The New Types of Acquirers in Health & Wellness, Different Parts Of The Term Sheet That Could Make a Difference In The Exit, and How Deals Get Done with Teddie Townsend from CG Sawaya Partners

27:29Because if your success is entirely tied on one buyer, that's really not a good way to think about M &A. Well, why would a founder, maybe tie, be focused, locked in on one specific buyer? Or do you have also thoughts in terms of what you've seen based off past transactions and past acquires? For example, and I understand there has been a lot of transformation, maybe a lot of turnover in the past 18 months at these big strategics. But types of deals that, for example, a Unilever might be interested in, or particular categories might be interested in versus like a P &G versus someone else? I mean, look, it depends.

28:10They all have their own views and it changes on a whim. But I think a couple of things have happened. One, they've all gotten slightly more intelligent. And so So one of the things, you know, it's funny when I, when I talked to, when I talked to brands now, one of the things I, and I do this a little bit for our own benefit, because I don't really want to deal with it. But you used to be able to say whatever you wanted on your packaging, right? You could say you could have these claims, you could be, you know, like I was joking with someone the other day about a brand that's in market right now that like their claims are basically that they're curing cancer.

28:48And like, they're not, sadly, but they are so they have such nice marketing. And like, you just can't do that anymore. You shouldn't have done it five years ago, but you really can't do it anymore. And that's because the strategics, the first question, if you ask them what their M &A criteria is, number one is, I don't want to get sued, which is like pretty, like simple, right? I just, I don't want to get sued. Um, and so, you know, so if you can like get over that hurdle, uh, which is not that high, um, you know, you might be good to go. So that's like that pretty much across all of them are, they have that general view that they don't want to step into something where there's claims that aren't substantiated, where there's some kind of liability, where you're misrepresenting what the business is to the consumer, you know, things like that.

29:36Um, and then it really depends on like what the strategic is looking for and what they've seen success with. So if you look at a P &G, for instance, right, look at how successful they've been with This Is Alan Native. Native is going to do 700 million at retail this year, probably more. It's a massive brand, and they didn't buy it when it was big. So they are clearly a company who has successfully taken a brand from, call it, 50, 60 million of sales and been able to scale it to what will likely be a billion, it may already be there, a billion dollar brand under their ownership in a relatively short time.

30:12There are other companies that have not been able to do that. But, you know, we've worked with J &J for a number of years. One of their things that they were always concerned about, especially when they were with Pharma, was, you know, we just don't have the ability to scale brands. So, like, we need to buy them when they have a little bit more scale. If you look at Unilever and you look at some of the deals they did, like Sir Kensington's, right, that was a smaller deal when they did it. It hasn't scaled probably as well as everyone wanted it to. and so understanding okay what what does that mean from an M &A perspective right it probably means that they're not going to go do another another deal of like a small size if they haven't successfully been able to scale it so okay maybe that means if you're 50 million there's a subset of strategic buyers who are probably not going to be able to to acquire you there may be others that have no issue that actually would like you to be that size so understanding kind of like the nuance of what's the right stage, what's the expectation.

31:12Again, like, go back to Unilever, Dollar Shave Club, not a success. You know, okay, perhaps if you're 100 % DTC brand, you know, losing money, maybe Unilever is not gonna be that interesting, because they like, just had a bad experience. You know, making money like a Nutrafol, huge win. But so, you know, understanding, okay, these are the deals they've done, this is what's been successful. This is what they should, you know, what they would likely continue to do. And how can I, do I fit that? Am I part of what makes them successful where they can see a vision to make me a billion dollar brand under their franchise?

31:52um so you know a lot of founders look at existing deals and they sort of you know they don't necessarily look into the components of what made it successful or what made it a failure in some cases but you know the reason that a unilever or nestle or png was is sort of the easiest one for a lot of founders to sort of tag on to is because they did some very visible deals over the course of three years um that doesn't mean that they're the only player in town in fact you know there There may be others today that are better suited to do the acquisitions. But again, generally speaking, like for any given business, there's really only two or three strategic acquirers usually at the end.

32:32It's not a big audience. So making sure that you can sell to a private equity group is also a good hedge, right? Because there's a lot of private equity groups and they have a lot of money. There's something like$1.2 trillion sitting in dry powder right now. So like, that's a good thing to tap into. I appreciate the landscape and also kind of mentioning too, like some of the differences based off of past performances about strategics and why. Like I said, it changes all the time. On a whim, on a whim. Yeah, just like, hey, we got a new CEO and like now we're not, now we don't like this category anymore and we're going to only do this stuff.

33:13And it's like, all right, well, now I know that, you know, I had brands who told me and this isn't applicable anymore. But there were brands who used to tell me that they were especially in women's health, that that J &J was buyer for them. J &J sold all their women's health brands like they know they're not going to buy you. Like, no. So like now, maybe perhaps as a standalone. But three years ago, you know, that was not a case. So I think education is really important for early stage founders as well. It's like, what realistically should you expect? And how do you make sure that when you bring that money in early, you are setting yourself to have as many options as possible?

33:53How do you think in terms of your assessment, because obviously you want to pick in terms of companies that actually that are looking for an exit or an M &A, the exit of business, make sure that they actually would be attractive to the strategics and strategics right now really are focused on, you know, does the marketing actually match a product? How do you do the, how do you do kind of your own analysis to make sure that the product, what, if it says, Hey, we, we cure cancer, it actually is not, you know, curing cancer per se. I know such a bummer. I mean, sometimes it's obvious, Mike, like sometimes you're like this, this doesn't feel Right.

34:36You know, we don't look I'm not a regulatory reviewer. I'm not going to like go through everything and have a scientific eye for it. But it becomes very apparent when certain things are just like not up to snuff. Um, and, you know, and also once you start digging into the numbers and, and understanding, okay, what's, what's going on here. We also really encourage our clients to do a lot of work ahead of time before going to market to avoid a scenario where you like find out the claims you're making are not valid. Um, so whether that's like hiring a third party to do regulatory reviews, often we encourage people to do that after they're like series A or series B so that they're really making sure in this moment where it's maybe not as critical that everything is buttoned up.

35:25Because you don't really want to have to do that when you're going to market. It's really it's not the right time to be assessing your claim situation. And there's all kinds of risks with changing your claims, right? There's the economic risk of, OK, if you're not saying these incredible things, perhaps the consumer is not going to buy your product. OK, well, then your sales are going to take a hit. So that's evaluation implication. And so for us, like it's getting to know brands early, really understanding what their substantiation is behind whatever claims they're making, whether it's a clinical, some clinical work they've been doing, you know, understanding how they think about the claims they're making.

36:04Things like that is really important to us. I think, you know, also understanding how they're marketing, who their core consumer is, what their product is, you know, what the ingredients are. There are plenty of brands that don't have clinicals, but are able to make claims based on ingredients that have well-known, you know, clinical support. Okay, so that's a very valid approach. So anyway, so, you know, we've spent enough time in the industry to really know what kind of is and is not going to play. Again, it's fairly obvious, but that's really important to us because it has applications everywhere.

36:43It's frankly, it's our reputation as well. And you don't want to set a business up for failure when you meet them and are potentially going to sell them. I remember when we first were chatting, you were saying how, too, on the sell side, there's no kind of standard anymore. You have to get really creative. What does that actually mean, getting creative in terms of like in this market and kind of how do you like put a pulse in terms of like this market when it comes to like the sell side part? Yeah, I mean, look, I think a couple of things. One, I think this is something one of my partners said, but like optionality is critical.

37:22And so we've seen a lot of brands go to market and they do this like very public preview with strategics only. And if it doesn't work out, then they sort of have to go to the private equity group And the problem with that is if I'm a private equity group and I know that you just went to all the strategics and they all passed on you, what the hell is my exit strategy? Like, mind blown. Sounds like a terrible idea. And so I think, you know, more and more we are, we're again, as I said earlier, like a private equity exit can be amazing. It can give you a second bite of the apple. It can give you a transition.

38:00It can give you a great valuation. And so constructing a process that enables that optionality, whether it's a private equity exit or majority ownership situation, a strategic exit or a minority deal. Right. You can do a large minority to get some liquidity. Perhaps that's the right transaction. Maybe you have a longer term, like time horizon as a founder. And so you don't want to start the clock at three years, maybe like a 10 year clock. And so having a family office come in is actually better for you. So we spend a lot of time with our clients of understanding, okay, what are your goals here?

38:34Because if your goal is just to exit, then we should make sure we talk to enough people to make sure you exit. And what's the brain damage list? I used this in a pitch recently and the people kind of laughed at me, but I was like, honestly, this is probably the way you should think about an exit anyway. What's the least amount of brain damage I have to do on valuation to get you what you need? right and that's not like hey i want to get you the lowest valuation but if your expectation or if you need a certain number to achieve either a venture threshold or just achieve your goals and like here like i'll make up numbers but say you're like hey i need to achieve a hundred million dollar valuation to get let's use a billion i need to achieve a billion dollar valuation to get me what i want whether it's an ego thing or like whatever my business is doing 10 million of EBITDA and up 50 million of sales.

39:31And in my category, businesses typically transact for somewhere between 15 and 20 times EBITDA. Then my brain damage list valuation is not a billion. It's actually 150 million. So if I'm going to market and I need a billion dollars to transact, there is a very good chance that I'm not going to get my valuation. Now, does that mean I'll get 150? Probably not, but probably not going to get a plan. So like, what does that range look like? Because if you think about it from a financial engineering perspective, you know, if you can find a private equity buyer, yeah, there's a decent chance you'll get higher than your, you know, the lower end of your line.

40:13But I also have a lot more confidence you're going to get a deal done. And that's what you hired me to do is getting a deal done. So if that gap is big, or if it exists at all, you probably shouldn't be going to market or you should really reassess what's driving that goal. And I think that's a really important conversation to have with people because about, I don't know, some atrocious number, like only 30 % of deals that went to market in the consumer space last year seemingly got printed. I think it's ridiculous. That's tiny. And the fact that a lot of what drove that difference was actually seller and buyer valuation discrepancies is even worse, that good businesses went to market and didn't transact because the sellers and the buyers didn't have aligned views on what the values of the business were.

40:59So again, when we think about process and we think about construct, it's what are your goals? Again, as a founder or an investor, whatever the profile is in terms of what you want to do. And then what are your like thresholds? What does success mean for you in terms of achievement? And making sure that everything lines up. The other thing that's happened that I think is important is strategics are slow, right? There's multiple decision makers. They have huge commercial organizations. They've got big M &A organizations. It takes a really long time to educate everyone. And so how can you make sure that in the process, you make sure that the key decision makers are educated early, right?

41:42Making sure there's some kind of socialization, or at least you give them a little bit of time to sort of get up to speed. Things that you as the advisor can help to make sure that, you know, if you're running a process with strategic and private equity groups, you're not putting yourself in a position where you have a bid date and all the strategic say, hey, sorry, we have a board meeting two weeks after the bid date. So, like, we'll get you an offer, you know, sometime in the next month. And you're like, well, like, that doesn't work. You know, our bid date is this day. Everybody else is coming in.

42:12So really thinking through, like, how do you how do you maximize the chance of getting a deal done? And if a regular way M &A deal doesn't work, what are the other things that you can do to help facilitate that? I mean, we've done like Mike, we did like I mean, when we sold Conair, we we took over a whole floor in our office building and we had them like build out a full showroom. And we did videos with the CEO and different people so that, you know, all the exact so that the private equity groups who were looking at the business at the time could really understand different components of the business and like watch it on their own time so that they could really look into it.

42:49But when we sold Coppertone, this is a story my founder loves to tell, but we, you know, we did all these things to just like, you know, we made the office smell like their suntan lotion. And like that was a really big deal. Like people just liked the smell of Coppertone. It was very like nostalgic. So like, how can you just bring those extra things into the process so that you can make connections and really facilitate that, you know, the deal itself again, and like more, I don't know, thoughtful ways than just being like, hey, I'm going to send out a hundred books and like hope somebody likes it.

43:27so how how do you typically because i know that you've kind of given a couple ways that you've engaged uh strategics or or or potential buyers in general with with some of your clients but what what's your process when it comes to actually running like a full process because obviously it's not doing like a preview i'd imagine uh that's a no-no um uh but like how do you you can do it thoughtfully you have to be thoughtful about it yeah well i mean like you I want to tell everybody we're doing. Yeah. You don't kind of tell anyone that we kind of did this thing publicly. So, I mean, is it first? I know it really kind of depends on what the client is, what the client's interested in, if they're dead set on one or two strategics or one.

44:15But how do you think about your process? Is it still generally talking to strategics first and then going to private equity or other groups? Or what's your process at all for running it? I mean, again, it depends. I think first, preparation is really important today because there's really no room for surprises. The market is such right now where if there's a surprise, it's really going to derail the process. And so making sure we've actually pulled forward a lot of the diligence that used to be done by the buyers to actually before you even go to market. So things like quality of earnings. We also have encouraged some of our recent clients to actually do brand studies or attitudes and usage studies, consumer studies with like BCG and McKinsey.

45:02Because, again, to my point earlier, like demographic is really important now. Um, so having a clear view, understanding, like, you know, we have a lot of clients who are launching new products. And so having third party validation that that category that they've decided to go into is actually something that their consumers want. You know, there's always the opportunity to go international. OK, well, does your product resonate? You know, if you're saying you're going to go to China, does your product resonate with the Chinese consumer? OK, let's make sure we have third party validation around that.

45:36So part of our process is going through that prep phase. Now, we talk to all of these strategics and private equity funds regularly. So we have a lot of insight into what they're looking for, what their bugaboos are and can help drive some of those, like, what are the work streams that need to happen? Are there things we should be concerned about in like some of these findings, based on what we know, right? So if we know that, you know, something is really important, and what we're finding is that actually for our client, like, it doesn't stand up. Okay, let's figure out how to like change the narrative so that when we go to market, we go to the right people, and we go to them with the right story.

46:17Um, so making sure all of that is aligned before we ever pick up the phone call formally for anybody, right? That all happens long before we go to market. Then as we think about talking to the buyers, again, it depends in, in every process, you know, we've done processes where we run a dual process, half of the process is too strategic and, you know, full buyout situation. And the other half is a minority round. Um, all of those calls happen at the same time formally. Now, you can do it in a way where, again, to my point, like, strategics tend to move slower. Do you socialize opportunities? Do you give them a heads up that it's coming?

46:54I.e., like, hey, this will come to market in, you know, in the second half. Get yourself ready, because if you're interested, like, this is the timeline. That, to me, is more important than doing a separate process and doing the strategics first and then the private equity. It's more like maybe we get the founder in front of them and say, look, you should just meet this person because what they're doing is really interesting and the business is going to come to market. Not today, but maybe in a couple of months. So doing stuff like that where it's more organic, to me, seems like a better approach in this market than putting yourself in a position where you're going to have to explain something down the line.

47:33that makes sense i mean it's almost like prepping for a fundraise right but it's it's like you're gonna run like you're gonna run like a a very tight process whether it's venture or whether it's pe but you're gonna run a pretty tight process you're gonna you know kind of let everyone that you know when your fundraise actually begins but you're not going there first be like fyi i'm like fundraising right now you know you're actually like telling them you're kind of like giving them a prep be like hey like in three months i'm gonna come back to you because we're going to start a process, but I just wanted to give you a heads up to prepare because, you know, I know you only invest in like a certain amount of companies.

48:05Yeah. Yeah. Educate yourself, talk to your commercial team, do whatever you need to, to like get yourself in order so that when we give you the call, when we're ready to go, it's not a surprise. And we don't have to do this whole education component. So to me that that's more just like being a good advisor of knowing, okay, if these are the, if these are like five really important the strategics that we want to make sure have a real shot here. Let's figure out a way to be a little bit creative in terms of how we approach them. Again, not in a formal way, but in a way of like, just make sure we don't run into a situation where we have a bifurcated process on the timing side, because people can't move at the same speed.

48:43Switching subjects. But when we're talking, when we were talking before, you said that not all women's health is the same. Can you elaborate on that? And, and, and how you think about women's health companies? Yeah, women's health is like one of the big conundrums for me. Because it's such an important category for like every reason you could possibly imagine. And everybody woke up in the last like three years and realized that like, women buy things. And that women have like, needs, like have specific health needs. And there's all this evidence that, you know, there are certain things that women just have, you know, there's, there's products out there that were never marketed to women, but like, you know, take something like a migraine, like women get more migraines than men.

49:33Like there are all kinds of like different need states that women actually experience in higher amounts. So not even like specific women things, but just, you know, we're not talking about like menopause, we're talking about like basic health things that women over index in. So put that on one side, which is like women over indexing in existing categories where there are products, but that were never really marketed at women. Then there's all the areas of a women's, like a woman's life cycle that, um, you know, in the venture space, especially in the last three years, a lot of those products have been very like, again, needs needs specific, but for a moment in a woman's life, whether it's like a prenatal product, like a Needed or a Parallel, where it's like a very clear, you know, fertility, prenatal type supplement.

50:19You have brands like Ritual that really got into more of a women's multivitamin. And then you obviously have menopause, which got a ton of press in the last two years. But outside of Bonafide, which took a while to get there, like you haven't seen a lot of brands break out. And part of the issue is that people don't like brands that only go after a very small period of a woman's life. So now you're seeing brands actually expand their scope. Are there, you know, perimenopause, menopause, postmenopause? Okay, so you can capture a woman for 40 years, that's a lot more attractive than a two year window or one year window.

50:55And so, you know, part of the issue, what we've seen in women's health is that there have been so many great women's health brands that have launched, but they haven't been able to scale because there just isn't that, you know, they either haven't been able to raise the money or they're going after a very specific moment in time and it's been competitive. And if they haven't been able to scale, they're not going to exit to a strategic, right? Because they're too small. And so that's why it's really bothered me in the last three years, because every call I get on with a strategic, the number one priority for most of them is women's health.

51:28How do I participate in women's health? How do I do something in women's health? What's out there in women's health. And the names are all the same, right? It's not like it's, you know, you look at who is scaled successfully and you're talking about like, Oh, positive has done a tremendous job in terms of being able to sort of sub brand across multiple different, you know, life cycle moments. So they have different sub brands, which they've done very effectively. Love Wellness has done a really nice job of having a broad portfolio that can bring in women at different phases and really support her in a much longer journey for her life cycle.

52:03You know, Bonafide did a really good job in the menopause space. But that was, you know, kind of unique. There have been other brands that have gotten to scale, but for whatever reason, you know, either their claims were not sustainable, and they've kind of disappeared or, or they just haven't, you know, they haven't made enough of a splash. But it's like, it's a shockingly small landscape for an area that everyone is incredibly interested in. And not small in the volume of businesses that have been created, because there's been tons created, but small in the fact that it's been very hard to succeed at scale for these businesses.

52:41Again, partially because the funding environment just dried up when they all came to market. Do you find across many of these brands that it is, that since there is a lot of them, as you say, like in the market, that it has been hard to differentiate across brands? Or do you think that, I mean, I know it was certainly, especially in this market, certainly like a funding issue. I'm just wondering, I'm just kind of curious as well in terms of like differentiation, if like that's been like an issue for you too. Not in women's health, only because at the scale, and there's just not very many brands available.

53:18you know certainly I think in the supplement category we're seeing not just in women's health but broadly we're seeing a little bit of saturation certainly from a form factor side right gummy vitamins had like a huge moment and now it's you know people have sort of realized that perhaps from a dosage perspective it's actually not a very effective way to deliver vitamins there's a lot of sugar in them which isn't really good and so figuring out alternative solutions again away from just the form factor. But there was a ton of Me Too happening in like 20 and 21 and 22, where brands were able to raise a lot of money because there was just a lot of capital being deployed for things that had worked, right?

53:57People saw the Ollie deal and they were like, great vitamins, like gummy vitamins, done. And, you know, it just, these things have cycles. And like I said, there's sort of one or two deals for every strategic. And so if you're the 10th, 11th, 12th gummy vitamin business and you don't have anything that separates you, I'm not sure why you would think that you would be able to really drive differentiation and attract the same type of interest. Um, so, you know, I think, especially on the VMS side, um, differentiation is really important, whether that's a clinical, like science, science support. Um, we're seeing a lot more in the practitioner channel brands that have like real clinical support, but are actually selling through or using the practitioner channel as a way to drive awareness, right?

54:48If your doctor tells you, Hey, this, this is the vitamin D you should be taking. Like you're going to listen to that. Strong, yeah. As opposed to like going and buying some weird vitamin D off the shelf that's like in a sugar-coated gummy vitamin. So differentiation, I think, takes a bunch of different forms. Part of it is, you know, the science. Part of it's also like where is the consumer migrating to? How are their purchasing decisions being informed and what are they looking for? And the consumer is moving away from certain things. you know again so at any given time there's a lot of me too in the consumer industry if something works you tend to find a lot of fast followers but especially in the funding environment we've had in the last two years like that that doesn't work anymore and we've seen a ton of brands disappear because they just they didn't have anything that made them special yeah that's that's interesting my final question for you what's one book that's inspired you personally and one book that inspired you professionally?

55:49I mean, I read The Stand by Stephen King. And so they didn't think I could read when I was young. I was like unable to read a book until quite late in my life. And when I picked up reading, I got very excited about it and very competitive because I was so late to the party. And so I went to the library and picked up The Stand, which is like a book about a plague and has a lot of other horrible things that happen. It's like 900 pages long. I mean, it's Stephen King. Yeah. I mean, that sounds like a that sounds like a Stephen King book. Yeah, but I was like 12 years old and had no idea. But the reason I picked it was because it was the longest book I could find in the library.

56:36And I obviously had some like a little bit of a chip on my shoulder. But it was like a pivotal moment because it one, one, it taught me all about plagues, which should have prepared me for COVID a little bit better. But two, it did not, shockingly. But also, I think there are those moments in your life where you sort of finally realize that you can do things. And before I decided to become a banker, I very much wanted to be a writer. And I think that skill set really came out of being able to read that book in this like transformative moment. And writing and telling stories is like 90 % of what I do now, right?

57:16I mean, there's the Excel component, but a lot of what my job requires is being able to talk to people and, and sell businesses, or sell myself and my company when we're pitching. And so it's such a standout memory for me on the personal side that I don't recommend it for children of that age. It's like quite traumatic and not an acceptable book for children of 12 years old. I was so proud. And then on the professional side, there's a book called, I actually, I have a copy of it here. It's just called Investment Banking. And so as I mentioned, I did not want to be a banker. I wanted to be a writer.

58:00And I went to college for writing. And that was like my big thing. I thought maybe I'd be a journalist or something. Um, and, uh, a bunch of things happened in college and I realized that like finance was cool. And so I sort of fell into banking and sadly I had no finance anything. Um, when I managed to convince a small bank to hire me, um, and the way I convinced them to hire me was because they let me write all their marketing materials. Um, and they told me that I could do that. I could have like a part-time probation role until I could teach myself accounting and banking. And my nickname was Terminator for the first four months, because I had never really used Excel before.

58:44And I didn't know how it worked. And so I would go in, you know, they'd have me doing like different Excel things in their spreadsheets. And I would literally destroy the spreadsheets. And so I was like, I was really bad. And so that finally gave me this book titled Investment Banking. And I've now read it like four or five times. And I recommend it to everyone I speak to, whether they have an experience in finance or not, because I think it's, for me, it was like the simplistic approach to what we do that gives you that like base understanding that really helps set a foundation for me. I mean, there's so many other things, but it was the first thing that like gave me the confidence to talk about finance in a way that I'd never been able to before.

59:27Um, so anyway, so that on the professional side was, it's not very creative, but it was very effective. No, that's awesome. That's, that's amazing. And is it the one by Joshua Rosenbaum and Joshua Pearl? Yeah. I mean, I still, I've been doing this for 13 years and I still have a copy in my office. Um, so, you know, no, that's great. Both these, I must say, Teddy, you are so original. No one has mentioned these books yet on this show. um and i'm and i and i well i i honestly hope you didn't have nightmares when you were 12 um after you read the stand are you kidding me first of all mike i won they gave us points for how like each book had different points depending on how long and difficult it was i crushed the year because of that book i like far out for everybody else it was like 900 points and like the other books kids were reading were like 10.

1:00:21So I was thrilled. There was no, there was nothing traumatic for me. I was like, I am amazing. On a high. That's amazing. That's amazing. Teddy, thanks so much for your time again. Really appreciate it. Yeah, thank you for inviting me. This was great. There you have it. It was terrific chatting with Teddy. Teddy, thanks again so much for coming on the show. If you're enjoying this podcast, I highly recommend subscribing on YouTube or whichever platform that you're listening on. And if you really love the show, check out the newsletter at theconsumervc.com. You'll receive weekly updates of all the consumer deals that are happening within the past week.

1:01:01And of course, write to your inbox the latest Consumer VC podcast. Thanks for listening.

1:01:16Thank you.