Private equity investments are either directly made into a private business or they are used to buyout and delist a company from a stock exchange. These funds can be raised from individual investors, institutional investors or sometimes, from a group that act together.
Private equity can be used by company managements for a variety of purposes, ranging from turning around a distressed business to further accelerating an already existing growth.
When investing, usually the investor sets an objective and a time frame to achieve it. As soon as that objective has been met, investor sells its stake and “exits”.
Private Equity in Direct Selling
Among many other businesses, direct sellers, too, have attracted investors’ attention and we have seen quite a few private equity investments in the industry:
While Oriflame was listed on the London Stock Exchange, IK Partners (then, branded as “Industri Kapital”), a leading European private equity firm bought 45% of Oriflame’s shares in 1999. With this transaction, Oriflame was delisted from the stock exchange, too. This acquisition had valued Oriflame at approximately 450 million Euros at that time. In line with the initial plans, the company was listed this time on the Stockholm Stock Exchange in 2004.
In 2010, Sequoai Capital invested $37 million in Stella & Dot. With this, Sequoia owned 10% of the company, valuing Stella & Dot $370 million. Before this, the company had also raised about $5 million from Radar Partners.
In 2011, MidOcean Partners acquired PPLSI (“LegalShield”) through a cash transaction valued at approximately $650 million. Seven years later, Stone Point Capital acquired the majority stake in LegalShield from MidOcean Partners.
In late 2015, Cerberus, an investment company, said it was acquiring Avon’s North America business. This unit included United States, Canada, and Puerto Rico. The transaction was quite complicated, but the total value of the transaction was $605 million. This newly formed company was named “New Avon”
Pampered Chef is probably the most publicized of these examples due to its investor’s high profile. In 2002, Warren Buffet’s company Berkshire Hathaway announced it would buy Pampered Chef. At that time, Warren Buffet was known to have said, “We are extremely excited by Pampered Chef. Doris Christopher has created from scratch an absolutely wonderful business.” To date, Pampered Chef has been a Berkshire Hathaway company.
And as a more recent and interesting example, Tracy Britt Cool, also known as Warren Buffet’s protégé and the CEO of Pampered Chef, quit Berkshire Hathaway to co-found her own private equity firm, Kanbrick. Kanbrick’s first move was to make an investment in Thirty-One Gifts in 2020.
Due Diligence Process
Before a private equity firm decides to invest in a direct selling company, a comprehensive evaluation of specific industry-related aspects is obviously essential. This due diligence process is imperative to ensure the potential for success and sustainable growth.
So, what should due diligence involve in direct selling industry? Or looking from another perspective, how can the direct sales entrepreneurs and executives be prepared to attract that investment?
1. Position in the Market and Competitive Landscape:
Before embarking on a venture into the direct selling domain, a thorough assessment of the company’s market position and competitive landscape is paramount. Understanding the company’s standing relative to its direct and indirect rivals offers valuable insights into its growth potential. Key considerations include:
Market Share: Determining the company’s current market share and its trajectory over recent years provides valuable insights into its competitive strength.
Differentiation: How effectively does the company distinguish itself from its competitors in order to influence its ability to capture market attention and loyalty.
Product Portfolio and Demand: An evaluation of the uniqueness and demand for the offered products will help determine the potential for growth and economic sustainability.
Trends and Projections: Understanding current market trends and predicting future developments provide valuable perspectives.
2. Regulatory Framework and Compliance:
Navigating the regulatory framework and understanding how the company complies with it is a pivotal step for any private equity firm considering an investment in the direct selling industry. Given the global nature of the sector, companies often face varying regulatory landscapes in different regions. Areas demanding meticulous scrutiny encompass:
Compensation Plan: Ensuring that the compensation plan adhere to local laws and regulations is crucial for avoiding legal entanglements. This is a task that needs to be fulfilled for each of the existing and the planned markets as the regulations may differ significantly.
Policies and Procedures: Professionally managed direct sales companies have documents that combine policies, procedures, rules, and internal regulations and make them public. These are used in guiding the sales force and dealing with the independent direct sellers. It is vital to make sure first, the company has these in written and secondly, it enforces them.
Products: In today’s world, manufacturing, selling, and international trading of a vast number of product categories are regulated. A private equity firm needs to verify that all products are in full compliance with the regulations in the markets the company operates and also in those that it plans to enter.
3. Field Force:
Central to the success of any direct selling enterprise is the efficacy of its sales force. Private equity firms should delve into the intricacies of how products are marketed, sold, and delivered to end-users. Considerations include:
Sales Force Effectiveness: This is evaluating the effectiveness of the company’s field force in not only driving sales and recruitment, but also in cultivating lasting relationships.
Direct Seller Engagement: Examining strategies for recruiting, training, and retaining independent sellers and how the direct sellers duplicate these on the field provide insights on the company’s ability to expand its network.
Technological Integration: Assessing the extent to which the company integrates technology, especially the digital technology in its distribution network is crucial in an era driven by digital innovation.
4. Technology and Digital Presence:
In a digitally transformed business landscape, a robust online presence and technological infrastructure are vital for success. The private equity firm should ascertain the company’s tech capabilities and its capacity to adapt to evolving consumer preferences. Key areas include:
E-Commerce Platform: The efficiency and user-friendliness of the company’s e-commerce platform can significantly impact customer experience.
Direct Seller Back-Office: Independent consultants strive to run and grow their businesses, part-time or full-time. They need a powerful and well-functioning back-office platform to achieve these.
Digital Marketing: The effectiveness of the company’s digital marketing strategies, including social media engagement and online advertising, are indicators of its adaptability.
5. Financial Performance and Growth Prospects:
At the heart of any investment decision lies the financial health of the target company. A comprehensive evaluation of financial statements and performance indicators is imperative to gauge the company’s revenue streams, profitability, and growth potential.
Key factors for a private equity firm to analyze include:
Historical Performance: Scrutinizing historical revenue and profit trends provides insights into the company’s past performance trajectory.
Recurring Income: Understanding the company’s ability to generate consistent, recurring income can determine its stability in fluctuating market conditions.
Future Projections: Meaningful projections for future growth and expansion can guide the investment firm’s expectations and strategic planning.
Compensation Plan: The compensation plan should be rewarding and competitive but at the same time, there should always be a cap on the selling expenses as a percentage of company revenues. This is a very significant expense item on the income statement.
6. Leadership:
Like the industry icon Mary Kay Ash once said, “A company is only as good as the people it keeps.” Of course, this includes those who manage the company. Entrepreneurial spirit is something good to have. So is the knowledgeable and talented management to run and grow the company. This needs to be good enough to take the business to the next steps with the funds to be provided by the private equity firm.
Conclusion
The direct selling industry’s players offer lucrative investment opportunities for private equity firms seeking avenues for growth. This has been proven by the successful examples. However, succeeding in this arena necessitates a profound comprehension of the industry’s nuances, regulatory dynamics, and its inherent complexities.
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Hakki Ozmorali is the Founder of WDS Consultancy, a management consulting and online publishing firm in Canada, specialized in providing services to direct selling firms. WDS Consultancy is the publisher of The World of Direct Selling, global industry’s leading weekly online publication since 2010. Hakki Ozmorali is an experienced professional with a strong background in direct sales. His work experiences in direct selling include Country and Regional Manager roles at various multinationals. You can contact Hakki here.
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Hi Hakki, thanks for the overview.
Closer to me in France companies like Captain’ Tortue, Victoria or Charlott’ are known to be or have been private-equity backed. With relative successes.
Question : how would you measure field force ?
Thank you for your input, Jerome! Regarding your question, it is not realistic to expect someone to quantify the effectiveness of a field force. That said, a person who is experienced in direct selling can reach a conclusion after reviewing various past data and interviewing company managers as well as independent direct sellers from various levels on the success ladder.