The Company, an online retailer of specialty niche apparel owned by a husband and wife, approached GHJ late summer 2019 with an interest in preparing the business for a sale. Sale was completed in April 2021.

BACKGROUND

• Finished 2018 with:
  • Revenues of $9.7 million
  • EBITDA of less than $1 million
• Projected for 2019:
  • Revenues of $13 million
  • EBITDA of $1.5 million
• Challenges:
  • New reporting systems installation
  • Underinvestment in its finance staff (not unusual for companies of its size and stage of development)

GHJ OBSERVATIONS

• Ownership team was creative, thoughtful, dynamic, smart and passionate about the business
• Business about to hit its stride in terms of market presence, growth, absolute revenue size and profitability
  • Formal planning could provide a meaningful assist
• Market space was old and stodgy and ready for a challenger to established brands
• Marketplace timing was ready for a direct-to-consumer (DTC) brand and the creation of a community to optimize value
• Professional financial leadership and reporting systems to provide support and manage the company needed upgrading and improvement

GHJ SERVICES

GHJ was engaged to:

1. Prepare a financial forecast
2. Scope out and assist in the selection of the best fit investment banking firm
3. Provide accounting and financial diligence and broad advisory services to support the sale process
4. Advise on building out the rest of its transaction team
5. As an experienced sounding board, provide ongoing advice to the owners during the process

Forecasting Model

The forecast model revealed that the extent to which increased spending on its traditional online sources of advertising (Facebook, Instagram, etc.) could yield outsized increases in sales and margin. Given size and capitalization, the Company’s ability to increase spend substantially was limited because of the related requirement for increased inventory, which required several months’ lead time at its overseas manufacturing partners. To move forward, the Company needed working capital to fuel growth.

Selecting an Investment Banking Firm

After completing the modeling process, GHJ provided insights on which investment banking firms would be the best fit. And in January 2020, the Company went to several of the recommended investment banking firms to discuss going to market.

While it took several months during the middle of COVID-19 shutdowns, GHJ ran a two-step process to help the Company select the firm to advise on the sale and negotiated the engagement agreement with the selected firm.

Transaction Due Diligence

Once the investment banker was selected, GHJ’s Transaction Advisory Services Team performed seller accounting and financial diligence to support the process and defended the findings with the buyer. The process included validating the company’s financial statements as well as adjustments to financial performance to better represent the true nature of the business.

Building a Transaction Team

The Company also required a team to be assembled with a strong understanding of ecommerce businesses that could assist with securing a smooth transaction. GHJ identified an M&A transactional attorney and the owners’ tax and estate planning counsel. Finally, as GHJ was advising on working capital sources, GHJ introduced the Company to the lending institution that ultimately supported the sale transaction.

CLIENT ACTIONS

Two months after GHJ was engaged by the Company, the world would be shut down because of COVID-19. No one knew that the impact would actually lead to a boom in business for the Company, which validated GHJ uncovering of the significant improvement to sales with more advertising spend. The Company took advantage of the collapse in advertising prices for its online channels and spent what it had planned to spend, getting many more impressions for the same advertising dollars.

As it saw the success, it put more money into inventory acquisition and, by the end of 2020, had more than doubled 2019 revenues and increased EBITDA many times, making it a very attractive acquisition candidate.

THE RESULTS

During GHJ’s initial conversations with the Company in late 2019, the owners expressed belief that they would be satisfied with an enterprise value that reflected the business at the time. Because of the stunning performance during 2020, the transaction closed with a very high-quality financial buyer at an enterprise value well in excess of their original expectations. This included a rollover equity position that the founders retained at closing, which expressed confidence to the buyer of their continued commitment to its investment.