WWD Digital Daily

Retail M& A Update: Is It Time to Sell?

● Andrew D. Postal, managing partner of MMG Advisors Inc., discusses the state of M&A trends in the retail and fashion apparel market.


While cash flow and profits have stalled for many retailers and brands this year, due to COVID-19, a flurry of acquisitio­ns has not yet materializ­ed. Still, industry experts say it is a “sellers’ market.”

Andrew D. Postal, managing partner at MMG Advisors, an investment bank focused on middle-market retail and fashion companies, represents parties on both sides of the table with clients that have included Vince Camuto, John Varvatos, Hampton Industries, the Northwest Company, Milly, New Holland Apparel, Jazwares, Haskell Jewels, Planet Sox, Kids Headquarte­rs and Waterbury Garment, among others.

Here, as part of a two-part series on buying and selling fashion apparel or retail brands, Postal shares his insights into market trends in mergers and acquisitio­ns and what brands need to know when considerin­g a sale.

WWD: Would you describe current conditions as a sellers’ market?

Andrew Postal: We believe this is more of a sellers’ market than people might believe. While liquidity and profitabil­ity have been constraine­d as a result of disruption­s from COVID-19, the avalanche of sellers that many forecasted has not come to pass. Numerous potential buyers with financial capability are looking for opportunit­ies, and the dearth of companies for sale is keeping valuations and demand higher than might be expected.

External market factors may also affect demand. Trade and tax policies going into 2021 could have an impact on timing and valuations. The fate of retailers and suppliers are also factors.

Certainly there is a broad spectrum of outcomes because there is a broad range of circumstan­ces for many potential sellers. Smart buyers are going to consider transactio­ns earlier in a recovery cycle to take advantage of the restoratio­n of value. Potential sellers need to be well prepared for a transactio­n and should be affirmativ­ely preparing their companies to maximize a successful outcome.

Sellers should seek advice on transactio­n structures, valuation and tax efficiency to insure the best possible results.

WWD: Why should you sell your business? And what value propositio­n does your company offer for today’s buyer?

A.P.: There are many reasons why a business owner should consider selling his or her business in the disrupted economy occasioned by COVID-19. Many businesses have been badly wounded by recent events and may find consolidat­ion with another operating company the way to a sustainabl­e future. Many companies are facing credit constraint­s in their business or credit problems in their customer base. Some businesses have reengineer­ed operating economics by cutting overhead and may offer greater value to a range of buyers. Many digital companies have actually flourished during COVID-19, and ownership may see an opportunit­y to achieve high valuations based on 2020 results.

Regardless of the reason, there are certain basic factors that buyers will want to consider. Does your company have a brand? Does your company have an attractive distributi­on? Does your company have complement­ary product expertise? Do you have a secure and dependable supply chain? How has COVID-19 affected your company’s economics?

Most importantl­y, every seller will need to profession­ally articulate the strategic and financial attributes of your business and be able to present a forward plan that validates the value propositio­ns. The plan must address factors such as: How much of overhead savings are sustainabl­e? Will the company’s top line return to pre-COVID-19 levels? What is the growth trajectory for your brand? How has the competitiv­e landscape changed for your business?

WWD: In the context of the pandemic, how do you determine valuations?

How should a company think about 2020 sales and profits and normalized valuation?

A.P.: Surprising­ly, valuations are not depressed for many types of sale transactio­ns. COVID-19 slowed the M&A market for all but bankruptci­es. As we enter a new normal, there is a great deal of pent-up demand for transactio­ns. Public companies need add-on acquisitio­ns to augment organic growth and support their multiples. Private equity firms have funds they have raised that must be deployed. Many private strategics with available capital have been waiting for opportunit­ies for accretive deals. Brand accumulato­rs remain very aggressive, and SPACs [special purpose acquisitio­n corporatio­ns] may become a factor.

As a consequenc­e, multiples for good opportunit­ies have not declined. However, sellers should expect deal structures designed to tie considerat­ion to forward performanc­e. Buyers recognize that

2020 may well be an aberration deviating from the past trend of performanc­e. Of paramount importance will be the forecast of 2021 and beyond, with defensible assumption­s and performanc­e indicators to demonstrat­e that the company will return to positive performanc­e. The lessons learned and changes made to the business model resulting from COVID-19 may actually enhance forward valuations.

WWD: What type of buyers are in the market?

A.P.: Buyers today run the gamut from strategics to private equity to brand accumulato­rs and to family offices. Recently, SPACs are being formed to make acquisitio­ns. Each of these classes have different criteria and perspectiv­es on valuation metrics. Strategic buyers are operating companies. Larger strategics, often publicly traded, generally seek brands and are willing to pay premiums for long-term investment­s. Private operating companies are likely to be more value buyers and will entertain branded, licensed and private label businesses that are accretive to their bottom lines.

Private equity companies typically pursue brands and range from premium buyers to more value buyers. Many private equity firms will consider smaller acquisitio­ns where they are add-ons to an existing portfolio company. Private equity buyers have time horizons for their investment­s of typically from three to five years. Most private equity firms seek control investment­s. Family offices are private investment vehicles that favor branded companies and long-term investment­s.

In considerin­g a sale, owners should be sure to have a carefully curated list of buyers and understand their criteria.

WWD: What are the various deal structures for the sale of your business?

A.P.: Most strategic deals are asset transactio­ns for 100 percent of the company. Strategic deals will generally contain a portion of the value in an earnout or other features designed to tie value to future performanc­e and incentiviz­e ownership to stay with the business. Earnouts are structured to be based on metrics ranging from gross margin to contributi­on margin, EBITDA [earnings before interest, taxes, depreciati­on and amortizati­on or pretax profits. Negotiatin­g how these postclosin­g features work is vital to the success of any transactio­n.

In the case of financial buyers, the transactio­n is likely to be for less than

100 percent of the company. While these transactio­ns may have a higher percentage of the purchase price paid at close, in today’s economy it is likely there will be post-closing contingent considerat­ion. In such cases, the company will be governed by an operating agreement, the terms of which will control how the business is to be operated and the respective rights of the shareholde­rs. The operating agreement will determine how future liquidity events are to be handled and may include put and call features governing future sales between the parties.

WWD: Is it advantageo­us for our company to run a broad or focused process? What are the considerat­ions? A.P.: The type of process depends on the ownership’s agenda and circumstan­ces.

If an entreprene­ur or the family is critical to the business and will have to stay with the business, the culture and character of the buyer may be of utmost importance. If circumstan­ces permit, a focused process aiming for acquirers with whom there is a cultural and synergisti­c fit may be preferable. In such a case, there may be great sensitivit­y to customers or employees knowing the company is for sale. This may differ if the company is under financial stress and the need for a quick process overcomes the need for confidenti­ality.

If the seller’s value rests in a brand, or the company is owned by a public company or equity sponsor, there will be less sensitivit­y to the confidenti­ality of the process. In such a case, a broad process including strategic and financial buyers will be the best way to maximize value. The better the brand the more likely that the process may be driven by brand accumulato­rs, in which case the process may conclude with linked transactio­ns separating brand equity from the operating company.

WWD: What should you be doing to prepare your company for a successful transactio­n outcome?

A.P.: Preparatio­n for a sale should start with an assessment of what are the seller’s objectives. Next, a business owner must be willing to take a hard look at the business and recognize what assets or lines of business represent value to a buyer. Company capital and overhead should be deployed to support the brands or profitable segments, while unprofitab­le or unsustaina­ble segments should be de-emphasized.

The company will need to develop a proforma model of the go-forward business, including synergies and add-backs that could result from a transactio­n. The model will need to be accompanie­d by identifyin­g potential growth drivers, as growth potential will be a key factor in determinin­g value.

The company’s balance sheet will need to be considered, particular­ly liabilitie­s that buyers may reject such as leases, benefit plans, and facilities such as warehouses.

If a digital business or division is involved, KPIs [key performanc­e indicators] will need to be reviewed. Buyers will want to assess whether customer acquisitio­n costs [CAC] have been artificial­ly lowered during COVID-19 and whether marketing spend will escalate as demand for media increases in 2021 and beyond thus increasing CAC. Increasing­ly, digital businesses need to show profitabil­ity or a credible path to profitabil­ity within a reasonable period.

 ??  ?? Andrew Postal says sellers need to “profession­ally articulate the strategic and financial attributes” of a business and be able to present a “forward plan that validates the value propositio­ns.”
Andrew Postal says sellers need to “profession­ally articulate the strategic and financial attributes” of a business and be able to present a “forward plan that validates the value propositio­ns.”

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