- Posted by Leonie Kroon
- On 6 May 2016
While the fashion and retail industry tries to keep up with the pace of the global digital evolution and changing consumer needs, brands need to stay in shape for possible investment or takeover. Profitability is usually the primary objective when buying a fashion business; however, there are several other crucial factors that a buyer or investor will consider.
1. Who is behind the brand?
It may seem obvious, but identifying and keeping key individuals behind a brand and its designs is essential. Businesses should consider the value of binding independent contractors with (locally compliant) employment arrangements and offering appropriate incentives to stay (such as bonus plans, share options or transaction-associated earnouts). Further brand protection could be sought through non-solicit agreements too.
Apart from securing the label’s top talent, it is key to ensure that all know-how, copyright and design rights sit within the target business (where possible, given that protecting fashion designs with intellectual property rights is not always an easy task). Potential investors or buyers will be keen to know whether individuals who have previously created works or designs for a brand have entered into valid intellectual property transfer agreements (through their employment or otherwise).
2. What’s in a label?
The international intellectual property portfolio of a fashion or retail brand will always be of interest to a potential investor or buyer. Apart from initial enquiries regarding jurisdiction coverage of intellectual property rights, and any pending or threatened litigation, secondary factors will also be considered. What is the likely cost of assignment of intellectual property at relevant local registries, for example.
In an investment or takeover situation, the current business owner or board must flag any past co-existence agreements or licenses limiting the company’s use of its intellectual property. In the fashion and retail industry, it is particularly important to be mindful of the existence and enforcement of infringement policies.
3. What about third-party rights?
When contemplating a transaction in the fashion industry, investors or buyers will map who has rights to use, market or sell a brand and its products. Long-term contracts with onerous termination provisions will be off-putting. It would be a nasty surprise to find out a distributor or reseller has unlimited exclusive licenses in place that provide for use of the brand’s intellectual property or burden the business with supply obligations and high commissions, especially if a full integration of the target brand was envisaged.
Furthermore, businesses should be conducting regular stock-takes. Large amounts of stock on the company’s balance sheet can be a liability, particularly in an industry so susceptible to seasonal trends.
4. What about ethical concerns?
Reputational damage caused by ethical non-compliance can be destructive to a fashion label.
Potential investors or buyers will expect assurances that manufacturing processes are compliant with local laws, for example on waste material, animal welfare, child labour prohibitions, humane working hours, health and safety regulations and data protection.
In addition, if corporate social responsibility is important to a potential investor or buyer, implementation of sustainable development policies and an assurance of compliance with them can go a long way.
5. How future-proof is the brand?
It has been widely reported that, with the growth of online shopping, retail stores are not as profitable as they once were.
In a takeover or investment situation, broad business strategies will be discussed at an early stage. This will uncover whether the target business has a focus on (for example) wholesale, owned retail stores, in-house department stores or online shops. Investors or buyers will need to decide whether the target brand is future- proof. Can it survive with just its current facilities? Or will a takeover require significant e-commerce investment to meet the needs of impatient customers?
6. Who is wearing the brand?
If an investor or buyer is looking to buy, build and sell a business within a short timeframe, proper investigation of the current international reputation of a brand in the broadest sense can make or break a takeover strategy.
Which customer segment purchases the products and what is the brand’s position relative to competitors? Are there enough opportunities to expand sales and earnings and be more profitable?
7. Is it an “it” brand?
Along with more traditional marketing and advertising strategies, social media activities and policies are key to fashion and retail businesses today. Collaborations with influential bloggers can add considerable value to a brand, for example. The absence of a social media strategy and/ or policies to prevent reputational damage online will be a red flag to a potential investor or buyer.
In fashion, success comes down to the ability to create sustainable and competitive products, then push them out with fast marketing and speedy delivery, to match consumer need and uphold brand reputation. Together with profitability, these factors define the value of a fashion business and will be considered carefully by a potential investor or buyer.
– Leonie Kroon and Laura Smit