It’s a tough time to be hitting the dealmaking scene.
This story first appeared in the July 13, 2016 issue of WWD. Subscribe Today.
Uncertainty is only growing — investors around the world trying to understand the fallout from the British vote to leave the European Union; the shift in retail from brick-and-mortar to digital, and the ever-changing consumer who seems more interested in so-called experiences than in buying another look.
Mergermarket said the value of deals in the consumer sector fell 51.4 percent in the first half, to $95.4 billion.
Luxury M&A experts argue that life goes on, and that dealmaking continues, even in the U.K. “Deals go on, they are happening. It’s like real estate — buyers have to buy and sellers have to sell,” said one M&A expert. “Especially now that the British pound is down, there are opportunities for foreign buyers who will get a cheaper deal.”
And the rewards are sweet for many of those who do get deals done.
“It is still very much a sellers’ market for profitable, privately held companies active in such sectors as consumer,” according to the Mergermarket analysis. “Valuations are high, and there is a good appetite for M&A.”
While prices vary widely, with hot new brands now getting credit for social media followers in their valuations, a price of 10-times earnings before interest, taxes, amortization and depreciation is seen as very strong for established players.
It’s strategic acquirers who are apt to pay the most, since they can trim costs as they pull in complementary businesses and consolidate back offices. But the list of strategic buyers is limited. PVH Corp. and VF Corp. in the U.S. and LVMH Moët Hennessy Louis Vuitton and Kering in Europe are always cultivating the cream of the crop. And Asian players are finally making themselves heard — witness Shandong Ruyi Group’s deal to buy SMCP, corporate parent to the Sandro, Maje and Claudie Pierlot chains, for an estimated 1.3 billion euros, or $1.45 billion.
But increasingly, it’s the financial types who are on the hunt, looking for tech-savvy brands with fashion cred and lots of room to grow.
Bringing in investors is a milestone in corporate life. It’s a marriage that — after what can be a treadmill of bad dates, one-night stands and live-in boyfriends — marks real commitment and a certain coming of age. It’s a time of potentially hyper-speed growth as fresh funds flow through a business.
It can also be a potentially awkward period when more cooks are settling into the kitchen.
There’s no one right way to raise money or find the perfect buyer to take a company to the next level. But there are plenty of people feeling their way through the process. Seemingly every semiestablished designer, growing retailer and fresh e-commerce site is out looking to connect with a potential investor. Among the financiers wanting to put money to work are private equity groups InterLuxe and Sandbridge Capital, budding fashion venture players M3 Ventures and Resonance, as well as Qatar’s Mayhoola for Investments, Bahrain-based Investcorp and giants TPG and KKR.
There’s bad news, though, for those hoping to cash in and get rich quick: Experts said owners should wait to take money out for themselves.
“I don’t think anybody should be trying to spend time trying to cash money out of a business unless you’re doing more than $1 million a month and on track to doing $20 million in sales,” said Martin Dolfi, managing partner at M3 Ventures, which has investment in a host of brands, including Carbon 38, Rhone and Spiritual Gangster.
“Focus on the business, and the financing will follow, if you’re building a business that has healthy markets,” he said. “If you have a good business, the capital’s going to show up.”
When it does, would-be sellers better have done their homework and be knowledgeable about the different types of buyers.
Ludovic Grandchamp, partner at Savigny Partners, said strategic investors will be looking for control, while private equity firms will be looking to accelerate the development of a business.
There are also former-chief-executive-officer types who could take a stake and bring management expertise, and family offices, the investment vehicles of wealthy families, where Grandchamp said, “personal fit will play a larger part…this investor usually takes a longer-term view and might not ever need to sell his stake.”
Many investors are looking to partner with owners, offering some capital and expertise as they wait for the upside.
“Certainly venture funds, but even private equity firms, don’t want to own a brand outright; they want to make a lot of money when the brand gets sold,” said attorney Douglas Hand of Hand Baldachin & Amburgey, who helped shepherd through investment deals for Rag & Bone, with Irving Place Capital; Cushnie et Ochs, with Farol Asset Management, and Todd Snyder, with American Eagle Outfitters Inc.
“A smart investor doesn’t want to acquire everything, because you want those founders, you want particularly those creative people who have helped bring the company to this level to still be a part of it,” Hand said.
Backers buying a minority stake will want to have some influence on their new investment, and Hand said this comes usually in some form of “negative control,” or veto rights over certain significant corporate moves.
It’s a process that requires clear thinking, and Hand advised: “Be as unemotional about your brand and your legacy as possible. Often these are eponymous brands, so you’re selling your name, at least the trademark rights to your name. But even if it’s not an eponymous brand, it’s a brand a designer created, it’s their child in many ways and they are parting with it, or a portion of it. That becomes an emotional experience, which can cloud judgment in terms of finding the right partner and striking the right deal.”
While selling takes a lot of work and dedication, the overriding message can be very simple.
“The big picture is, ‘What really makes my brand special?’,” said Daniel Hoverman, director at Houlihan Lokey. “Your brand should permeate everything you do. If you have a five-minute conversation and you think you’ve presented what the brand means, any book or a teaser that you send afterward has to convey the same identity and opportunity. If they sit down and say, ‘This isn’t the same,’ you create confusion around your message. Inconsistency will make people less excited. And at the end of the day, you want the buyer to be excited about paying for the opportunity to own the brand.”
By definition, dealmaking is business and everyone’s trying to make money, but owners also have to be careful to not get too greedy as they pass the baton.
Mortimer Singer, ceo of consultancy Marvin Traub Associates, said sellers need to “leave meat on the bone” by setting a clear path for the next owner to grow the business and staying away from funny business with the numbers.
“Don’t skimp on expense in the 18 months leading up to a transaction just to juice profit margin,” Singer said. “This can be easily called out.”
He also advised: “Don’t pump revenue to improve revenue optics. Good profitable distribution trumps overextended distribution over and over.”
William Susman, managing director at Threadstone Advisors, said sellers need to “think like the buyer.”
“Companies are ‘bought, not sold,’ meaning that you need to understand how and why a buyer will pay the price,” he said. “Do they need or want it? What financials will they see? Why is now the right time for them?
“I have never found anyone who buys a business because they liked the designer,” Susman said. “They buy a business; they don’t buy a person.”
But how many “likes” the designer has might well matter.
“In today’s world, one of the first questions we ask a brand is, ‘How many Instagram followers do you have?” Susman said. “The world of social media and its place in valuation is evolving.”
Certainly digitally savvy goes a long way in the fund-raising world.
Caroline Gogolak, president and cofounder of the buzzy e-commerce site Carbon 38, said the three-year-old company is using the money it raised to expand — in part, by focusing on private label. Terms of the investment were not disclosed.
“We are entrepreneurs with the mind-set to scale and grow quickly,” Gogolak said. “We needed outside capital to fuel the e-commerce platform. We’re looking to disrupt ready-to-wear, and in order to do that you need to do it quickly.”
Alan Shor, president of The Retail Connection, said owners of small private firms are typically looking to kick-start their business.
He sketched out a typical scenario, where the owners of a 15-store chain want to get the business to the next level. They sell 40 percent of the business for $8 million, giving it a valuation of $20 million. The money is used to open 40 new stores at $200,000 a pop. Now the retailer can use the cash flow from its larger store base to open more and grow to 100 stores.
The owner, instead of controlling 100 percent of a retailer worth $20 million, now has a 60 percent stake in a company worth $120 million.
That’s some pretty compelling math, although any price tag could feel too low to someone who’s spent years building a business.
“The entrepreneur/seller always thinks his company is worth more than what the market tells him it’s worth,” Shor said.
But selling can also be risky business.
Tamara Mellon, who’s still working on her second act under her own name, after growing Jimmy Choo into a powerhouse, said in 2014: “When I talk to students who want to have their own brands, I tell them there’s a magic number they can never forget, and it’s called 51 percent. That never gives someone control of your business.”