Selling your design business

Someone I will call Jody writes:

Do you have any articles or information about how to sell or license a design? Although I have streamlined and have one full time helper, the business has grown too big for me to handle on my own and I am interested in finding out if there are any companies out there that would be interested in buying my designs and brand. I have a small business making xxx from post-consumer apparel.

I’ve published several posts on selling your business which I’ll link to as is appropriate to sort out these issues.

  • What is she selling? The business? A license? The brand? The designs?
  • How marketable are those elements as they would interest a buyer?

Background: Jody included a link to her website. Personally, I think her products are awesome (and you know how I resist making such pronouncements) and priced well (commensurate to their value) but there are two core problems that can affect the sale of businesses like hers.

First the downsides: With respect to licensing -this isn’t going to happen, or it shouldn’t. Only someone who is really green would buy a license and these people tend to not have much money so its a zero sum game. If you are toying with the idea of selling a license, keep in mind the option is limited to celebrities or very well established brands. A license is only good for an add-on product, it’s not a take-over of your primary one. In other words, Ralph Lauren can sell a license to a sunglasses manufacturer but the license is worth nothing if RL stopped producing -which is what Jody wants to do. So unless you’re Beyonce, Martha Stewart or Hello Kitty, cross licensing off your list of options.

The designs -while attractive and well targeted in their niche- aren’t so valuable because the product is obvious. With a bit of experimentation, nearly anyone could copy the concept and not have to pay Jody anything. This is not to say a company isn’t worth buying only that designs unto themselves aren’t as marketable as one would hope. It’s everything else included in the package that can make or break a deal. This is true across the board, not just Jody’s venture.

Another downside specific to this particular business but not design companies generally is that these items are made from discarded garments. Sure, I know what you’re thinking, tons of customers like this stuff but the question arises of -who would your buyer like to be their customer? You respectively may not have the same customer in mind. Hold this thought.

Let’s talk for a minute about who these businesses are suited to be purchased by. The first is someone bigger who has the money to scale it. The second profile is someone who wants to buy a craft based job/business for themselves to augment household income. The latter will probably run it much as the seller had. The former is another story.

Returning to my previous point, that the product is made from discarded garments is problematic from the perspective of someone who buys for the purposes of scaling and expansion. As it stands, nearly any product in this class is labor intensive and more expensive to make because one can’t roll out yardage and cut a predetermined number of items in one pass. This also effectively reduces the likelihood that the enterprise in its current form can scale because there is little (no) continuity, meaning wholesale will be difficult. Another difficulty is that design decisions over varying color combinations and trims must be made ad hoc and continuously. This means one would need a different class of worker rather than strictly production sewers and this would largely be insurmountable.

So, a primary conflict of this particular sale is that a purchaser with the means to buy all that Jody would like to sell is someone who wants a return commensurate to another level.

This is what I think:
Jody’s business is marketable to someone with a design aesthetic who wants to buy a crafts based job/business for themselves. The critical question here is what is the price of entry and can someone service the debt (if acquiring a loan) or if self funding, what kind of a return can one expect above and beyond usual costs and receipts? Not incidental to this buyer profile but is the seller open to a carryback (owner financing)?

The other type of buyer who may be interested if Jody has created a brand worth paying for, will only take it on with the idea of reorganizing it to permit scaling –this is no small, incidental thing. Specifically, the owner is expected to stay on in some form throughout a stipulated transition period. Meaning, if the purchaser takes the company in a direction the seller doesn’t like, the seller can’t imply the slightest negativity about it in the marketplace. Or you can but do so to your peril. [I’ve deliberately left few links in this post, follow both of them for further detail and context!]

As I’ve written before, most large firms only got that way through acquisition. You have less to fear from a large enterprise than a small one. A large one wants to buy your name recognition and accounts -in short, your good will and reputation in the marketplace. Large enterprises aren’t set up to knock you off; the people who knock you off tend to be on your same level or below it. Anyway, a buyer who can afford to buy the whole shooting match is going to want hard numbers and a way to measure one’s following in the market.

Jody’s brand might be of value in that it is something that can be developed a bit more, I don’t know. In the absence of specific information (that I wouldn’t be comfortable publishing anyway) she has at least 5 specialty store accounts, a respectable Etsy presence (over 1,000 100% feedback ratings) and the number one slot on google for her specific key words. With slightly more generic phrasing, she’s still within the top three results.

I’m going to throw this out there so take it for what it’s worth. The top price for a small business like this is a figure equal to its annual sales. If you’re selling to a party who wants a job, you might get a little more if you’re throwing in capital goods -in effect, as turn key as it can get. Then again, you might not because your equipment may not be so great. If you sell to a larger player, they might pay more but the downside for someone who just wants out is that a condition of sale will be that you stay on to manage the enterprise, at least through the transition phase. For what it’s worth, they won’t expect you to work for free; your salary is also a point of negotiation as is the transition term.

A common problem I find in sales like this is that the existing owner is burnt out. They should have sold before getting to this point because at this stage they’re desperate to reclaim their lives and so, don’t have as much to negotiate with. If you can’t stay on, be advised that your rapid departure can negatively and dramatically impact the value of the business to the buyer.

One last bit of advice: seek legal counsel before agreeing to anything. You’ve found a buyer and you’re both deliriously happy but it’s nothing but a honeymoon. As an aside, I once read an interview of a woman who wrote a book about prenuptial agreements. In her opinion, everyone should have one. Not because she felt they were needed as instruments in the event it all went south but that it is an extensive counseling situation whereby each party lays out the expectations of their marriage. It is in this process that many couples decide they don’t want to marry because they discover their expectations and values were not congruent. Anyway, this is how you should enter business too. No matter how well you get along with someone -even family members- it should be spelled out in concrete terms, the meaning of which is clear to both parties.

Related: If you are considering the purchase of a sewn products business, it pays to have its value assessed beyond the testament of the ledger. If you’re buying a turn-key operation lock, stock and barrel, you don’t want to discover you overpaid by an order of magnitude. Without exception, any company I know of that has bought a DE business, had to have the patterns re-made and it ended up costing them thousands more than they anticipated. If this describes you, call me.

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8 comments

  1. Alan says:

    Interesting post. I bought a DE about 10 years ago…when I asked for a nested set for one dress so we could check specs, the response was, what is a nested set and what are specs…I knew the patterns were a piece of s#¥t. Biggest headache imaginable.

    1x sales no way…more like 3xCash flow reduced by owners labor. 100k sales, $30k cash flow, owners labor = $25k. I’d pay $15k for the business + reasonable price for brand name + more if quality of customers was extraordinary.

    1x sales I would’ve sold years ago!!!

    I’d love to here more about this biz. Been exploring the upcycled market and can’t figure out how to scale. Kathleen pls feel free to share my contact info with the owner.

    Best,
    Alan

  2. Sarah_H. says:

    Success is so seductive. Does the person in question really want out, or does she want to scale down and have a life. I could be selling way more than I am in my one woman business, but after long introspection I have decided that I want to run this by myself and I want to run it as a retired person, ie working 20-30 hours a week. I have a successful job rather than a successful business. Time and time again I find my sales going up beyond what is comfortable for me and I have to drop back in my listings just enough.

    This is slightly off the subject of selling the business, but I felt the question should be raised. You don’t have to go for “as big as you can get”. It is so easy to be consumed by your business, but it does not have to be.

  3. Kathleen says:

    Alan, I’ll tell her. It might be compatible with your market (a children’s product).

    Sarah: I think she’s burnt out. She says she’s had over 150 wholesale inquiries and if she’s exaggerating, I believe it wouldn’t be by much.

    I totally agree with you about being aligned with business size. I don’t think larger businesses are evil or that they have to make unpalatable trade offs but some people prefer something smaller. I have an ongoing argument with a friend of mine. She says you don’t have a real business if it won’t scale and maybe she’s right but in my case, it beats being unemployed or underemployed. I don’t think whether a business can scale to be the whole answer either. One can still create a lot of good and have an inordinate positive impact (perhaps unmeasurable with traditional metrics) to make it worthwhile. In Jody’s case, I think the business could grow (not without its challenges) but I think she is wise to realize she’s not the one to do it. I think that is preferable to someone who blithely believes they can do that when they’re poorly equipped to do it.

  4. Sabine says:

    I have to second Alan here somewhat, when I sold mine, it was NET-PROFIT times three, which was not a heck of a lot after remembering that I had to pay myself before I had the amount for the net profit, plus value of inventory/equipment.

  5. Marie-Christine says:

    Very astute point there about the owner being burned out. It happens, sometimes very insidiously. Sarah’s analysis is very good, size is not necessarily success on a personal level, but you have to decide where you want to go at some point, and preferably before you’re totally fried and unable to go on.

    I also have a hard time believing that all these ‘upcycled’ businesses can be sustainable or have any hope of scaling up, there is a limited amount of suitable clothes available out there. Most of us could remember scoring cashmere sweaters, or simply fulled ones, at the local thrift shop – those days are long gone. Keep up the upcycle trend and soon they’ll be importing old clothes back from Africa :-). Your point about it taking a lot longer to make something from already-built clothes rather than raw material is also quite true in my experience, and something most people overlook. What Jody has is very much a one-off business, which is fine if that’s what she’d set out to do.

  6. Doris W. in TN says:

    “This is slightly off the subject of selling the business, but I felt the question should be raised. You don’t have to go for “as big as you can get”. It is so easy to be consumed by your business, but it does not have to be.”

    I do not have a business, nor do I sew for others, but my husband is self-employed and I have a B.B.A. so there is a, albeit ancient, business background. Sarah_H. raises an important (to me) question, because IMHO it pertains to one’s quality of life.

    In our culture (the U.S.) we are expected to grow a business to the nth degree: ‘Bigger is better and what is wrong with YOU because you are not wanting more, more, MORE?’

    At some point, the business owns you. As my husband says, “Do you work to live, or do you live to work?”

  7. Dawn says:

    This sentence caught my eye: “Another difficulty is that design decisions over varying color combinations and trims must be made ad hoc and continuously.”

    In a business like this, at lease some of the value of the product is linked to the design choices the owner is making. She brings a certain vision to the product. People want the product because it has that certain something.

    The new owner might also have a great sense of style…or might not.

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