What do Polaroid®, Halston® and Miss America Properties® have in common, other than being brands you bought or followed some time in the past but haven’t seen much of lately?
All three have been purchased over the past several years by a private equity owned company called Hilco Brands, which has made a great business out of acquiring and selling well-known brands with little if any remaining physical assets or inventory. This includes brands for which 100% of the products are licensed products.
From what I have seen of companies owned by private equity firms pursuing brand licensing as a growth strategy, however, Hilco is an exception to the rule. For most companies, licensing and private equity don’t mix.
On the surface it seems like brand licensing as a growth strategy would be a natural fit for companies owned by private equity firms. After all, both the licensor and the company share the goal of expanding a brand’s equity. Potential licensees do not want to spend a lot of money marketing to build a brand, and brand owners do not want to invest more in manufacturing capability. Yet once you peel back the layers, you begin to see they work against each other.
The first issue is the long lead time for the negotiation of the licensing deal and the development and launch of the product, which is typically 18-24 months, and can sometimes extend to 36 months. Private equity’s time frame to build and exit (sell) a company is typically 7 years, necessitating quick, high return investments that maximize their profits.
A second problem is the volatility and unpredictable nature of the consumer marketplace. What is popular with consumers can change overnight. Most licensed products do not represent safe, cash-cow type revenue streams that are favored by private equity owners.
Another major issue is control. It’s well known that private equity firms must have control over the assets of their portfolio companies in order to be able to sell those assets at the end of the roughly seven-year investment cycle. However, with most licensing agreements, the licensor maintains a great deal of control in the relationship in order to protect its reputation and typically reserves the right to end the relationship at its discretion.
Hilco Consumer Capital. HCC, a division of The Hilco Group, a financial services liquidator, has dealt with many of these difficulties by pursuing a licensing business model that is based on the acquisition of brands, primarily those that have faced severe financial difficulty and even bankruptcy but have retained the majority of their brand equity.
In a June 2009 article in License! Global Jamie Sales, HCC president and chief executive officer, said they have made more than “$2 billion of brand-related investments” with the goal to “be the global leader in managing, growing, and owning a highly diversified portfolio of sustainable consumer brands.” HCC has continued their push to be a global leader in consumer brands with the acquisition of Under the Canopy and Portico earlier this June.
In 2009, just a year after HCC acquired The Sharper Image, the brand had an impressive list of licensees including Samsonic Trading, CTI Industries, STL Electronics, and NYL Holdings and their products were available in major retailers like Macy’s, Bed, Bath and Beyond, Office Max, and Staples.
Hilco’s model is not just about owning brands, but also about selling them. According to its website, prior portfolio brands and companies that were successfully grown and sold include The Sharper Image®, sold to Iconix Brand Group (NASDAQ: ICON); Ellen Tracy® and Caribbean Joe®, sold to Sequential Brands Group (OTC:SQBG); Tommy Armour Golf® and RAM Golf®, sold to The Sports Authority; and Bombay Brands, sold to Otto International.
Having built a portfolio with a projected $1.4 billion in retail sales in 2009 with this acquisition-based model, it’s hard to argue with Hilco’s success.
Short of a high-control approach like Hilco’s, however, we advise both our licensors and licensees that deals with companies owned by private equity firms are among the trickiest to negotiate and make work.
As published in The Licensing Journal, March 2014.