The global pandemic has not only generated what looks like a prolonged economic crisis, but also shifted people’s sentiment toward consumerism. How the fashion industry will be affected in the long term is a difficult question to answer.
Looking at the medium term, there is one topic that can be immediately discussed: In the current context, is it worth thinking about selling the business you built over the last few years or decades?
In short, the answer is “yes” if you believe you’ve reached the stage where the future of your firm is more likely to benefit from being part of a large group than if it were to remain independent. As you know, a large corporation can easily flex its muscle in such areas as advertising and media buying, customer data and analytics, commercial partnerships, online and brick-and-mortar retail, IT and technology, logistics and finance.
Today, large groups tend to approach M&A with more humility and empathy than previously. It is in their best interest to ensure that your brand, reputation and revenue significantly improve once you have joined their “family.”
Still, for an entrepreneur, a designer, a creator, there is a patent and comprehensible sense of nervousness around selling.
First, what will your life, your brand, your staff, your style, your savoir faire look like once you are not anymore at the driving seat of an independent entity? Second, do you have the impression that you are selling your business too early or not at the right time? Third, will the valuation match your expectations?
In all instances, there are ways to mitigate risks and alleviate these justified concerns.
Red lines, or how not to lose your soul when you sell.
It would be best if you began by drafting a list of all the elements that count and make the fabric of your business. Some of them are trivial, while others are crucial.
The evident subject is your brand. You want it to last and not be merged, destroyed or undermined. You might also stipulate how free you need to be to design and launch your collections.
But in addition to these obvious topics, you should review and negotiate other red lines. For example, the tight relationship you have with some of the artisans or suppliers you use; being imposed different ones could damage your product, or even your creativity. If educating students is paramount, ensure that you include in the agreement with the buyer a few days per year dedicated to teaching.
Equally, ethical sourcing, recycling or environmentally friendly production can constitute a primary activity. In this case, make sure that the terms in the contract protect your focus on sustainable design principles.
By insisting on including specific red lines, you do signal to the buying party that you are serious about life after the deal is completed. Buyers prefer to deal with entrepreneurs who are demanding because it underlines their level of commitment. Don’t be afraid to be openly worried or stressed…because it means you care.
The last thing a large corporation wants is to buy a company and inadvertently destroy it over time. Discussing these red lines, which could appear to them at first as peripheral, is reassuring and increases the odds that the post-acquisition integration of your business will be smooth.
Perhaps the most important lesson is that buyers also want — or need — to learn from the companies they buy. For example, a small firm that set up a network of Scottish artisans or fair trade producers in Morocco or mastered the art of recycling by partnering with local authorities, can become invaluable for large corporations, which tend to lack agility with projects and processes that are not of gigantic sizes.
All in all, a balance must be reached. Yes, once you sell, you are not independent anymore, but you can certainly retain a level of autonomy that must be outlined as much as possible in advance. Since your style, your imagination and your creativity are at the heart of what you do, you ought to talk candidly. Not every future problem can be foreseen, but ensuring your red lines are understood — and hopefully, agreed — by the acquirer, can limit future disruption.
Timing, or when is it right to sell your firm?
You have a massive mountain ahead of you, and you might wonder: Shall I continue the walk head down on my own, or decide to join an organization that can support and facilitate my climb?
The best time to consider a sale is for sure when everything is going well. Don’t sell when problems emerge, when you are in a hurry or when your business is close to financial distress.
If your business is in good shape and needs a shot in the arm, there are ways to structure a sale deal so that you benefit from the future performances of your business, once you are acquired.
For example, you can decide to sell a portion of the capital, as opposed to 100 percent. You can also agree to receive a fraction of the sale price in different installments over the next few years, in order to profit from the future growth of your firm.
And you can also accept, in some specific circumstances, to be partially paid in shares of the acquiring group — if, in addition to cash, you had received LVMH or Kering stocks 10 years ago, you would not complain today.
These options can be combined in various ways, but it is fair to say that each solution you negotiate will invariably contain drawbacks and risks. For example, if you sell 80 percent of your firm, you will enjoy receiving dividends from future profits on the 20 percent you still own. When you decide to sell the rest of your shares, you will have only one potential buyer to negotiate with — not the most comfortable position to do “push-backs.”
These various schemes aim to allow you to benefit from the future growth of your business so that you avoid leaving too much money on the table when you sell.
Valuation, or how much is your company worth?
What is the optimal value your business can reach? The short answer is it depends on the buyer’s views. In other words, you can spend time speculating…but the only way to know is to ask the question to a multitude of potential acquirers. Each of them will see your firm with their own eyes. They may focus on one aspect of your brand, on your personality or the culture you built.
They may value your ability to leverage your company and use it to conquer China or Latin America. They may see your products as highly complementary to their current brand portfolio. They may value the typology of your customer base. The list of parameters that impact valuation is long, and each buyer will have its own analytical — and emotional — framework.
That is why valuation can widely vary between potential buyers. I saw multiples of up to four between the lowest and the highest valuation for the same firm.
It is also a definite advantage to mention to potential buyers that you are talking to other firms. They would not want to “miss the bandwagon” and should endeavor to follow up promptly and make an offer if they are interested. Consequently, the price of your firm also depends on the number of interested parties.
Buyers do not tend to like formal auctions, but if they understand that their direct competitors are talking to you, it will ease the M&A process and provide you with ammunitions when negotiating.
In the end, the only way to ensure that an offer you receive is optimal is to be able to compare it with other ones. Synchronicity is crucial in M&A. You must endeavor to receive offers simultaneously. If you are stuck with a single offer, unable to compare it, even if it is a good one, once the deal is done you may retain bitter taste in the mouth.
Established fashion and luxury groups are keen to buy businesses. Each of them has its own rationale and strategic goals. In the end, it is a seller’s market, which is in your favor.
And if you decide to start a sale process, and end up not finding the right acquiring group with the right offer, you can simply go back to growing your business independently, until you decide, in two years or two decades, to approach the same buyers again.
One thing to note: Regardless of the outcome, going through a sale process is an excellent way to learn about your firm and yourself.
Christophe Cauvy is a partner at Intersection M&A Ltd., an M&A advisory firm based in Oxford, U.K.