An insider’s primer on integrating a small company into a larger one—as seen by both entrepreneurial brand founders and the behemoths who bought them.
THE SELLER SIDE
On NYX founder Toni Ko’s Instagram feed, the hashtag #5yearvacation, a cheeky reference to the non-compete clause she signed upon selling her brand to L’Oréal last year, appears nearly 30 times. It’s on a post of a bikini-clad Ko reclining on a boat in the Grand Caymans, on another of her hands brimming with wine grapes in Sonoma and on yet another of an immaculate view overlooking the turquoise waters of the Amalfi Coast.
“I turned 40 when I was about to sell the company. Throughout NYX, I was never married and I had no children. At that point in my life, I felt I needed balance. I wanted more personal time and to change my lifestyle. That’s why I sold,” Ko says.
She walked away with no earn-out provision tying her to the brand she built, and the confidence that L’Oréal could turn NYX into a billion-dollar force in the global beauty market without her.
Ko’s clean departure from NYX is an anomaly. In the eight deals for American beauty brands tracked by Intrepid Investment Bankers in the second quarter of this year, including Coty’s whopper of a merger with 43 P&G beauty brands, six entail the purchased brands’ founders staying on board in various capacities. In beauty M&A today, selling in is the new selling out.
Charismatic brand founders are prized assets at a moment in which engaging backstories filled with visionary inventors are deeply resonant with Millennial consumers. “Founder involvement post-acquisition is important. Very rarely is a brand acquired where the intention is to kick out the founder on Day One. Many times companies are looking to partner with founders for the foreseeable future,” says Vennette Ho, Financo’s managing director who oversees beauty and personal care. “Companies are looking to keep the magic of the brand and just bring it to a larger scale.”
Historically, the industry falls into two camps: some companies prefer not to retain the founder for a long period post-acquisition and integration; others maintain a long association with the founder. The Estée Lauder Cos. Inc. scooped up Bobbi Brown’s makeup brand back in 1995, for example, and she’s still active, 20 years later.
Companies are shifting their approach. L’Oréal, not known for retaining founders, is edging in that direction, particularly with brands like Urban Decay and Carol’s Daughter, which it bought in 2014. Nicole Fourgoux, general manager of L’Oréal’s multicultural beauty division, underscores that founder Lisa Price continuing on in a leadership role at the brand she founded was a “key factor” in L’Oréal’s interest in the brand.
“Lisa is not just the face of Carol’s Daughter, but is really rolling up her sleeves to work on everything from brand strategy to product conception, all the way to personally training on her product line,” Fourgoux says.
For a founder who has lived and breathed a brand since its inception, relinquishing control is often easier said than done. Integrating into the bureaucracy of a larger corporation requires founders to skillfully alter their roles—and accept that the authority they had at their own brands can’t be replicated. “A lot of founders, including myself, can be quite controlling and moving from a founder/ceo role to a corporate position is not an easy transition,” says Eric Malka, cofounder of Art of Shaving, which was acquired by Procter & Gamble in 2009.
Malka remained at P&G for only one year after the purchase. “I was selling my company to move on. I wasn’t selling it to stay on,” he says. “I stayed to make sure the business was handed off properly, but I didn’t see a long-term future beyond that.”
ColorProof Hair Care founder Jim Markham, who has sold five brands, including PureOlogy to L’Oréal in 2007, knows that relinquishing control isn’t his strong suit—and that’s why he hasn’t remained at the companies he sold beyond transition periods. “Some buyers might say, ‘Take the thing and run it the way you want it,’ but I don’t see much of that happening. Most of them have rules and regulations you have to play by. I just thought it wouldn’t be best for me,” he says.
Essie Weingarten and Max Sortino understand what it’s like to run up against the routines of a big conglomerate. When their nail polish brand Essie was sold to L’Oréal in 2010, the founder and former ceo, respectively, planned to continue with the brand indefinitely, but the realities of working within the confines of a larger corporate entity became less appealing. They stayed active with the brand for about two-and-a-half years following the sale and were consultants for the company until June. “It wasn’t a partnership,” Weingarten says. “When someone buys your company, there’s no partnership.”
Looking back at the process to join L’Oréal, the duo is resolute about what they should have done differently. “We should have had definite roles and responsibilities written out,” Weingarten says.
Price agrees that it’s imperative for founders to identify the goals they have for their roles post- acquisition. “You are negotiating and there can be a fear of asking for too much and putting people off, but you have to know what is important to you and be ready to articulate your job, your worth, why you are needed and then be prepared to do the work required,” she says. “Entrepreneurs know that the work isn’t easy. It never is and just because you get acquired, it doesn’t change who you are or your mission or your drive.”
Not surprisingly, price has a tendency to prevail over other considerations during negotiations. Bruno Mascolo, who, along with his brothers, sold professional haircare brand TIGI to Unilever in 2009, regrets that he didn’t press for certain demands in the face of a $400 million windfall. “I would have done a three-year non-compete [instead of 10]. I would have probably not given them the opportunity to take the Toni&Guy line. The other thing I would have done is make sure I stay in some sort of position for a long time to help mix our culture with the company’s going forward,” he says, advising fellow founders, “Don’t be blindsided by the amount of money you get offered. Prior to the negotiations, work out what you are going to
ask for. When you get to the negotiating table, say, ‘If you don’t agree to these things, we don’t have a deal.’”
Enormous, untenable valuations can cause problems later on, too. Melisse Shaban, founder and ceo of investment and management firm Chrysallis Consumer Partners, says, “If the valuation isn’t right from the outset, you’re going to struggle, because you’re going to be wrong and both sides are going to look for people to blame. You’ll be forced to look at execution as opposed to what might really be the basic business case thesis: ‘We thought this was going to be a $250 million business, but guess what, it’s not. Now what are we going to do?’ The first thing people do is point to the execution people, but that’s not what it is—it’s the business.”
The money deluge in M&A is exacerbating valuation creep and making it tougher for brands to succeed. Shaban says, “Ten years ago, people were willing to write a $15 million check to get something funded. Now, with so much money around, it’s just as hard to write a small check and get a small return as it is to write a bigger check and get a much larger return. It takes just as much energy, so why not go for the bigger payback? As a result, we’re seeing small businesses fall by the wayside because they can’t get profitable and so they don’t get funded, or they’re getting funded at the wrong inflection point of their life cycle.”
Founders have to be extra careful about choosing from a buffet of backers. Janet Gurwitch, cofounder of Gurwitch Products and partner at Castanea Partners, a private equity firm with First Aid Beauty and Drybar in its portfolio, says the field of suitors for brands has changed markedly since she sold Laura Mercier in the Nineties. “There is so much private equity money interested in the beauty space. People have many more options, and there’s a lot of money available,” she says.
For a founder, being clear about intentions going in is crucial to picking the right option. Five years before selling to L’Oréal, Ko brought on HCP & Co. as a minority investor with the purpose of aiding her in erecting a management team that would ultimately allow her to exit without an earn-out. “If you don’t have a team in place, the company is completely dependent on you,” Ko says.
Smashbox aligned with TSG on the way to its sale to Estée Lauder Cos. because former ceo and cofounder Dean Factor realized the brand needed support and funding. “We were a small but growing company,” says Factor in a video for TSG. “We were at the stage where we almost kind of plateaued.” He says TSG recommended Smashbox zero in on hero products in advertising and, the week after the first ad ran based on that recommendation, sales of the brand’s primer surged 30 percent.
Deal-making is largely a commercial matchmaking process. Good chemistry looms large. “The most important part is knowing from the beginning that the union is right. When you first meet, are you laughing at the same jokes? Do you find yourself explaining who you are to a room full of engaged people or do they appear to be making their DVR lists in their heads,” Price says. “You know from ‘hello’ if it’s right. You know and they will know if there should be a second, third and a fourth meeting. If it doesn’t feel right in the beginning, chances are it will be awkward in the end.”
THE BUYER SIDE
In families across America, micromanaging helicopter parents are giving way with the rise of free-range child-rearing methods. In the beauty industry, a similar dynamic is materializing.
As a new generation of Indies ascends and gets snapped up by industry stalwarts like L’Oréal, the Estée Lauder Cos., Unilever and Coty, the process of integrating them into the larger organization has evolved considerably since the first wave of indie acquisitions in the Nineties. The new thinking: Hands off!
“We’re fundamentally seeing something different than we saw years ago,” says Andrew Shore, managing director of investment bank Moelis & Co. “The bigger companies have recognized that entrepreneurs shouldn’t necessarily be assimilated overnight into large corporate monoliths. The large corporate companies have allowed the culture of smaller companies to exist, live and remain vibrant.”
In other words, let indies remain, well, independent. Such an approach starts during the earliest days. At Smashbox, which Lauder purchased in 2010, the integration process began on Day One, but global general manager Beth DiNardo believes waiting a couple of months would have been wiser. “It is good to have 60 days to do nothing before you start doing anything,” she says.
DiNardo arrived at Smashbox with the purpose of soaking up the company’s customs rather than imposing Lauder’s, a course of action advocated by chairman emeritus Leonard Lauder, who advised her to not have an opinion during her first 90 days at the brand. “He said, ‘You don’t know what you don’t know.’ In hindsight, it was brilliant advice,” she says.
In retrospect, Melisse Shaban, founder and chief executive officer at investment and management firm Chrysallis Consumer Partners and former ceo of Frédéric Fekkai, believes Proctor & Gamble shouldn’t have absorbed the brand, which it bought in 2008, as rapidly as it did. “You sell to a strategic to position the brand for its next level of growth and development, but you have to be careful not to throw the baby out with the bathwater,” she says.
“We had a six-month transition services agreement in place for most of our top executives, but it probably should have been longer. It’s about having time to understand the brand, and where its strengths and weaknesses lie.”
Figuring out what makes the culture tick—and not undoing that—is a chief concern. DiNardo focused on identifying and codifying Smashbox’s 10 core values—“pave the way for creativity” and “make s–t happen” among them. “We made sure we were very conscious about living and breathing them,” she says, noting the values were institutionalized in part by giving monthly rewards to employees embodying them. “The intention was to keep everything from the culture and make it even stronger.”
Distance, both structurally and geographically, seems to be a winning solution. According to sources, Lauder is grouping its newest acquisitions including Le Labo, Glamglow and Frédéric Malle, into Estée Lauder Cos. Ventures. A source explains: “Lauder tells them, ‘You are not going to be integrated until you reach a certain point in volume. They’ll have to put budgets together and have strategy meetings, but it’s not as rigorous as it is for the bigger brands in the company’s portfolio…. They want to leave them alone as much as possible, at least for now.” The source adds that, theoretically, “It is a lot easier to dispose of the brands if they are not fully integrated.” Lauder declined to comment on Estée Lauder Cos. Ventures.
At Unilever, recent acquisitions Murad, Dermalogica, REN and Kate Somerville have each kept their individual home offices and on a corporate basis are grouped together in the recently formed Prestige Division, which is helmed by senior vice president of prestige Vasiliki Petrou. Murad founder Howard Murad says that in the near term, Murad isn’t being modified much. “What I’m doing is essentially the same as what I had been doing,” he says.
Separation is important, says a source, stressing that the track record of mass companies running prestige brands is largely a losing one. “If they try to use the Unilever formula in mass for these brands, they will kill them and you will see them selling them off in five years. But, if they run them more [independently], they will work,” says the source.
Whether it is location, technical know-how or social media expertise, the bottom line is acquirers want to save the components of a brand that make the brand what it is. “We list the things that will never change, the things that are open to change and the things that will change,” says John Demsey, group president at Estée Lauder. “You have to have a really good understanding of the reasons you bought a brand and what made it special to you, and continue to ensure that you keep those things special.”
To achieve that balance requires a strong leader with a foot in both worlds—the parents’ and the acquired brands’—who shields acquired brands from corporate practices that might not be suitable and reinforces to parent companies the consequences of force-feeding the brands those practices. Tim Warner, ceo of Urban Decay, views himself as a Secretary of State of sorts. “I spend a lot of time saying, ‘We are not going to do it that way,’” he says. “We have to have conviction. Our experience shows this business model works. There is no reason to dismantle it.”
Warner also spends a great deal of time meeting with peer brands at L’Oréal. He says, “We almost have somebody full-time creating decks for various presentations to corporate and other countries.”
In fact, that kind of entrepreneurial mindset is one of the vital assets of an acquisition. “Acquirers want to ensure the secret sauce of the business survives,” says Shaun Westfall, managing director of consumer investment banking at Piper Jaffray. “They have changed their approach. They are learning from the businesses they are acquiring because those businesses are quick to spot new trends.”