The life arc of a fashion company is subject to usual and conventional patterns. Inspiration and creativity is the starting point and focused on the look, image and aspirations of talented individuals, a/k/a designers. Around the designers a brand is born. The designers produce signature collections to build brand identity. Friends and family money is raised to fund fabric acquisition, product distribution and hopefully some salaries.
After that initial stage and the brand has traction an over-the-horizon view will envision the proverbial exit vehicle…tuck in, public offering, reverse merger and so on.
In the middle falls the shadow. The brand has traction, distribution targets are met, prestigious doors are opened, EBITDA (hopefully) is hitting the bottom line but yet the fashion company is precarious or at an inflection point. The conundrum is faced by the timing issues of seizing the moment to push the arc of the trajectory and possibly exit first round investors or to grow conservatively, organically, incrementally retaining control and hoping the brand value follows the foreshadowed arc of accomplishment.
At this stage the fashion company will likely be introduced to, or solicited by, investment bankers. Some welcome this approach as a sign that the hard work of brand development is on the cusp of financial recognition. But the usual question I receive is so what is it that an investment banker can do for me? Is an investment banker just a glorified broker?
Actually no. An investment banker has several functions. It can be the middleman between the fashion company and the buying public; it raises capital and functions as an underwriter, securing commitments from mutual and pension funds and the like.
The investment banker also advises on mergers and acquisitions, advising the fashion company on such matters as business valuation, negotiation, pricing and structuring of transactions, as well as procedure and implementation.
Personally I have found the process with investment bankers to be a critical component for a fashion company ready to take on new investors, strategic partners or to acquire other targets. There is a necessary reality check as to valuation, to have a perspective on valuation beyond the application of a multiple to EBITDA. Maximization of value cannot be achieved without knowledge of the market as a whole and which targets, be they family offices, private equity firms or strategic. The good investment bankers are worthy and invaluable strategic partners to extract maximum value.
Of course investment bankers are paid for their services. While everything is negotiable there are some patterns including minimum retainers and variants on the Lehman Formula including Double Lehman and Double Percentage Lehman. For this the investment banker will take the fashion company from the start of due diligence, to preparation of a teaser, confidentiality agreements, information memorandum, target identification and solicitation, preparation for the target examination and the negation of a letter of intent.
Surprisingly, I have often been asked why do we need investment bankers in an age of public dissemination of information whereby valuation screens and target identification is readily accessible via the Internet. My usual response is that such a process is similar to one using WebMD® to diagnose and treat oneself.
But for reasons beyond economics, clients have been moving to a new model for the mid-stage equity raises. On the proactive side clients have asked Fox Rothschild to prepare them for the process; clean up otherwise basic or fundamental matters due to budget constraints or mere lack of prioritization are then brought to the fore. An examination of corporate practices, tax optimization, potential tax issues arising from transfer pricing, employee practices and handbooks and even basic corporate records and state qualifications. Call this the corporate check up and remediation. Before commencing the process, how will an outsider view the company? In this process we want to look our best on our first date, and not wait for the multiple rejections before putting on our best garb.
Thereafter we move to the critical commitment stage. We are not ready to jump to the teaser or information memorandum stage. Now we need a vendor due diligence, the “VDD”. The VDD will be prepared by an external firm of accountants. Multinational companies will use a major firm such as KPMG®. The VDD will be a a micro detailed examination of the company. It will include an overview of the structures, key employees, key policies, tax optimization strategies employed, potential tax liabilities and basically serve as a foundation for monetization optimization. The VDD is an integral component when not using and investment banker. It gives a potential target the comfort that should it begin the process of acquisition, the costs of such process will not be wasted because of unknowing (or gasp, knowing!) soft representations by the fashion company.
Then we draft the teaser which should be, in my opinion, a one-page highlight of the brand, its top line numbers, number of doors and other critical data. The teaser at this stage does not identify the fashion company. The key issue now is the validity of the assumption that an appropriate target can be identified to match up the fashion company with a partner, strategic or financial. This is art as well as science. The degree of confidence may be affected by the personal knowledge and experience of attorneys, accountants, public relations advisors as well key executives of the company.
If interest is expressed a non disclosure and confidentiality agreement will be drafted and executed by those interested in receiving both the information memorandum as well as the VDD.
If further interest is expressed after preliminary meetings, a process later may issue outlining the fundamentals of an expression of interest and/or a letter of intent.
While I have undertaken the role to shepherd the process without an investment banker, my first advice is to let each professional play its appropriate role. The only time I am enthusiastic about disintermediation the investment banker is if the client is at the stage where we would be dealing with investment bankers at the end of the scale whereby the function is more of a broker. If a quality house is not available then there are good reasons to control the process internally. But in the end each brand, each entrepreneur is different with varying needs at different stages of development and therefore must be evaluated on a case-by-case basis. Feel free to contact us if you have questions regarding your next equity raise.