There are considerable number of existing fashion brands in the global marketplace. For sponsors and lenders, independent due diligence plays an important role in the transaction process for any potential capital investment. This includes haute couture, ready-to-wear, intimate apparel, activewear and accessories. Accordingly, a properly planned strategy and execution plan is key to conducting due diligence of emerging fashion brands.
On a macro-level, a commercial market assessment is required to determine realistic market scenarios, trends, drivers with respect to value chains, customer segmentation and demographics, end-customer purchasing power, and critical price points. In addition, existing players coupled with barriers to entry, expansion and increased market share, infrastructure for supply chains, logistics and distribution. Also, the role of digital vs. brick and mortar retail, dynamic impact of omni-channel sales and artificial intelligence (AI), technology trends in fibers, fabrics, textiles and other related areas.
On the fashion brand level, it is essential to focus on the business and investment fundamentals. Starting with the review of the corporate structure, corporate governance, legal agreements and contracts, current and pending litigation, functional business and operational aspects, management team, supporting organizational structure and reporting. From a capital investment perspective, review of the historical and current financials with respect to assets, income, cash flows as compared to all liabilities, expenses and debt service coverage (senior, subordinate and mezzanine). A review of capital costs, operating costs, cost of production and margins with economic modelling and financial analysis to determine profitability, return on capital, payback period and breakeven capacity. A sensitivity scenario analysis will enable sponsors and lenders to understand and appreciate the impact on profitability and returns as a function of key market and business variables.
As part of the tangible asset valuation process (property, equipment, cash, term deposits, securities and inventory), it is mandatory to undertake an assessment of the fashion brand value with respect to intellectual property rights (IPR) for copyrights, trademarks, patents and other related rights.
The above methodology and approach will enable a proper assessment of, among other metrics, enterprise value (EV), earnings before interest, taxes, depreciation and amortization (EBITDA), return on assets (ROA), return on equity (ROE), and internal rate of return (IRR).
As a result of the independent due diligence process, once bankability with risks and mitigation has been determined, it is important for sponsors and lenders to evaluate and assess the potential exit strategies with critical path milestones and timelines. These include a possible merger and acquisition (M&A), strategic sale or an initial public offering (IPO).