LONDON, United Kingdom — For decades, fashion was populated with independent, family-run businesses. While a few of these still exist — Chanel is one — most successful fashion houses are acquired by other entities, which can help to fuel growth in a capital-intensive sector where cash flow can often be tricky to manage. Fashion businesses have proven an attractive category for many kinds of investors, from strategics (think LVMH, Kering or Richemont) to independent financiers (such as Lanvin’s Shaw-Lan Wang) and private equity firms (like Apax Partners or the Carlyle Group, which recently seized a stake in the blockbuster streetwear label Supreme).
“Some buyers just have a passion,” says Elsa Berry, co-founder and managing director of Vendôme Global Partners, a New York-based strategic financial advisory firm specialising in luxury, beauty and premium consumer brands. (Recent deals include the sale of luxury fur and evening wear label J Mendel to Stallion, Inc.) “There is a fascination with the fashion and luxury business. And when these brands are successful, they can be so incredibly profitable.”
But for founders, the decision to sell is complicated by several factors, including the size of the business, the success of the business and their current commitment level. They must also carefully weigh their options when choosing the right partner and deciding what percentage of their company to sell. After all, the M&A process can take six to nine months, sometimes more than a year, and dramatically alter the trajectory of a business.
Why should you sell?
“The simplest reason is to monetise,” Berry says. Cashing out, as it is sometimes inelegantly called, often happens when a founder or a founder’s family has no interest in taking the business forward and there is no clear successor. (Shoe designer Stuart Weitzman, for instance, sold to Coach Inc., in part, because his children chose to pursue career paths outside of the business.) Alternatively, even if a business is growing steadily and its founder wishes to remain, friends and family backers might be eager for greater liquidity, prompting a sale.
The other major driver for selling a stake in a business is to raise the capital required to accelerate growth. “Let’s say you get to the point where you’ve done really well in wholesale and you want more [direct] retail, but the company might not have the internal DNA for retail,” Berry says. For instance, Qatari investment firm Mayhoola’s majority ownership of Anya Hindmarch has allowed the playful British accessories label to expand its retail footprint globally to reach nearly $55 million in 2016, a 20 percent jump from the previous year. (In late September, it was announced that Mayhoola would invest another $13 million in the business.)
Brands in financial distress — whether that means debt, problems with cash flow or declining revenue — may also seek a cash injection, but this can result in a so-called fire sale, where the most valuable parts of the business are sold off for cheap. This sometimes happens when companies go bankrupt. For instance, the intellectual property and customer database of the failed start-up Nasty Gal was sold to Boohoo for just $20 million in February 2017. (At its peak, Nasty Gal was reportedly generating more than $100 million a year in revenue.) In June 2017, luxury marketplace Farfetch absorbed Style.com’s trademark, intellectual property and database in a strategic deal with one of its investors (and Style.com’s owner), Condé Nast.
When should you sell?
Money is often hard to come by when you need it most. Many M&A advisory firms stay away from distressed but not-yet-bankrupt businesses because they are difficult to sell. There are, of course, exceptions this rule. If a founder-designer has received critical acclaim and a strategic investor sees an opportunity to install him or her at another brand — as with Marc Jacobs at Louis Vuitton or John Galliano at Dior — the firm will sometimes provide cash support to keep his or her namesake label going.
The big companies are interested in investing in talent.
“The big companies are interested in investing in talent,” says Gail Zauder, managing partner at Elixir Advisors, a New York-based investment banking and financial services firm that has represented designers including Joseph Altuzarra, Donna Karan and Narciso Rodriguez. “If somebody comes to me and wants a $1 million or $2 million investment” — simply to keep a label afloat — “it’s very hard to find that.”
To be sure, the sorts of deals where a conglomerate is willing to back a nascent label are rare. (Loewe creative director Jonathan Anderson’s 2013 deal with LVMH — which included an investment in his own brand — and Kering’s investments in Joseph Altuzarra and Christopher Kane are examples of this scenario.) Now more than ever, firms are looking for designers for hire. Consider Clare Waight Keller’s appointment at Givenchy, or Demna Gvasalia at Balenciaga.
Perhaps unsurprisingly, M&A advisors prefer to represent healthy businesses with real potential to scale — and attract a high price. (This makes sense, given that an advisor typically earns a percentage-based commission on the deal. Some charge a fee for their services during the process, but many work on what is known as a “success fee”.)
“You have to come with some good news,” says Karine Ohana, co-managing partner of the Paris-based Ohana & Co, an independent investment bank that advises on M&A and represented Onward Luxury Group when it acquired a controlling stake in shoe label Charlotte Olympia in July 2017.
It’s also important to consider inbound offers carefully, even if you’re not looking to sell at that very moment. “Often, I see people miss the train,” Ohana adds. “They’ll say, ‘Not, now.’ When they need to find a buyer two or three years later, the buyer is not here anymore and it’s a problem.”
Some advisors only work with brands generating upward of $50 million in annual revenue. For a smaller fashion brand looking to sell, the baseline revenue for consideration is typically $10 million. However, experts advise that brands hold off on selling — even if it’s only a minority stake — until a transaction is absolutely imperative to the advancement of the business.
After all, equity is expensive. “Once love money from friends and family is exhausted, it’s tempting to want to reach to investors for the next step,” says Pierre Mallevays, founder and managing partner of Savigny Partners, a London-based corporate finance advisory firm focused on retail and luxury goods. Past clients include Nicholas Kirkwood, which sold a majority stake to LVMH in September 2013. “But it’s important to have a plan for which the money will be put to use.”
Who are the buyers?
Brands in search of a strategic partner may want to sell to a bigger brand, retailer or a retail group. This is generally a long-term investment with no foreseeable exit. (Consider Kering’s acquisition of Christopher Kane, Coach Inc.’s acquisition of Kate Spade & Co. or LMVH’s acquisition of Rimowa.)
For designers and owners who want to remain with the company and perhaps avoid some of the pressures brought on by a different sort of investor — the kind that wants to increase revenue rapidly, instead of sustainably — a strategic partner is typically the preferred route. “Ultimately, we were looking for a strategic investor that could actually help add value,” says Bonnie Takhar, chief executive of Charlotte Olympia. “We were looking for synergies in manufacturing, logistics and distribution.”
There are also semi-strategic partners, which may not be in the same business but can offer guidance in certain areas. “Say you’re an American brand and you find a Chinese retail investor — they could be the lead partner when it comes to distributing the brand in Asia,” Mallevays says. “They will bring considerable value to the table.”
Private equity firms, on the other hand, are typically looking for an exit in five to 10 years, which means they are keen to grow quickly and sell the business for significantly more money than the firm paid. While a private equity firm will want a say in how the business is run, these investors tend to be more operationally hands-off than strategic partners.
The true financial guys are very disciplined investors, they buy to sell.... There is no long term.
Private equity firms usually seek out brands generating more than $20 million or $30 million a year in sales. “The true financial guys are very disciplined investors, they buy to sell,” Mallevays says. “There is no long term.” A successful example of one such deal is London-based private equity firm Apax Partners’ $1.6 billion acquisition of Tommy Hilfiger in 2006. In 2010, it sold the business to apparel conglomerate PVH for $3 billion. Another is the case of MatchesFashion, which raised about $20 million in 2012 from venture capital firms Scottish Equity Partners and Highland Capital Europe. Five years later, in September 2017, the company sold a majority stake to Apax at a reported valuation of $1 billion.
Private investors and family offices often fall somewhere in the middle. These investors may have a passion, interest or expertise in fashion or retail, but will also likely be looking to exit the investment at some point down the road.
For a profitable brand generating upward of $100 million in annual revenue, or possessing a significant amount of cash on its balance sheet, a floatation on the public markets is also an option. This allows a company to quickly amass a lot of capital and fuel growth. Take Michael Kors, which went public in 2011 when it generated $758 million in net sales. Six years later, in its 2017 fiscal year, sales were $4.5 billion.
But being a public company comes with a very specific set of pressures. Michael Kors, for example, must now disclose its financial performance quarterly — and deal with the ramifications a bad quarter can have one the value of its shares. This often results in short-term thinking as a brand prioritises immediate revenue over long-term brand value. As its sales declined over the past year, Michael Kors faced this precise challenge. “A public company relies on quarterly results, and luxury is not a business focused on the short-term,” Berry says.
Ultimately, a brand must carefully evaluate every option on the table. “You need to be asking yourself the question, 'What type of money are you really looking for?'” Takhar says. “What are the business needs? It’s really important to understand the value outside of the financial funding that a potential partner can bring. Some brands probably are not that aware of what types of different funding are available. Before they start the process, they should get familiar.”
How do you find the right buyer?
One rule of thumb: if you’re not already seeing inbound interest from investors, know that selling will be difficult. While many M&A advisors are sell-side — meaning they represent the brand being sold — buyers often hire advisors as well to keep them updated on which brands to watch. “The big companies already know who they want to invest in,” Zauder says. “It’s hard to get them interested.”
In an ideal scenario, a brand is approached by many different investors. If there is inbound interest and financial records are in order, a brand may indeed want to present itself to the market. (The more offers, the higher the ultimate selling price.) If you are not bankrupt, there are three main bidding-process scenarios. One is the classic Anglo-Saxon model: a “wide” auction. A bank like a Morgan Stanley or Goldman Sachs will inform the investment community that a company is going up for sale and prepare a memo detailing its financials. The bank will then set a date for inbound offers. Typically, the highest bidder — or the bidder that offers the best value — will win.
[Brands] that are good don’t need to show the high price, the price will come naturally.
Another is a more targeted bidding process, where only a few potential buyers are contacted. “It’s more discreet,” Ohana says. “The market can punish people. [Brands] that are good don’t need to show the high price, the price will come naturally.”
And finally, there is the direct sale, where a seller accepts an offer from a single buyer, often a strategic. “It’s always the best when you are courted,” Ohana adds. “It means that the buyer really wants you.”
How much of your business should you sell?
Some owners sell a minority stake in their business, some sell a majority stake, others sell the entirety. There are dozens of possible scenarios.
For instance, if a company opts for a public flotation, it usually reserves a significant number of shares — and seats on the board of directors — for its owners, so that it can still exercise a degree of control over decisions made about the business. Hermès, for instance, is publicly traded, but the majority of its shares are owned by members of the family that founded it.
If an owner sells to a private equity firm, the firm may only take a minority stake and a certain number of board seats in order to minimise its own risk, although this is rare. In most cases, the private equity firm is looking to acquire a majority stake. In strategic partnerships, the buyer often wants to acquire at least 80 percent, if not 100 percent. Parent companies are often eager to reach that 80 percent mark because at that point you can include the business in a consolidated tax return.
Some designers sign a “two-step deal”, which means that the parent company will buy a smaller stake and increase ownership over an agreed-upon period. If the deal is not “two step”, there may be an agreement to offer the investor the “right of first offer”, meaning that if the designer chooses to sell off more of the company, the existing investor has the right to negotiate to buy the asset before the deal is presented to a third party.
For some designers, however, maintaining majority control is imperative. (Joseph Altuzarra, for instance, sold a minority stake to Kering in September 2013.) The healthier the business, the easier it is to negotiate these terms.
“If you’re doing a deal with a big group, you want to use the resources of that group: the advertising platform, the distribution platform. It’s not a bad price to pay to accelerate the business,” Mallevays says. “If you are not at the stage where you are willing to consider an affiliation, you can sell a minority stake.”
“It is critical that expectations on both sides are made clear, and that interests are aligned,” Mallevays adds. “Are we going need another fundraise, and when? Is there an exit strategy for the investor?”
How do you protect yourself?
Minority, majority — regardless of how the deal nets out, owners must protect their interests. For a founder, that means protecting creative control. “The negotiation of creative control rights is paramount,” Mallevays says. “This can range from simply designing products for shows and giving creative input to having approval rights over every consumer-facing aspect of the brand: products, image and communication, store and visual merchandising.”
The negotiation of creative control rights is paramount.
For a founder whose name is on the label, that also means protecting the right to use one’s own name if they at some point part ways with the investor. For instance, when Donna Karan sold her then-public company Donna Karan International to LVMH in 2000 for about $260 million, she separately sold her studio, which owned the trademarks, for $400 million. A few years later, Karan sold her store at 819 Madison Avenue to LVMH for an undisclosed price. Through it all, though, Karan maintained control of Urban Zen, of which LMVH only owned 5 percent. (At some point during the partnership, LVMH gave up its interest in Urban Zen altogether.) When Karan stepped down from Donna Karan International in 2015, she was able to continue developing Urban Zen.
This is where M&A advisors — and in many cases, a lawyer — play a crucial role. Some designers only work with an advisor (who is sometimes also a lawyer), others hire both parties. Many brands — even smaller ones — employ in-house counsel. (For instance, Charlotte Olympia’s keeps an in-house counsel on staff to help negotiate licences and collaboration deals.) These advisors will help manage the founder’s expectations and ensure terms are fair. “Anybody, whether it’s a private equity firm or a big group like LVMH or Kering, has super-veto rights over certain things,” Zauder says.
To be sure, while there are many instances when a partnership is fruitful, they often end badly. Consider epic examples like Alber Elbaz’s departure at Lanvin or John Galliano’s dismissal from Dior as well as his own namesake brand, both of which are owned by LVMH. While Elbaz is free to launch a label under his own name if he wishes to do so, Galliano’s trademark is still controlled by owner LVMH. When Galliano exited the firm, it owned a 91 percent stake in his brand.
Because there is often so much to lose, founders may also want to also negotiate specifics on things like price point — forbidding the company to take the brand down market, for instance — and to ensure that their remaining stake in the business cannot be diluted.
“It’s important for a kid, for a designer, to understand what’s going happen if the thing doesn’t work out,” Zauder says. “It’s the thing no one ever focuses on: what happens to your name and your likeness and your brand name if somebody invests in the company? If different parties have different expectations, then you’re going to have a problem.”
Is it worth it?
Selling a company is a lengthy process that can end in conflict. However, when parties are aligned it can be a powerful amplification tool and offer a new sort of freedom for a founder who may have struggled financially for many years. The key is to seize the opportunity when it presents itself. In M&A, timing is everything.
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