Independent Sponsor Structuring deal

I have been an owner/operator of clothing and eyewear brands over the last 7 years. Our brand growth has stalled out and my partners (Family office) asked me back in October to look at new ways to jump start the company. FYI, we are based in Spain.

Our original idea was to start with a roll-up strategy and offer stock for stock mergers with several brands to build up a larger holding company. After doing some outreach and lots of cold calling we received soft commitments from 6 brands, it would total about 18€ million in sales, 2€ million EBITDA. From there we could probably do more bolt ons, and buy up some licensed brands. Ideally build up a holding company and attract an operational buyer or investor later on.

One issue is the original brand portfolio will be very diverse (nobody is really competing) but will have very little overlap in production or sales strategy. We would only be able to consolidate logistics and admin to start probably.

I have reached a cross roads. I was not familiar with the Independent sponsor model when we started, but I am enjoying the work. I am now convinced I could get deals done with this structure, but have my doubts about the current deal/industry we are working on.

  1. Should we make a partial cash deal for one of the bigger brands ~4€ million in sales (40% growth YoY), they want 7€ million but would probably negotiate down due to fears in the new economy. and use that as the ship to then acquire others?

  2. Is this current structure doomed to fail, and doing stock for stock is a recipe for disaster.

  3. With the turbulent economy many companies are willing to negotiate right now, make the deal and figure it out later.

One of the models I was following is MBH Corporation that started trading in Frankfurt last year.

Comments (9)

Mar 30, 2020 - 7:26am

Few observations on your plan
- You will need the platform deal first, as nobody is going to give you their company if you offer 0 in return? Make sure there is a path for you to make money as well, can't see yet how you are going to make money if you don't bring in a business (and receive shares in the group in return).
- How are you going to incentivise each business when they become shareholder of a larger group?
- Make clear synergy analysis before deal and let sellers agree to it. Admin often done by family members which will be redundant
- Would at least focus on 1 extra synergy bucket. See if you can find companies that would benefit from production optimisation for instance (where are they producing now)? In addition I think you could add a lot of value to brands that are underperformign online - which can be a very scalable skill (SEO, website optimisation, influencers, etc). Especially the latter could be very iteresting in a diverse brand portfolio.
- Think about governance now. Who will get a vote when you do add-ons?

PE trackrecord in fashion
PE is not a huge fan of fashion as its results often fluctuate a lot based on the quality of the collection of that season. Huge brands (Zara, H&M) therefore are making douzens of collections throughout the year to mitigate this partly. Do some googling on fashion private equity and see what other lesssons are to be learnt.

Current investment climate and forecasting
With regards to current investing climate: this year will be a disaster for fashion, especially brands that rely heavily on store sales (as oppossed to online). In addition expect a significant drop in retail sales next year because of the crisis. You should be able to gather some data on non food retail sales in Spain through the last 2 decades to get a better understanding of what is to be expected from your targets in coming years. I would say most of them will have serious topline issues, resulting in serious liquidity issues: you might be able to collect quite a few brands for little in the years to come but you should have the financial resources to support potential bleeders as well.

Mar 30, 2020 - 11:14am

Thanks Rover-S we have already agreed that we would take 10-15% equity of the company for structuring the deal, and managing the board.

We would start with a core group of businesses that are profitable (or were before COVID) then look for accretive investments to improve EPS and sales. They would receive capital from parent company to execute their business plan. WE are selling them on joining a bigger network and having capital behind the,

Most of these businesses have a relatively small back office, but almost all want to get rid of the admin tasks. Their main incentive to join is to grow sales and distribution by having a larger back office and network.

There are many synergies we have come up with, our biggest issue right now is that the companies that have gotten to "yes" offer very few synergies amongst them. Marketing, logistics, and admin is what we can offer for now as they are all very different. After completing the first merger we could find other bolt-ons that could use synergy.

One Vote for all original firms joining, bolt on acquisitions will depend on how much they bring to the table.

PE track record in fashion

I agree, not the best market. Since starting this project I have become very interested in this business model and starting to look at other industries we might be able to do and Independent Sponsor deal with.

We feel that with the current situation if we hold out 6 months we could have a situation where companies are willing to join at a cheaper valuation, or just based on earn outs if we can guarantee them cash.

Most Helpful
Mar 30, 2020 - 9:01am

I don't know if investing into fashion at this time makes sense unless the management has a track record of successfully scaling young brands. Marketing will be a key part of the budget and you should be prepared to spend a good amount. Part of the reason why supreme and Canada goose do well is the marketing and the kind of folks they've gotten to endorse the brand. Obviously having a high quality product is incredibly important too but marketing is what'll get the initial attention. You don't want to buy too many brands at the same time so that you don't end up cannabalizing others. Rover is right - you need to build an initial platform and it makes sense to buy the one with a bigger size and then engage in add-one. Your deal seems too expensive in this scenario - where people might not be visiting stores for some time. Don't forget that physical locations are still very important to build awareness - digital spending is expensive in terms of acquiring customers and having stores in high quality stores lowers customer acq costs. Either way, if you still want to go ahead, your deal sounds expensive. It's probably in ball park of 6-7x ev ebitda. You should take advantage of the current circumstances and offer 3-4x with the remainder in earn out. Plus make sure they roll over.

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Mar 30, 2020 - 9:22am

I would be wary to putting together a platform like that when you don't feel the synergy is there. More often than not, synergy fails to materialize in the first place and it will only be even worse if your thesis is correct.

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Mar 30, 2020 - 11:06am

Our original thesis has been that we can find lots of synergies (and it's certainly possible) the issue is after doing outreach, the only companies that have shown interest have very little synergies.

It's possible that after structuring 1-2 deals we can begin attracting other brands with a synergy sale. As ibd-london said we could be going after production (plastics, lenses, hinges, 3pl), marketing budgets, and scaling their online performance with platforms that would not work with less than 10k/month in ad spend.

Our issue is the current lineup doesn't have it. So that is why I'm considering the buyout of one, and going after the others.

We think that many will have a cash crunch so if we can offer them stability they might be willing to do a 3x+ earnout.

Mar 30, 2020 - 11:09am

Yeah I think if you nail the structure/price side then obviously that mitigates a lot of the risk. What's wrong with the $10k/mo ad spend btw? I don't think that's unreasonable? Would that be targeting the EU specifically?

Eyewear is pretty brutal atm though because VC funded unprofitable co's like Warby Parker in the US will outspend you and drive up your CPM.

Mar 30, 2020 - 11:43am

I'm saying these companies alone are not doing 10k/month. Pooling resources we could reach that spend and access better platforms like RocketROI (for example) which allows for better returns.

Current targets are in the EU, and the US.

It is a mix of online brands, and many are traditional distribution brands that go through optical channels. So it would be a mix of online and trade marketing.

m_1 I've read several of your posts and your background. I personally feel the CPM's online are unsustainable, I believe the only brands that will find scale will be the ones focused on audience building. In my opinion, anyone looking to buy customers can build up a decent mid range business, but eventually it will catch up.

Love reading your posts, very interesting how you have transitioned into your current role.

Mar 30, 2020 - 11:53am

Thanks! I think it's definitely become exponentially harder over the last few years due to the influx of funding into DTC brands willing to burn ridiculous amounts of money plus overall pressure on digital ad inventory but, digital still works and it's worth doing. It's still the fastest way to scale with the most capital efficiency and get the data you need to launch into physical retail.

RE: building a team out to manage the spend and digital side. If you're tackling a lot of b2b channels, a good digital guy can likely help quite a bit too and pay for his seat that way? I think for $80,000 - $150,000 a year (precorona?) OR you can find someone competent willing eat shit and take some equity? On the b2b side they can do things like organize scraping leads + automatically emailing/bombing ads programmatically by geo (adwords API let's you go down to inches) and then organize the sales process.

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