risk investments with stable, predictable cash flows but lower upside. The exit can be challenging as unless you are the "oldest", there may be little in goodwill to pass onto the buyer. So for instance what are you getting when buying a coffee shop other than a second hand machine and a few tables and chairs?

If you would like to set up a call and discuss valuations, exits or anything associated with this please book an appointment Calendly - ROBERT TEARLE -anything CFO related.