Gateways to the Future
Making a graceful, and profitable, exit doesn’t always mean goodbye. While some business owners equate exit strategies with a total sale of the business, for many an exit represents the opening of doors for future growth.
Introducing the Main & Wall session on “Exit Planning and Execution,” moderator David Deutsch, president of New York City-based David N. Deutsch & Co., outlined three opportunities to liquidate and take cash out of the enterprise. “The classic alternatives are a sale or merger transaction; an IPO (initial public offering), which is often misunderstood to be an exit when in fact it is a gateway to an exit; and recapitalization of the business, another gateway process.”
Planning an exit strategy is a multi-layered process that should include an assessment of shareholder objectives, duediligence reviews, addressing operational, financial and transactional issues and a valuation of the business, all of which can take 12 to 36 months to complete.
When the pre-exit planning is complete, a traditional sale-based exit will take another six to 10 months to be finalized, suggested Deutsch. He also cautioned attendees to interpret letters of intent (LOI) for what they are: “An LOI is merely an agreement to agree; it is not the final transaction. Between the LOI agreement and the final transaction, there is typically a lot of negotiation.”
Investors Smile on giggle: Building a new retail prodigy into a financial success storyAs a new parent herself, Ali Wing, the founder and CEO of the hip retail concept, giggle, experienced firsthand the frustration of baby merchandise overload. The established big-box retailers that serve this niche were heavy on product selection but devoid of any valuable product knowledge. Wing created her unique retail stores to become “resource destinations,” where new parents would find an edited selection of the best baby merchandise available across a range of prices. More importantly, she established giggle as a parenting community, providing expertise, advice and discussion forums to help parents “navigate the glut of choices and find only what they need, when they need it.”
Wing impressed Main & Wall attendees with her enthusiasm as well as her market savviness. The average age of births by first-time moms continues to rise from a median age of 21.4 years in 1970 to 25.2 years in 2003, according to the U.S. Center for Disease Control. Older parents make for more financially established, educated consumers, who make informed purchases, particularly when the purchase correlates to a huge emotional investment as well.
Although giggle is quite possibly a brilliant idea whose time has come, Wing’s true genius was in taking her nurturing philosophy straight to the boardroom. She has fortified her company with a veritable who’s who of experienced C-level executives. Directors on the giggle board include John Bronson, whose former positions include senior VP, Williams- Sonoma, Inc., and executive VP of Pepsi Cola; Mikel Durham, formerly president, global supply chain for Cadbury- Schweppes and president, Burger King North America; and Robert Fisher, whose 42-year career in the securities industry included positions as principal, managing director or partner in a number of firms including Flagstone Securities, Schroder & Co., and Drexel Burnham Lambert. Advisors to giggle include Roger Enrico, former chairman and CEO of PepsiCo, and Dale Hilpert, chairman and CEO of Footstar.
Additional coverage of giggle can be found on page 20, in the April issue of Chain Store Age, and under the “Picture This” feature at www.chainstoreage.com.
A recapitalization process can occur in many forms, including corporate dividends, repurchase of company shares, asset-based lending or an employee stock-option plan (ESOP).
Barbara Anderson, senior VP, LaSalle Retail Finance, Reston, Va., noted, “It’s been a robust couple of years for recapitalization, with lots of activity in the retail space. Assetbased lending [ABL] was historically used more for rescue financing, but today ABL is anything but plain vanilla. We’re seeing a lot of creativity in the ABL market, and it is not uncommon to see 100% to 125% loan to values.”
For owners who simply want to sell the business, Deutsch said, “No doubt it is a seller’s market. But does that mean every owner should head for the nearest exit?”
Not necessarily, according to Dominic Rispoli, managing director, Lehman Bros., New York City. “Although multiples are at a peak average and some companies are trading at exceptional values, others remain at modest values,” he said.
Advice to retail attendees from the Main & Wall analysts: Stay true to your long-term objectives and sell only if that fits with your overall plan and principles. In all probability, the selling market is not going to wane in the near future.
Anderson predicted the market will likely remain fluid through the coming year and there will continue to be competition for retail transactions. She said, “Activity will slow when those 125% loans are tested, a shift that will probably be driven by outside factors such as a decline in the economy and/or declining consumer confidence.”
However, small and mid-sized retailers seeking to sell their businesses may face a challenge if they have not maintained a consistent growth pattern. “Companies that are selling often have a strong history of growth,” explained Jared Kaplan, partner, McDermott Will & Emery, Chicago. “Many private companies don’t have predictable growth, which may make an alternative such as an ESOP more viable than a market sale.”
On a positive note, Anderson reminded attendees that enhancing a company’s value has become more affordable. “Enhancing value can be as simple as achieving the ‘right inventory, right place, right time’ objectives. But we see a lot of weak systems that make valuation difficult.”
Competing in a World of Behemoths: Technology is now more affordable and easier to implementThe good news for small to mid-sized retailers is that it has become significantly more realistic to compete against the big guys—at least where technology is concerned. The bad news is that the big guys aren’t going away, and they sure aren’t getting any smaller (neither in size nor threat).
Richard Michalec, global VP, retail, of Oracle, Costa Mesa, Calif., encouraged Main & Wall attendees with his report on “the democratization” of retail software. “What was once only available to the big retailers is now available to you,” he noted.
Historically, the behemoths have had a huge advantage over smaller retail companies because the scale of the retailer determined, or lowered, the cost of technology. This was “back in the day” so to speak, when there was very little packaged software for enterprise management; functionality and complexity were tightly integrated; and only the behemoths could afford the highly customized solutions.
Enter the new millennium, when technology platforms are standards-based, hardware has become a commodity and the world of connectivity has been totally transformed. “A retailer’s investment in the platform portion of IT [information technology] is down 40% to 60%,” Michalec stated. “Software costs 30% less than it did five years ago; implementation costs are 25% to 50% less, and the time required for implementation has also been reduced 40% to 60%.”
For retailers looking to grow, and in many cases grow multichannel, hearing that technology has become “cheaper, better and faster” was reassuring.
However, Michalec warned that the “big guys are applying science to create localization and to improve the shopping experience.”
For instance, technology makes information more readily available to store associates, keeping the