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Sea Change: Beauty’s Historic Opportunity

By: Andrew M. Apfelberg
Posted: November 9, 2009, from the November 2009 issue of GCI Magazine.

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Despite it being a buyers’ market, there is no lack of eager, or at least willing, sellers. Some business owners do not have the stomach for the current climate of uncertainty. Others are at or approaching an age of retirement and do not have a likely successor in place or in the horizon. In either case, these business owners have been eagerly waiting for the climate to change. Many have tried to hold out as long as they could, hoping that the change would have come by now. For the most part, it hasn’t yet arrived (though it does appear to be on the way).

The end of 2009 looms, and waiting is no longer an option for many. For others, it is a health condition that adds urgency. Still another group worries whether capital gains tax rates will be raised. Some are doing fine but know that they have taken the business as far as they are able and that it requires the skills or resources of another to take it to the “next level.” Others are fatigued from battling the economic climate these past 12 months, and others remain skeptical about a quick end to the recession. Yet another group is struggling and needs new management, a capital infusion or extreme cost savings to survive.

Regardless of the motive, the effect is the same—even though business owners would prefer to wait until valuations and deal structures were better (not to mention the financing markets), they are realizing that delay is no longer an option and that stagnation could result in death.

Even with more favorable valuations and deal structures coupled with reduced competition for each deal, many buyers still need some form of financing in order to have the resources to do the deal. For most of 2009, lenders were not interested in putting out new money—or when they were, it was at unaffordable rates. Many shied away from providing financing toward the beauty industry due to concerns over whether reductions in consumers’ disposable income would hit it disproportionately. Others expressed a concern about the ability to liquidate foreclosed upon collateral that was a branded product for fear that purchasers would be unwilling to pay anything close to standard prices for the product at that point.

In the third quarter of 2009, that seems to have been changing. While far from the free- flowing leverage of two years ago, senior and mezzanine lenders are getting involved in new deals. It takes a while to get through the credit committee, and the standards are higher. The diligence process is more intense and personal guaranties are the norm. However, these are not necessarily bad things. A second set of eyes reviewing the financials and operations of the target company never hurts. The moments of pause that come with the consideration of a personal guaranty are excellent moments of reflection/consideration and gut-checks for the buyer.