In the first of a two-part series, we look at which things the owner of a fashion business should consider when contemplating a sale of their company.
Last month it was reported that the number of M&A deals targeting UK retailers increased 23% over the last year. These have included big names such as Authentic Brands Group acquiring Ted Baker, but there have also been many “rescue” acquisitions with Next expanding its portfolio by acquiring Joules and Cath Kidston. Fox Williams lawyers Paul Taylor and Georgie Glover have previously set out the key considerations for fashion businesses considering an asset sale (catch their webinar here), but what else should you consider before starting the M&A process?
1. What do you hope to achieve from the potential sale?
The goal in an M&A process is typically to achieve a clean exit from your business and you need to decide if that is what you want.
You may be interested in staying on and working with others to achieve growth after you have sold the business. Alternatively, you may wish to stay on with the business and achieve a sale, but look to become a part-owner of a bigger business that acquires yours (for example, a private equity firm).
For many fashion businesses, this may be about expanding into a new market. This was the case for JD Sports entering the mainland European market by acquiring French sporting giant Groupe Courier earlier this year, and French pre-loved luxury fashion marketplace Vestiare Collective acquiring LA-based clothes-resale platform Tradesy in Autumn 2022 in a bid to increase its reach in the US. The goal could also be to expand your current business offering, by purchasing a business that specialises in a different (but complementary) line to your own.
In focussing on your motivations and goals at the outset of the sale process and communicating these to the potential buyer upfront, you are more likely to achieve your desired outcome. Given that there will be nuances and details to be worked out for each driver for a sale, you should make your goals known to your advisory team at the outset.
2. Are you selling shares or assets?
Most sales with which we are involved take the form of a share sale, as opposed to an asset sale. A share sale is the sale of the ownership interests in the company. In contrast an asset sale is the sale of all (or part of) the assets and businesses of the company, which will be transferred to the acquiror.
There are pros and cons to each structure, but one of the key reasons why a share sale is generally preferable to an asset sale is tax-related. A share sale should give rise to capital gains tax on the capital profit made. However, an asset sale will result in corporation tax on the proceeds of the sale made by the company. Once the company has paid the corporation tax, the proceeds of the sale can then be distributed, but if the owners are individuals, they will be charged income tax on the proceeds. In effect, there can be double taxation on an asset sale and so often a share sale is preferred.
3. How much will I be paid?
One of your primary concerns will be how much a buyer might be willing to pay for your business. For private limited companies, as there is no open market for the shares, it can be difficult to determine a valuation without external advisers. We recommend obtaining a valuation from a reputable corporate finance adviser early in the process to understand what you seek to gain from a sale.
You should also consider whether the deal will be priced on a ‘locked box’ or ‘completion accounts’ basis. With a locked box, the price is ‘locked’ on a particular date (for example, the most recent audited accounts date), and any leakage out of the company to you, any other seller and your connected persons from such date will be owed by the relevant sellers to the buyer. With completion accounts, the price is subject to adjustment once accounts have been prepared and finalised following the completion date, to reflect the true position at the date that the buyer acquired the company. A locked box is generally preferable for sellers as it provides certainty as to the price to be received on completion.
4. What are the most important terms?
Other than the price, there will be other key terms on which you will want certainty before you instruct lawyers to draft the official documentation. These will link with your goals (see point 1 above) for the process.
These key terms should be documented by way of a letter of intent or heads of terms, and it is good practice to engage a lawyer to do this for you. While such a document generally will not be legally binding (save for certain specified provisions such as costs; governing law; and confidentiality), it will record that the parties agreed to proceed with the deal on the basis of the terms. This, therefore, makes it much harder for the buyer or its lawyers to argue otherwise when the official sale documentation is drafted and negotiated.
5. How do you expect to be paid?
If your intention is to depart the business entirely, it is likely that you will be looking for the buyer to simply make a single cash payment upon completion of the transaction.
However, if you intend to or are required by the buyer to remain with the business following completion, the buyer may suggest a different consideration structure such as an earn-out. This is a provision that links a target (for example, profit level or revenue level) to the price that is payable to you at a future date.
There are many other potential consideration structures that may be proposed, depending on the motivations and finances of the buyer. For example, in private equity transactions where the buyer expects certain sellers to stay on with the business, the buyer may require the sellers to reinvest a portion of their proceeds into shares or loan notes within the buyer’s group.
Likewise, a buyer may want to stagger the consideration over a longer period – across 1 to 3 years is common – to see how the acquired business performs after completion, and whether profit matches the sellers’ projections. Indeed when Estée Lauder announced its acquisition of the Tom Ford brand (in a deal that valued the Tom Ford business at $2.8b), the purchase price was financed over a 3-year period through a combination of cash, debt and a deferred consideration of $300m (to be paid from July 2025).
Look out for part 2 of this article in the next Fashion Focus newsletter! Sign up for the newsletter here.
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