Final sale: What happens when a direct-to-consumer brand is acquired?

The second half of 2021 saw a number of direct-to-consumer brands make their way to the stock market, with glasses brand Warby Parker, sneaker maker Allbirds and Rent the Runway all making their debuts.

But while these events may grab headlines, a far more common outcome for founders looking to sell off their business is to find another company willing to buy it.

In 2021 — which saw a record number of direct-to-consumer brand exits — 40 U.S. direct-to-consumer brands filed for IPOs. However, this number pales in comparison to the 458 acquisitions and buyouts that took place among this group of brands that year, according to Pitchbook data.

Already in the year to January 18, 2022, 16 U.S. direct-to-consumer brands were bought out or acquired, Pitchbook’s latest data shows.

More recent deals include last week’s acquisition of male fertility startup Dadi, purchased by telehealth company Ro, which also added Modern Fertility to its portfolio a year earlier. On February 24, hygiene giant Kimberly-Clark announced that it had acquired a majority stake in period underwear brand Thinx, while Mars Petcare said it’d be buying pet food startup Nom Nom in January. In the same month, semi-permanent tattoo company Inkbox was acquired by pen maker Bic for $65 million.

These deals follow in the footsteps of other notable acquisitions of direct-to-consumer brands, such as Unilever’s $1 billion purchase of shaving brand Dollar Shave Club back in 2016, and the $310 million purchase of men’s apparel brand Bonobos by Walmart in 2017.

Why do founders sell their brands?

Joel Roos, a serial entrepreneur based in Finland, has been through the acquisition process twice. First in 2014, when he sold his furniture company One Nordic to the design marketplace Fab. Following the acquisition, Fab decided to merge and spin-out One Nordic as a new business, called Hem, of which Roos became a cofounder and minority shareholder. In 2016, Hem was acquired by Swiss furniture company Vitra for an undisclosed sum.

Roos says he hadn’t necessarily built One Nordic with the idea of selling it to another company in mind, but that it became an option when the brand was trying to raise investment. “We were looking to grow — we didn’t look to get acquired,” he says, adding that it was during these conversations that Fab offered an eight-figure sum in exchange for a controlling stake in the business.

The incentives seemed aligned: One Nordic needed support in order to keep growing, and Fab’s platform could put its products in front of an international audience. Fab, meanwhile, was trying to move away from being a marketplace for other brands to sell their products, and sell its own stuff instead. When it was time for Vitra to acquire the brand, Roos says the firm was interested in Hem's e-commerce prowess — founded in 1950, Vitra had a lot to learn from its digitally native competitors.

The question of financing is often what pushes a founder to consider selling his or her brand. If a brand needs more money but finds that venture capitalists aren’t biting, or that bank loans aren’t a suitable option, an acquisition can provide not only the money, but the resources and industry connections needed to take a brand to its next stage of growth (and a reason for the founders and early employees to make their exit).

Shortly after Lululemon’s $500 million acquisition of Mirror in 2020, the latter’s connected workout devices started to be installed in Lululemon stores, where users could try them out in real life.

Acquisitions are appealing to brands in an environment where “it’s becoming increasingly challenging to scale,” says Eric Satler, president of Win Brands Group, a company that buys direct-to-consumer brands. “We’re also in an environment where sourcing is a real challenge, between supply chain, logistics and warehousing.” Becoming part of a bigger entity, which already has robust systems in place, can remove some of these headaches.

As for the big brands that are doing the buying, there are a number of reasons why they might want to acquire a smaller direct-to-consumer brand. If it’s a private equity firm, it’s likely they will be buying a brand with the intention of selling it a few years later, once they’ve added a bit of value to it (or stripped out the more expensive parts — or people).

A huge multinational might be hoping the addition of a new brand will allow it to tap into a customer base they are struggling to reach (when Estée Lauder took a controlling stake in affordable skincare brand The Ordinary, it filled a gap in its portfolio for price-conscious consumers). In the case where brands are swiftly shuttered after an acquisition, it may be that the buyer wanted to nip a competitor in the bud before it became too formidable — or they may have identified that it owned some intellectual property or sales contracts that would be useful for them.

Satler says that Win, which counts weighted blanket brand Gravity and candle brand Homesick among its portfolio, typically looks for brands that are generating between $5 million and $50 million in revenue, and which have proven their product-market fit. “We want to see that the business can generate cash flow on its own, and then we can start to accelerate that.”

He says that since Win acquired Homesick in 2018, for example, the brand’s revenues have increased six-fold.

Brands can indeed become "too big" for this kind of exit. In 2020, shaving giant Edgewell scrapped its planned acquisition of direct-to-consumer rival Harry’s, following the Federal Trade Commission’s attempts to block the deal. The FTC argued that “the loss of Harry’s as an independent competitor would remove a critical disruptive rival that has driven down prices and spurred innovation.”

Venture capital investors pushing for a big return on their investment can also nudge brands that don't quite have the right economics for an acquisition to pursue IPOs. “The vast majority of [direct-to-consumer] businesses aren’t going to be billion dollar companies,” Satler says. “I think the IPO stuff is more driven by investors needing to find a path for liquidity.”

Cutting the emotional ties

For the founder, the process of selling a company they have built from the ground up can be emotionally fraught. While a life-changing sum of money might be on the table, the founder will also likely be wondering what the sale means for what they do next, as well as their sense of personal and professional identity.

The negotiations process can therefore be “a delicate balancing act,” says Laura Brunnen, a U.K.-based solicitor and founder of The Legal Strategist. “This [startup] is someone’s baby, and there’s a lot of emotion and pride involved. As a lawyer on the buy side, I’m always mindful of showing respect to the seller.”

Touchy subjects can include the valuation of the business — the acquirer will likely have a very different idea of what the company is worth compared to its emotionally-invested founder — and what the founder’s role will be once ownership has changed hands.

Often, a transition period will be agreed where the founder commits to staying with the company for a certain amount of time after the sale has been completed. There are two benefits of this arrangement for the acquirer. One, it means the founder is on hand to answer questions and train up the acquirer’s staff on how things have been done. Two, it reduces the risk of the founder going AWOL once the sale money hits their bank account.

“What some buyers do is say, we’ll pay you 50% when we buy the business, and 50% at the end of the transition period,” says Brunnan. “Then the founder will enter into a contract for six or 12 months to oversee the transition.”

Roos says that selling his brand, first to Fab and then relinquishing his minority stake in Hem, came with “a certain sense of relief.” “You have employees, and there had been times in our history where money was tight and investment was hard to come by,” explains Roos, who is currently building his next business — another furniture brand called Magic Factory.

“It was a strange feeling,” he reflects. “A mix of emptiness, accomplishment and relief. And then I was on to the next thing.”