Inside the Deal Room for Beauty Brands

Claudia Lewis: 00:11

You're building a beauty or wellness brand in a fast moving, highly competitive market.

Kristen Ruisi: 00:16

Standing out isn't just about developing quality products and creative campaigns. It's about navigating regulations, protecting your brand, and managing risk.

Claudia Lewis: 00:25

From FDA oversight and product claims to data privacy and consumer expectations, the legal and regulatory landscape is becoming more complex.

Kristen Ruisi: 00:34

Social media, influencer marketing and global expansion are only accelerating that complexity.

Claudia Lewis: 00:40

I'm Claudia Lewis.

Kristen Ruisi: 00:41

And I'm Kristen Ruisi. We're partners in Venable's Beauty and Wellness team.

Claudia Lewis: 00:46

On this podcast, we talk with our Venable colleagues and industry insiders about the legal and regulatory issues shaping the beauty and personal care market.

Kristen Ruisi: 00:55

And focus on practical guidance brands can use to stay compliant and competitive.

Claudia Lewis: 01:00

Welcome to the Beauty Law Glow-Up.

Kristen Ruisi: 01:03

This week, we're talking about beauty brands as acquisition targets. Hi. I'm Kristen Ruisi, a partner at Venable focusing on trademark prosecution, enforcement, and brand protection. As beauty brands continue to attract strong investor interest, mergers and acquisitions remain a defining force in shaping the next generation of industry leaders. But behind every acquisition is a complex mix of valuation, governance, intellectual property, profitability, and founder strategy that can determine whether a deal succeeds or it falls apart.

Kristen Ruisi: 01:41

In a market where buyers are becoming more selective and founders are facing tougher questions around structure, scale, and exit timing, preparation has never been more important. In this episode, we explore what makes beauty brands attractive acquisition targets, what buyers are really looking for, and how founders can position themselves early for a successful transaction. To help us do that, we're talking to Marty Okner, CEO of Fromm International, a leading marketer of beauty products. And Chuck Morton, a Venable partner who focuses on M&A and financing transactions. Chuck, Marty, welcome to the podcast.

Kristen Ruisi: 02:18

It's great to have you both here. Chuck, let's start with you. Can you tell our listeners a bit about your practice and your role at Venable?

Chuck Morton: 02:24

Sure. First, Kristen, thank you so much for having me on the Beauty Law Glow-Up. It's an honor to be here, particularly with my friend Marty Okner. I am the long term head of our national corporate practice for more than a decade, and currently serve as the managing partner of our Baltimore office where the firm was founded a hundred and twenty five years ago. And I'm an active middle market M&A lawyer representing many companies in the beauty industry.

Kristen Ruisi: 02:50

And Marty, could you share a little bit about your background and experience in the beauty industry?

Marty Okner: 02:54

Sure. I've been in beauty for over twenty years, and broader consumer goods for over thirty years. Started my career in beauty at Revlon, and worked in corporate strategy, then I went into private equity, and I worked as an advisor in private equity for about six years, mainly in beauty. And then I joined one of my clients, dpHUE, which was a small hair care company at the time, and grew that into a quite a large brand, and then eventually had a successful exit. And I actually just recently co invested alongside Firelight Capital, which is a mid market private equity firm here in New York, as well as in Florida.

Marty Okner: 03:33

And we co invested to acquire Fromm Beauty, and Fromm Beauty is a platform company in beauty. Similar age length to Venable actually, so we're a 120, nearly a 120 years old, And after three generations of family ownership, the family decided to sell to private equity firm Firelight, and I got the fortunate opportunity to co invest alongside them and become CEO post closing.

Kristen Ruisi: 03:57

Very impressive. Thank you. Okay. Chuck, let's start with you. Why has the beauty industry remained such an attractive target for private equity firms and strategic buyers?

Chuck Morton: 04:09

It's a giant, measured by any measure you can apply, from dollar value to number of companies, incredibly dynamic industry, which creates opportunities. There are winners and losers every day in the field, and that creates opportunities for particularly strong operators to be able to create value. So whenever you have that combination of market scale and rapid changes, that creates a place of great interest for investors.

Kristen Ruisi: 04:38

Okay. And Marty, are buyers looking for revenue, profitability, brand equity, or something else?

Marty Okner: 04:46

I would say all of the above. If I were to go back to a time period of six years ago or so, right around COVID and our emergence from COVID, buyers were really putting a greater emphasis on revenue growth, especially in the private equity space. What we saw sort of happen, post that boom in '21 and early 2022, a greater focus on brand equity and, subsequently after rising inflation, profitability as well.

Marty Okner: 05:20

So now buyers are expecting brands to really demonstrate strength in all three areas.

Kristen Ruisi: 05:27

And do you think that there have been any changes due to the current economic climate?

Marty Okner: 05:32

Absolutely. It really, started post COVID. So after that M&A boom in beauty of 2021 and early 2022 you really saw a much bigger retrench, and then especially when interest rates rose. Because when interest rates rose, the cost of capital became that much more expensive, so companies really needed to demonstrate strong bottom line operating health in order to support the financing structures necessary to get a deal done. And not many companies were able to demonstrate that, so you've seen a big contraction in M&A A over the past few years in beauty, although the sector, to Chuck's point, has many positive and and attractive attributes.

Marty Okner: 06:14

I firmly believe that this year we're going to really see an emergence of more deals, and it's already started off that way this year with BYOMA.

Kristen Ruisi: 06:23

Very good. And, Chuck, what corporate structure or other mistakes do you commonly see beauty founders make early on that later complicate a sale?

Chuck Morton: 06:33

There are lots of founders who are so excited about the opportunity that they fail to bring basic business discipline to the enterprise at the beginning. It can be the passion project for them, but it's important for all founders to really begin with the end in mind, to think about what their exit may look like, to structure the company around that from an ownership perspective, and also just basic blocking and tackling. They need to be certain that their IP is properly buttoned up. They need to be certain that they're mindful of the complex regulatory landscape that is implicated by the industry. They need to be certain that they have their proper agreements in place with their promoters or however they're going to market, so that when due diligence actually occurs as part of the sales cycle, they have a clean story to tell where everything is held together in a way that makes sense and can in fact be transferred to a buyer.

Kristen Ruisi: 07:33

And Marty, how early should founders be thinking about an exit strategy?

Marty Okner: 07:37

I'm going to echo exactly what Chuck said, and from a time frame perspective, they should really start thinking about it day one. You know, from the time that they form their LLC or, you know, sub S, whatever entity they choose, they really need to think about corporate governance out of the gate. They should have their operating agreements in place, they should think about their financial reporting, they should be really diligent in terms of documenting what their vision is. Because at the end of the day, we all talk about exits, that's the transaction. The real critical thing for a founder to do is sit down and say, what is my vision for this brand?

Marty Okner: 08:17

What is my vision for this company? And if an exit is a piece of that, they need to understand and go in eyes wide open as to what it's going to take to effectuate that transaction, and that really starts day one.

Kristen Ruisi: 08:32

And, Chuck, what are the most common deal structures in beauty M&A transactions?

Chuck Morton: 08:38

It really depends on who the acquirer may be. So M&A transactions generally reflect the golden rule, where the person or the entity with the gold tends to set the rules, at least the rules of engagement. In this context, what that means is that if there's a strategic buyer, the deal is likely to be set up as an asset deal, perhaps a stock deal, but something where it's likely to be cash, maybe some contingent payments, but less likely to involve a significant equity position. In contrast, if the buyer is a private equity fund, there's likely to be a significant part of the deal that will be rollover equity. It's important to structure that rollover piece in a way that's tax efficient to the seller, which can be done, and in that context, the private equity fund ends up trying to create alignment through the rollover piece, and in the best case scenario, the seller gets to enjoy a second bite at the apple when the private equity fund subsequently exits.

Chuck Morton: 09:46

But that can be a surprise for a founder if they're approached by a PE fund, and their initial thought is that there would be a complete exit.

Kristen Ruisi: 09:56

Earn outs are common in founder led brands. Why is that?

Chuck Morton: 10:01

One of the challenges is trying to reach agreement around valuation, and earn outs are used as a tool to bridge that gap where the seller may think, in this case a founder, that the future of the company is certain, and and extraordinarily bright, and the buyer understandably may be slightly more skeptical of those projections. So an earn out is simplistically a way for the buyer to say, prove it. And if in fact it goes as well as you predict, you'll reap the rewards of that. But such arrangements are not without risk or complexity.

Kristen Ruisi: 10:38

Right. And what are those risks that founders might not realize?

Chuck Morton: 10:42

So there's a long list, but some of them would include depending upon what the earn out is tied to, there are lots of aspects of that that the buyer can control after the deal occurs, and the control of those factors, for example cost, can create avenues for dispute. So for example, if the earn out is tied to profits and the buyer decides to increase expenses during the earn out period, and they believe that is sound and in the business' best interest for the long term, that decision could in the short term over the earn out period negatively impact profits. Similarly, the buyer may conclude that the seller's historic marketing budget has been unreasonably high, and fight to decrease that and maybe increase margins while decreasing top line sales. And if the earn out measurement is tied to top line sales or growth of top line sales, there can be a misalignment.

Kristen Ruisi: 11:52

And how can founders protect themselves during earn out negotiations? Are there any key things that you would point out to them?

Chuck Morton: 12:00

So shorter is better, just as an exclamation point there. The longer the earn out period, the more room there is for dispute. Secondly, focusing on things where the seller has control, or at least can build in some control during the earn out period is incredibly helpful, and focusing on those things for which at the time of closing, there's the greatest line of sight.

Kristen Ruisi: 12:26

Okay.

Narrator: 12:28

Artificial intelligence is transforming every industry. With opportunity comes new legal, business, and strategic challenges. On AI and IP: The Legal Frontier, Venable partner Justin Pierce talks with industry leaders and legal professionals about AI governance, innovation, intellectual property, compliance, and risk management. Get practical insights to help your organization harness AI with confidence. Search for AI and IP, The Legal Frontier, wherever you listen.

Kristen Ruisi: 13:00

And Marty, turning back over to you, how important is founder retention post acquisition?

Marty Okner: 13:06

I just have one thing to add to the watch outs for founders, and that is get yourself a good attorney. Absolutely. It will pay back in the thousand times multiples. Because I've seen so many people try and negotiate or arrive at a transaction with someone who's really not qualified to handle the level of detail and the intricacies associated with these earn outs and the way they're written, where the founders really wind up being underwater and they have no recourse. So get yourself a In good terms of founder retention, would say, you know, two cuts at this.

Marty Okner: 13:47

Number one, if the founder and the brand are very much intertwined and there's, now obviously with a lot of creator led brands, whether they're content creators or celebrities, when the celebrity or content creators really intertwine with the brand, founder retention is really key. But I think any buyer should really think about before they acquire the brand, how can they in some way decouple that from the founder's likeness in a way where the brand stands on its own. And that's not to marginalize or push the founder legacy aside by any means, it's just the fact that you've got some really key person risk going into this. And there needs to be a clear path as to how these brands are going to stand on their own.

Marty Okner: 14:31

So I think that's number one. The second type of transaction is where the founder may have been the catalyst behind the brand and really shaped it, but their likeness is a little bit less tied to the customer acquisition and overall success of the brand. In that case, it could go either way. There's a lot of continuity and benefit in keeping a founder on for the first year or so after a transaction, but then after that it typically gets a little long, and you really want to be able to decouple that founder from the brand within a year.

Chuck Morton: 15:05

And setting the groundwork for that decoupling is an important step that a savvy founder can do to maximize value. And there are thoughtful ways to do that while still ensuring that the brand maintains authenticity, and navigating that can be the difference between significant returns on exit.

Kristen Ruisi: 15:30

And Chuck, what would you say some of the biggest red flags buyers uncover in the beauty brand due to brand due diligence?

Chuck Morton: 15:37

So supply chain issues across the beauty industry are extraordinarily important. And in the most recent period of time where there's been such uncertainty around tariffs, that's become even more important. The regulatory environment around that supply chain can be a very significant red flag that can be uncovered through the process. That would be number one. Number two, and I've already touched on this, not properly protecting your IP, and particularly where perhaps you've not done as much in the past, but that you've identified as significant for your growth potential in the in the sales cycle, you're gonna be focused on those growth markets.

Chuck Morton: 16:24

And if it turns out that you don't have the right to the IP in those markets...

Kristen Ruisi: 16:29

It's a problem.

Chuck Morton: 16:29

It's a problem. So rather than being able to sell into that growth, you find yourself being handcuffed with regard to that. And then thirdly, guess I would say a lack of thoughtful tax planning both for the founders or sellers, but also when it comes just to state and local tax. You have lots of nexus issues, and that can be uncovered in the course of diligence and spook a buyer, pretty significantly.

Kristen Ruisi: 16:59

Sure. And Marty, how are beauty brands typically valued?

Marty Okner: 17:05

Sure. So interestingly beauty brands back going to about 2012, 2013, were typically valued on a revenue multiple, in most cases, especially in private equity because they were relatively new, really demonstrating some strong growth in many cases with the rise of D2C in this time period, as well as the rise of Sephora, and Ulta really being a path to discovery for new brands, during this time period. A lot of brands could really show a very clear path to profitability at a certain level of scale. So I think a lot of private equity buyers and some strategics, but in large part private equity were willing to take a bit of a flyer on revenue multiple, because that path was a little bit more clear. With the rise in interest rates of 2022, and even though they have been coming down, we're still in a period now where revenue is an important component to it, but really it's now an EBITDA multiple.

Marty Okner: 18:09

And, yeah, I would say the EBITDA multiples for private equity transactions have contracted a little bit in beauty. No longer are private equity firms being a little flexible with the add backs and whatnot. I think when PE firm is looking at an adjusted EBITDA number, they really need to see a very clear credible list of... And schedule of add backs that they could realise as EBITDA post transaction. So it's definitely transitioned from being revenue multiple to EBITDA multiple, and I think buyers are becoming more discerning now about what that actual EBITDA is.

Chuck Morton: 18:47

That transition has also, Kristen, been particularly difficult where the market had been rewarding rapid growth even if that growth were unprofitable. When that shifts, you go from thinking that you can access the markets for additional capital to fuel that growth, to appreciating that if you're not cash flow positive, you're in a very disempowered position. As that shift has happened, it's caught a lot of companies in the crosshairs, and that has made for very difficult discussions when it's come to down rounds, meaning rounds that are valued at less than the prior round of funding.

Chuck Morton: 19:30

The way companies have reacted to that has created its own challenges, because when you're faced with a down round, there are very few attractive choices. But generally, delaying the pain only makes it more complicated.

Marty Okner: 19:48

Building on that, a lot of the .com focused companies were .com, their own .com was really their primary channel of distribution back in 2017, '18, '19, '20, early part of '21 once iOS 14 hit and the targeting pool of potential customers contracted by two thirds, right, you lost 66% of your available targeting pool. So now companies saw their CAC go from like $10.11, $12 up to $36. And unless they had an AOV to support that and enough first time order profitability, those dollar, that Chuck was referencing, it's very hard to invest to scale and continue that growth. So, now you're facing a down round and the options are really not all that attractive, and then the path to actually navigate your way out of that hole is really hard too because a lot of .com brands aren't necessarily retail ready.

Kristen Ruisi: 20:45

Very insightful. Thank you. So let's talk a little about the emotional side of deals, and I think I'd like to hear from both of you on this. What's the hardest moment for founders in the sale process?

Chuck Morton: 20:59

So it's two different scenarios. So if if they're hitting numbers that they're excited about, the hardest part can still be the psychological part if they feel like they're selling their baby. But one of the things I encourage people to do when they enter a sales process is... And they don't need to tell me, and they don't need to tell the investment banker, but write down what their number is. Meaning, what number is enough for them?

Chuck Morton: 21:26

What number would reflect success to them? Put it on a little piece of paper, and put it in their desk. And if we're above that number, let my attention shift to making sure that your flank is protected, that your risk are are, to the fullest extent possible, controlled, and allow yourself to declare victory.

Kristen Ruisi: 21:49

Okay. Marty?

Marty Okner: 21:51

I would say the same. Valuation is the toughest thing for a founder to come to terms with, because no matter what, when you pour your heart and soul into something, you're always going to expect to get more than you might actually get. Especially in this environment where we haven't had as many unicorns, you know, in the $800,000,000 to billions of dollar range for founder exits, it's been really hard for a lot of founders to see that and know that they probably put just as much work in, and they're not seeing that same level of return. So I think that's a bit of a tough adjustment for founders to really reconcile with emotionally. And the advice there is markets turn around, so they might just want to hang on if they're really confident in their strategy and they're really confident in their growth.

Kristen Ruisi: 22:46

One final question, which I'd like to hear from both of you on. What negotiation mistakes do founders make when they first enter the deal room?

Chuck Morton: 22:55

I would say, Kristen, that they think they can do it all. They've built a successful business. They are at the point where they're excited to exit. They feel like they know the industry pretty well, but unless they're a repeat founder, this is not something that they do every day. In my experience, for example, investment bankers almost always earn their keep, and it's often the case that a founder will look at the fees related to an investment banker and say, they don't want to engage them.

Chuck Morton: 23:27

Or they may have their cousin Vinny, who's been their trusted lawyer as they've been building the business, but who's not an M&A lawyer. That's probably a mistake as well. So if they are too arrogant as they enter the process, the people on the other side of the table are likely to be serial acquirers, and it can create an awkward mismatch in experience that could really leave some money on the table.

Marty Okner: 23:54

I completely agree. Having the right professional services stack, and that really includes sell side due diligence, having that done, having the right investment bank, you know, really interviewing a few of them who have expertise and who are really known in the beauty space of having successful transactions, having somebody who's really a good tax expert. You know, a lot of people don't think about the fact that when they sell a closely held asset like this, there's huge tax implications and that involves preparation. So I would advise getting this stack in front of you a year before the transaction. Then obviously, the right attorney, and then a wealth manager too.

Marty Okner: 24:36

Because once you get these proceeds, they're gonna have to go into the right entity and structure for you as an individual or your family, however you want to structure it, and that involves planning and wealth succession strategy. It's very much a strategy. So I always advise that stack of individuals around you, who all have expertise in their respective disciplines.

Chuck Morton: 25:00

And they end up being synergistic. For example, if a seller is confident that if they get x amount of money because they've spoken to their wealth planner and they've run a bunch of simulations about what outcomes look like, that X is enough to secure their financial future, they can enter the sales process with great confidence. So all of these parties end up being synergistic.

Kristen Ruisi: 25:26

Well, thank you so much. It has been very insightful. Thank you both for being here and speaking with me today.

Chuck Morton: 25:32

Our pleasure. Thank you.

Kristen Ruisi: 25:33

Thank you. Okay. That's all we have time for today. I want to thank Chuck and Marty for helping us better understand what drives beauty industry, m and a's, what founders need to do early to prepare for a successful exit, and how the right strategy and advisors can make all the difference in the deal room. You could read more about Venable's beauty and wellness team by visiting venable.com/beauty.

Kristen Ruisi: 25:56

I'm Kristen Ruisi. Thanks for listening to the Beauty Law Glow-Up.