Neil Patel

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M&A in the fashion industry has facilitated significant transformations, and correcting defragmentation is only one of them. As one of the largest segments of the global economy, the apparel and garment sphere now includes massive manufacturing houses.

Big brands now dominate the sphere that previously had small, specialist boutiques run by families or individual designers. These small manufacturers and sellers prefer to sell via eCommerce and social media platforms or have merged with the giants.

Global luxury brands have been acquiring smaller names to create massive corporations. Some of the best-known deals in recent times that took the industry by storm were worth $8.5B. Tapestry Inc., the parent company of top brands like Kate Spade and Coach, acquired competing Capri Holdings.

The international apparel vertical had a record 278 M&A deals in 2023, of which six are considered mega-transactions with values of more than $1B each. If you are considering a merger or acquisition in 2024, this is the opportune year to enter into collaborations.

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The Ultimate Guide To Pitch Decks

Current Trends in the M&A Industry

Experts estimate that the fashion sector will grow from 2% to 4% in 2024. Segments that will see the maximum growth are luxury brands and blockchain technology, which ensures sustainable and ethical practices. Such practices are about avoiding exploitation and infusing conservation initiatives.

A good example is VeChain, a blockchain platform that has partnered with the Givenchy brand in an M&A transaction. The objective is to enable informed purchasing. Personalization in fashion trends using AI-generated applications will also capture consumer interest.

Technological advancements and increasing globalization have altered apparel manufacturing and distribution. For instance, using AR and VR applications on mobile phones and tablets, customers can visualize clothing before finalizing purchases.

Consumer buying trends are also changing; Americans purchase twice as many items as before. Smaller brands are relying on M&A in the fashion industry to capture a bigger market share and raise awareness.

Larger luxury houses have successfully leveraged their size without losing brand value. LVMH Moët Hennessy Louis Vuitton’s acquisition of Tiffany & Co. for nearly $16B in 2021 is a good example.

Horizontal mergers have enabled companies to collaborate with competing brands dealing in related or similar products. Vertical integrations also enable brands to consolidate their positions in the pipeline and supply chains. That’s how they ensure an uninterrupted supply of inventory and streamlined distribution.

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Optimum Valuation Methods

Valuation methods for M&A in the fashion industry are unique to the segment and how it operates. Typically, dealmakers deploy approaches such as the replacement value method, discounted cash flow method, or the comparative ratios method. Each of these methods has its pros and cons.

Replacement Value Method

When calculating the replacement value, M&A advisors add up the costs the buyer must incur to duplicate the target. This value includes the costs of the fixed assets, such as land and premises, and soft assets, like Intellectual Property.

The fashion segment puts a strong emphasis on brand value, logos, trademarks, and trade secrets. However, the replacement value method cannot accurately calculate the time it takes to build popularity and visibility in monetary terms.

Hiring and training the right skill sets and talent pool that drives the brand value is a complex process. Building the company culture and compiling a well-coordinated management team is also crucial. Since these assets are integral to the target’s value, M&A advisors need to go beyond to assess value.

M&A in the fashion industry is also about acquihires. Larger companies seek to buy out top designers and bring them on board, retaining their original brand name.

Discounted Cash Flow Method

The discounted cash flow method (DCF) estimates the cash flows or expected revenues the target can potentially earn. But within a specific time frame in the future. This value also accounts for the risk or the potential for losses the buyer could incur after purchasing the company.

Using this strategy also presents challenges because of the extreme volatility of the fashion sector. Customers’ tastes and preferences evolve quickly, with new ideas and concepts emerging all the time. For this reason, estimating expected risk and revenues is difficult.

Take, for example, a fashion trend that emerged in 2023, where many fashion brands, particularly Gucci, released clothing and accessories with bold and conspicuous brand logos.

The distinctive GG logos were prominently displayed. By mid-2023, the trend faded as customers moved on to a more subtle approach in their dressing styles.

Although this changing trend did not affect the brand value significantly, it resulted in unsold stock and losses. This is why the DCF method is unsuitable for M&A in the fashion industry.

Comparative Ratios Method

The comparative ratios method compares the target to similar companies currently operating in the segment. However, these companies are not in the process of a merger or acquisition transaction.

Your M&A advisor will gather the financial information of another business with a similar size and scope. Next, they evaluate the ratio of this comparable company and then value the target up for an M&A.

However, the multiplier values can be different depending on the specific metric considered.

For instance, one company may conduct more D2C or direct-to-customer sales while others may be wholesalers. Then again, the company may have varying revenues coming from franchise sales, royalty revenues, or sales to retail stores.

Since these metrics may vary with the ebb and flow of customer buying trends, they are not exactly reliable. The same rule applies when estimating a comparative company’s profits. That’s because a fashion house has several types of costs that may influence the net profit.

For instance, the costs of sourcing raw materials like textiles, fabrics, leather, and trimmings. Fashion companies also incur costs for advertising, marketing, and the expenses incurred for shipping. If they own and manage a retail outlet or eCommerce stores, the costs vary accordingly.

With so many variables to account for that can also change from season to season, comparable ratios are not practical. As a result, M&A advisors and legal teams must use a blend of methods to arrive at accurate pricing.

Regardless of whether you’re buying or selling a company, you should know how to conduct due diligence. Before you read ahead, check out this video where I have explained the basics in detail.

Due Diligence Processes for a Fashion Company

Due diligence is a crucial part of any transaction, and dealmakers must approach it with meticulous planning. Particularly when they intend to execute an M&A in the fashion industry. Due diligence and its scope depend on the target company’s size, growth stage, and status as a public or private entity.

M&A in fashion typically involves extensive representations and warranties since IP assets are a critical aspect of the deal. Compliance with ESG regulations is also an area of interest. That’s because this industry has attracted a lot of flak in the past for unethical practices.

Other areas under consideration include the target’s capitalization and its commercial and material contracts with third parties. If the target has entered into collaboration deals for horizontal or vertical integration, the buyer may want to reassess them.

For instance, partnerships to source inventory like fabrics, which the buyer may want to replace with sustainable sources. If the purchaser is committed to greener practices, it may want to switch to flax, bamboo, or hemp. Such products are better received by eco-conscious customers.

Managing IP in a Fashion Company

Pending litigation, liens on the company’s assets and IP, and potential tax defaults are issues that the legal team examines. Since brands, trade names, trademarks, and copyrights are especially valuable in this sector, they may feature in the investigation.

Buyers need complete information about any licenses or leases the seller may have issued. They will also need confirmation that these intangible assets have been registered and the seller retains unencumbered ownership without liens.

Fashion houses typically have teams of highly skilled and talented employees who assist in designing and creating the apparel. Prospective buyers will need to examine the company’s contracts with this personnel regarding the IP they ideate.

Contracts should specifically state the employee transfers IP to their hiring company and will have no claims at any time. The buyer may also want to see NDAs and other binding agreements preventing the employee from creating similar IPs.

That is if they leave the company and join competitors after a transaction, particularly in M&A in the fashion industry.

Keep in mind that in mergers, acquisitions, or fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

Retaining Eponymous Designers

The top brands and giants of the fashion industry are typically driven by eponymous designers who are creative forces. When entering into M&A transactions, buyers may want to add clauses for retaining these entities.

The term sheet may include conditions for the designer to continue working with the buyer’s brand for a pre-determined interval. Since the brand value is entirely dependent on the designer remaining with the brand, the acquirer may include exit restrictions.

Achieving Synergies in an M&A in the Fashion Industry

Regardless of the participating companies’ vertical, size, scope, or market share, their core objective from the M&A transaction is synergy. Considering that at least 65% of mergers fail, dealmakers must tread carefully before diving into a deal.

When presented with what seems to be a viable opportunity, buyers and sellers should conduct due diligence. Exploring the possible synergies is crucial, as is the need for a carefully designed strategy to execute the integration. These steps can make the ultimate difference for a successful outcome.

One of the core objectives of an M&A deal is always maximizing revenues. However, the fashion sector is heavily reliant on changing customer tastes and trends. Fashion evolves quickly, and brands must not only keep pace with but stay ahead of styles.

Especially since customer preferences change not just year after year but also season after season. Companies have to work harder to keep costs down while efficiently managing lead designers along with myriad other operations.

The fashion vertical is largely about Intellectual Property and Intangible Assets that dealmakers must evaluate. At times, the M&A is driven by the core talent and is essentially based on designer and brand names. Missed synergies can cost the buyer heavily in terms of financial losses.

A good example is the failed deal that TPG Capital LP and Leonard Green & Partners LP entered into. This deal was for the acquisition of American fashion retailer J.Crew Group Inc. in 2011 for $3B. To ensure that dealmakers achieve value from the transaction, they should be clear about their goals.

A greater starting point is to identify the strengths, resources, IP, and assets both companies bring to the table. Listing the sources of revenues and types of costs also helps.

Post-M&A Growth Strategies

M&A in the fashion industry is typically a horizontal integration where the buyer acquires competing brands. This strategy allows them to combine similar product portfolios and markets. A good example is the retailer Michael Kors Holdings’ acquisition of Jimmy Choo in July 2017 for £896M.

Expanding the company’s portfolio to include related products is another common growth strategy in the fashion sector. Including seasonal products is effective in the apparel sector since people need clothing and accessories to match the changing weather.

Vertical integration for growth allows buyers to capture inventory suppliers higher up on supply chains. For instance, the Chanel brand has purchased several companies selling lace, tulle, cashmere, feathers, and milliners or hat makers.

Although expansion into overseas locations is also a tried and tested growth strategy, the fashion segment is also culture-driven. Items that may work well for a particular country may not attract customer interest in another.

For this reason, designers may have to diversify and come up with product lines specifically geared toward the local audience. With this objective in mind, bigger companies may buy out local, reputable brands that have a market presence. This move can get them a toe-hold and starting point.

The Takeaway!!

M&A in the fashion industry involves unique aspects that are distinct from other sectors. That’s because this sector is highly volatile, and trends and customer preferences can change drastically without warning.

The increasing interest in cruelty-free and sustainable products has triggered major transformations. To keep up with demand, fashion houses must adapt, and collaborating horizontally or vertically could be the key.

You may find our free library of business templates interesting as well. There, you will find every single template you will need when building and scaling your business completely for free. See it here.


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Neil Patel

I hope you enjoy reading this blog post.

If you want help with your fundraising or acquisition, just book a call

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