Transcript – From Paper Sketches To $441M Sale

Transcript – From Paper Sketches To $441M Sale

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John Warrillow:                Hey this episode of Built to Sell Radio is brought to you buy the Value Builder System. I had the opportunity to interview Stephanie Breedlove the other day. She sold her nine million dollar payroll company for a cool 54 million dollars. How did she do it? She focused on the eight things that drive company value. Things like, what we call the Switzerland structure, monopoly control, recurring revenue. All things you’re going to evaluate in your own business using the Value Builder Score.

John Warrillow:                Takes about 15 minutes to complete the survey. Go to ValueBuilder.com

John Warrillow:                So usually when I do these interviews I keep a little piece of paper beside me and I’ll write down a little nugget that I wanna include in my introduction and usually by the end of the interview I’ve got three or four kind of key nuggets that I wanna sort of talk up in the introduction. My next guest, Tevya Finger, I’ve got, I don’t know, two dozen nuggets here and I don’t know where to start so I’m gonna butcher this intro but I’ll do my best to share the story.

John Warrillow:                So Tevya Finger is the founder of Luxury Brand Partners and a key shareholder in that business as well as a shareholder in a number of the businesses that he has funded. In particular we get into, in this story, Oribe brands which is a hair care brand which he built after a six million dollar investment into a 441 million dollar exit. Not a bad little run for what was about ten years worth of work.

John Warrillow:                In this interview, you’ll hear a lot from Tevya. A couple of things that I’ve written down here, again, there are dozens of examples of insights but one of the one I took away that I really liked was the idea of earning the right not to take a risk. I asked Tevya about how much of his personal wealth he’s got in luxury brands, I think you’ll be surprised by the answer.

John Warrillow:                He talked about how he spends the money that he invests in a brand, in particular, his position that there are two things that make up a successful investment, two things that have to be in place, and he talks about that. Gives a definition of a convertible note and a pick which I think is good for the technical investors on the show.

John Warrillow:                He has a real interesting philosophy around papering a deal so you’ve got control but never using it and I think that is a fascinating, almost a juxtaposition of two ideas that I think is really interesting.

John Warrillow:                He talks about the importance of branding and using luxury brands and companies like Neiman Marcus as a way to substantiate and position a brand. It’s interesting the way he financed, let the buyers of his product finance the growth. There’s a fascinating idea in there about how to get from 20 to 80 million in sales and how important that gestation period is for a lot of companies. How to answer the question, do you wanna be acquired? He’s got some really interesting, strong views on the answer to that question.

John Warrillow:                Lots of great stuff. I’ll let Tevya Finger tell you the rest of the story.

John Warrillow:                Tevya Finger, welcome to Built to Sell Radio.

Tevya Finger:                     Hi, how are you John?

John Warrillow:                I’m great, I’m great. So tell me a little bit about this company. We were talking a little bit offline about luxury brands. It’s almost like an incubator. Take me through this company. What’s the model?

Tevya Finger:                     Yeah so our company’s called Luxury Brand Partners. I’m the founder and CEO. The concept is that we were gonna take, create, and ideate, and fund ourselves as well as operate and then ultimately sell so, if you think about that it’s kind of an unusual, you might have a venture company or angel investors, we kind of take all of that out of it and we do everything on our own.

Tevya Finger:                     So we even fund, we shop for a face of a brand and then we kind of cobble together with a business plan, then we fund it, then we sell it on the street and we find ways to make revenue and then ultimately the goal is that we sell the brands for nice hefty exits.

Tevya Finger:                     So we’re kind of like an incubator as well as a venture fund as well as operators so that is kind of unusual and all of that, sorry I should say, is all within the beauty industry so makeup, haircare, skincare, anything to do with beauty regimen.

John Warrillow:                Got it. And so who are the partners in luxury brands?

Tevya Finger:                     There’s quite a few. I won’t name them all but the main partners are the chairman of the company, his name is [inaudible 00:05:05], he’s actually a Canadian, and the other one is [inaudible 00:05:10] and she’s from Europe so she’s an amazing female entrepreneur and she really helped back us in the very early days.

Tevya Finger:                     So those are the kind of core. We then have a whole group of kind of operating partners that work with us, probably about six others in that group as well and it’s a really fantastic, well rounded team. Everyone kind of does different stuff.

John Warrillow:                It sounds a little bit like an investment group where there’s kind of operating partners and then limited partners who put money in but don’t have operating roles. Do you have limited partners as well or is it just kind of more operating partners?

Tevya Finger:                     It’s funny, it’s actually a great question. So everything we do is through LLCs. Our main company which is Luxury Brand Partners, that’s an LLC and then all the subs underneath it are LLC. We don’t have limited partners. We really just have three board members which are equity holders that hold the largest amount of equity, which is me, and the other two that I had mentioned to you. So that’s kind of the structure but then the operating partners, when I say operating they really, they can [inaudible 00:06:18]. One can be a president of a brand, we can then sell a brand, they’ll then move and become a head of international, so everyone kind of pinned. We have one that’s a genius at marketing so he’ll work on all different brands. We have a couple of our presidents that are phenomenal as well so it’s really a good mix but we don’t have it as an LGP set up although it probably feels like that a little bit.

John Warrillow:                Got it, got it. Okay, well great. So you recently built this brand Oribe. Maybe we can talk a little about Oribe. How did this come about?

Tevya Finger:                     Yeah, that was a great, well I’ll go back just in history just before that. My partners and I started a brand called Bumble and Bumble and that was a hair in New York City and the owner, name is Michael Gordon, he wanted to start a product line so we all kind of came together. We funded it for about a million and a half. One of the main partners funded it for about a million and a half and next thing you know, the brand kind of took off and about 12 years later we sold it to Estee Lauder and had a really good exit so that was our first haircare exit brand that we had done.

Tevya Finger:                     I had a one year noncompete so I actually moved down to Florida and just relaxed for a little while which is the perfect place to do that and then after the year was up, came down and said all right, let’s get the band back together ’cause everyone kind of disbanded. And went to that same investor that put the money into Bumble and Bumble, he put the money into Oribe and then I went on a road show and raised the rest of the money for the Oribe brand so in totally we raised about six million dollars which was a lot more than we had raised for Bumble but remember, it’s 12 years later so the games kind of changed.

Tevya Finger:                     Now interestingly enough, that was in- Yup, go ahead.

John Warrillow:                I was just gonna ask why didn’t you, I mean presumably given the success of the Bumble and Bumble and exit, why not self fund it? Why not just do it yourself and not bring in the outside investors?

Tevya Finger:                     It’s funny, we did put some money in. The three kind of original founders put in, I think, around $600,000 dollars to kind of get it going and then after that first year we needed some real money and in order to compete with, basically with Bumble and Bumble, the company we had just built which at that point was a hundred million in sales. It was just dominating the fine, high-end hair salon. I knew that we kind of had to get up to speed really quickly and I didn’t have the time so if we self funded, we’d be putting a lot of our own cash into it and we had just had our first sales after 11 years, it’s not like you wanna put everything back into the kitty right away so that was the kind of decision at that point and we were happy to give away equity but we had a really healthy evaluation at that time because of our past success which I think, for entrepreneurs, it’s kind of one of the effects.

Tevya Finger:                     I think it’s always hard your first time, right? ‘Cause you have to have that proof of concept that you can do it but once you’ve done that you can start to push that valuation higher and obviously lose less equity in doing so. So we ended up giving away for the six million bucks about, we gave away 20% of the company which I think was pretty, you know-

John Warrillow:                That’s a pretty good evaluation.

Tevya Finger:                     Healthy evaluation, we should say. And the thing is-

John Warrillow:                And what was it at the time? Was it just an idea on a piece of paper or was it actually-?

Tevya Finger:                     Idea on a piece of paper, literally, with some sketches of bottles and stuff. But again-

John Warrillow:                That’s incredible.

Tevya Finger:                     -the investors were shrewd because they understood that it was really about our relationship and the team that we brought to the table so we started that brand, this was in 2008, and as you can imagine, I’ll never forget I was working out in the gym and I remember President Bush coming up on the TV saying hey, if we don’t act and do this tarp thing, literally the country’s gonna shut down and the stock market started crashing and I remember thinking oh my God, what a horrible time to start a luxury haircare brand where the shampoo is 50 bucks and the conditioner is 50 bucks. Who in their right mind is gonna spent a hundred dollars for a shampoo and conditioner? This is it. This is the end of the world.

Tevya Finger:                     And so as you know, that’s where entrepreneurs have to really reach in and really change your strategy and pivot a little bit and we had all kinds of issues. Part of that six million we had put into the regular bank account and I don’t know if you know what an auction rate market is but the auction rate-

John Warrillow:                I don’t, no.

Tevya Finger:                     Sometimes if you want to get a little bit of a better interest rate in the bank, for your commercial account, they’ll put you in a thing called auction so instead of getting half a percent interest you can get like 1.2 and it’s completely safe. Auction rate markets have been around for 30 years or 40 years and have never failed. Well, of course, they failed and out of the six million we were up to about three and two of the three got locked up in these auction rate markets during that whole crash in 2008 so it was a really tumultuous start and it was very difficult but it really made us work ten times harder and be a very clever how we spend money.

Tevya Finger:                     I can give one quick example that I think for entrepreneurs is really helpful. In that time, so, we had to really decide, how are we gonna dispense and use our money? Because if the whole economy is down, maybe raising money is gonna be really difficult. We weren’t really sure about the next three million we needed but second to that, we still wanted to come out swinging and build a brand that was competitive so we threw some huge hair dresser event and what I did was I went to Las Vegas because towards 2009, or middle of 2009, nobody was going to Las Vegas. The economy literally in Vegas had crashed. Apartments weren’t selling, no one was going to casinos, ’cause nobody had money. The system kind of locked up. This was early 2009.

Tevya Finger:                     So what I did was I went to Las Vegas and I negotiated with them and it was so easy. It was like shooting fish in a barrel. I said listen, I’m gonna be here with 400 hair dressers, we’re throwing an event, I want free drinks ’cause they were begging to get people to come into the casinos and gamble which is where they make their money. So I got them to throw in drinks, I got hotel rates of $80 at the Palms, as an example.

John Warrillow:                Oh my God.

Tevya Finger:                     It was insane. I mean we threw what was probably equivalent to a two and a half million dollar event over the course of a week, for a total cost of about $250,000 and the thing is, what you have to realize is when things are really bad in the economy, there are ways to get a lot out of it, right? Your dollar can go a lot further, your funds can go a lot further.

Tevya Finger:                     So instead of doing what every other company did in hair care at that point which I had noticed, which was they were basically turtling, which is a term I use. Kind of going inside their shell and not spending money and not doing anything and no marketing. I don’t know if you remember, nobody was advertising in that period. It was really a very dark time for us. We did the opposite. We started spending money on advertising ’cause I was getting full page ads in the trade magazine for one tenth of the price because nobody was advertising so we used that dark time and that difficult time in our country as a perfect time to get more bang for our buck and that helped really propel us because we started becoming this bright spot in the hair industry when everything else was kind of depressing and not happening. We were this flame that kept it going so that’s just a little glimpse into some of the entrepreneurial thinking as I’m sure most of your listeners are very acutely aware of.

John Warrillow:                Yeah, no, I think it’s a great reminder and those were dark days for sure. Talk about Oribe and its business model. So you sold to hair dressers, you didn’t sell to grocery stores and Costco, you went through the hair dresser channel. Is that right?

Tevya Finger:                     Yeah, it was a hybrid model. We sold to hair salons. Just to give a point of reference, there’s about 300,000 hair salons in the United States, of those we ended up, by the time we sold which was a couple weeks ago, maybe a month ago now, it was about 3,000 customers that we had in that range. So it takes time to acquire, each salon is one door at a time that you have to open up so the business model was sell to salon and at the same time sell to Neiman Marcus and some department stores so Neiman Marcus, Space NK which is out from London but also in the US and Bloomingdale’s so we had a high end department stores where we would anchor the luxury sides and then salons and that was our product. So we didn’t sell to Costco and Sally’s Beauty Supply and places like that where you would find kind of less expensive products so we definitely wanted to distinguish ourselves as a Rolls Royce of haircare and I think we did a really good job of that it just was a little difficult from the beginning because nobody wanted to buy a Rolls Royce of haircare in the very beginning so that’s what we had to retool a little bit.

Tevya Finger:                     And we actually did, to compensate for that, is we came out with our Rolls Royce line, then realized it was very expensive, so we created kind of a sub line of about five pieces which were way lower price point and way lower margin. Think of it like the loss leader to kind of get us in the door and salons would take that and interestingly enough, they would take the lower expense stuff and once it was in the door for a month or two, they would tend to take on the rest of the line and people actually bought, someone decides they’re gonna buy a Rolls Royce, they’re generally not gonna try and cheap out and buy the lowest, inexpensive model. An interesting psychology. So when you’re dealing with that kind of top echelon of a customer who’s got more money to spend, they kind of sometimes want to buy the more expensive product. That’s what we learned from that process.

John Warrillow:                Interesting. Talk about cash flow here. You’re buying, are you contract manufacturing the product or do you own the manufacturing facilities? What’s the cashflow like? I’m particularly interested because hair salons are probably really slow payers if I had to guess.

Tevya Finger:                     Interesting you say that. So they are. They are notorious for slow or not paying so what we had done is just did everything by credit card. We kind of demanded that you kind of have to use credit card and we’re not gonna do any terms and are angle on that was look, you’re getting 30 day terms on your credit card and you know what? If you can’t make a payment you just pay them interest and you can have 60 days or 90 days. I know it sounds kind of simple but that actually was a workaround that worked really well and-

John Warrillow:                I find that fascinating. That’s incredible.

Tevya Finger:                     Entrepreneurs, it’s interesting. A lot of times it’s how you raise and package things that can kind of get you over these hurdles that come up, right? So that’s how we got past that, the 30 day thing.

Tevya Finger:                     We also-

John Warrillow:                What would an average- [crosstalk 00:17:19].

Tevya Finger:                     Yup.

John Warrillow:                Tevya, what would an average order size be of a typical salon? Not the highest one, not the lowest one but average.

Tevya Finger:                     Yeah, yeah, an average order of Oribe would be about $1500 a month at wholesale which means they sell it for 3,000 at retail so they make, if they buy $1500, they’re gonna make 1500 so it’s actually the most profitable part if a salon business. Most salons make around, the good ones, make between five to ten percent profit for the year on everything and the biggest generator of that profit in their salon, ’cause the margins are good, is the actual product, right? They’re making 100% on whatever they buy so that’s how that works.

John Warrillow:                Got it.

Tevya Finger:                     Back to the other thing you had said before about, from the contract manufacturing and all of that, in order to get cashflow because that tier point, cashflow is everything, right? When you’re growing a business. So the way we did it was we kind of we shoot everything outside of us and try not to own it so like the warehouses, we don’t use our own warehouse, we use a public warehouse and there were three of those kind of strategically located around the country so that if you placed an order for ground, you would get it within three days which is kind of a little bit on the slow side distributors, which is the other route model that people use which obviously we didn’t use distributors, that was a huge piece. We cut distributors out of the model and we just went direct to salons so when you use a distributor you might get the product in 24 hours, with us it took three days. It wasn’t ideal but it helped us, we didn’t have to pay distributors and lose half of the margin.

Tevya Finger:                     The other thing we did was when it comes to manufacturing, we didn’t buy our formulas. We didn’t buy the formulas, we subbed everything out but we worked intensely with these contract manufacturers and we guided them on this is what we needed to do. Have to do this and this and this. And actually that’s where the person, Oribe, which is actually a hairdresser, it’s a person, one of our partners at the time, they moved on now, we’ve sold the company, but Oribe the person would really help us and, he was a hairdresser, would help us with the labs, kind of directing them on what it is we needed and that was very, very helpful and he was really a master when it came to understanding the product side.

Tevya Finger:                     So everyone played a role and a function in creating the brand.

John Warrillow:                I find it just fascinating. So you’re starting these brands with a view to selling them, obviously, how big did you get Oribe before you decided it was time to exit?

Tevya Finger:                     That’s a great question. It’s a question we get quite often which is, you know when you start a brand, you operate the brand as though you’re gonna own it forever ’cause it makes you run a better brand. So that’s how we kind of look at it. Our mentality is let’s build a phenomenal business and we just know that if we do a great job of building a phenomenal business, someone’s gonna come along and pay a lot of money for that. More than maybe a normal company would get and that’s where you get the multiples on EBITDA or multiples on valuation so our industry has a range of multiples. We have all kinds of analysis on that but for us, it’s really about driving a huge amount of EBITDA so as an example for Oribe, we were at about a 33% NOP, net operating profit, on about 90 million dollars so that’s a very, 90 million in revenue and 33% net operating profit. That’s a really healthy margin and profit and the business is spitting out cash every year. It’s printing out like twenty something million dollars of cash that you can kind of reinvest in the business.

Tevya Finger:                     So interestingly enough, the entire eight year journey, from beginning to end, it took eight years in the Oribe brand, we never once took money out from profit for ourselves. The only money we ever distributed was a tax distribution that covered the taxes for the members. And it shows you, when you have something good you can take money out but you’re gonna slow down your growth and it’s really important in some fields, sectors, it is important to kind of get there very quickly because if you take too long to get there someone else can come and kind of push you out of the way so we reinvested every penny after that six million.

John Warrillow:                I mean how do you know how fast to push because I mean some of these brands, Estee Lauder, some of these very high end established brands have been around for generations, if not centuries, so why do you think it’s important to move so quickly?

Tevya Finger:                     Because, well first of all the great news is that, newsflash, these huge conglomerates, think of them as big huge dinosaurs, like a brontosaurus, right? And when you’re small and startup, they don’t even notice you. You’re not even on the radar so they start to notice you when you get to about 20 million dollars. And I’m talking about, this is specifically haircare at this point or maybe even a little bit of makeup at that point.

Tevya Finger:                     And at that point, when they notice you, that’s where you have to turn the after burners on because you need to get from 20 to 80 within three or four years because they’re gonna start becoming competitive. Their generals are gonna look at their troops and say all right, push back on them in that location. Push back there.

Tevya Finger:                     So you kind of wanna get to the 20, you’re gonna be undetected. Once you get to that 20 million in revenue, that’s where you actually really wanna push hard and it’s been like that every brand we’ve had. We had a makeup brand that we exited actually so Oribe technically was in December, was when the sale happened, of 2017 and then in 2016 in December, we exited a makeup brand called Becca and we actually sold that brand to Estee Lauder and that one was published, I think, in north of 200 million dollar so I’m not giving away any price tag which was published north of 200 million dollar exit and that was a brand that we actually had taken on three and a half years prior. They were losing three million a year and doing four million in revenue and they were mostly found in drug stores so that was, what I would call, a absolute disaster.

Tevya Finger:                     We put in new management, put in a president, his name’s Bob DeBaker, phenomenal president who was a good friend of mine at the time, we put him in there. We put in about six million dollars of investment into the company and this is a company that’s been around for 12 years.

John Warrillow:                What did you buy it for?

Tevya Finger:                     We actually kind of absorbed it. I was like we’ll take it over, we actually didn’t even buy it. We’ll take it over, we’ll leave some of the original founders with their equity, and we’ll turn this into something. So there never really was an acquisition. It was kind of we’ll lower some of the equity of this existing numbers, and then we’ll invest money and run this thing and then everybody, hopefully, will make money. And that’s exactly what happened.

Tevya Finger:                     Three and a half years later we sold the brand, it was 200 million dollar plus exit and it was a really great example of sometimes you need the right team inside of there and you gotta have that funding, right? So businesses are difficult in that you can have the best team in the world but if you don’t have funding, it’s gonna be really difficult and if you have funding and you don’t have a great team, that could also be really difficult. So having those two with the one two punch I think is, honestly it’s a must, in our opinion, to do what we do.

John Warrillow:                Because you injected six million dollars in both Oribe as well. Is it coincidence that six million dollars was the number or is there something magic about that amount of sort of injected capital in the early stages?

Tevya Finger:                     Yeah, that’s a really good question. I think, look, I wouldn’t know that unless from our past experiences but it really does seem like six million dollars gets you what you need in that field. However, I will tell you, we have some new brands in our, but all brands start at 0 so right now at Luxury Brand Partners we’ve got about six brands currently and of the six brands, only one of them is over 20 million in sales and that’s only been in business two and a half years. That’s another haircare brand. So that’s on its trajectory, doing it’s thing. We’re reinvesting all the money. We’ve probably put in ten million into that brand so what I’m noticing is as time goes on, the amount of money you need grows substantially. It’s growing faster than, certainly inflation, right?

Tevya Finger:                     So if four or five years ago it was the six million number and 14 years ago it was the one and a half million number, today it’s looking like ten million so a lot of the brands that are in our kind of group now are at about ten.

Tevya Finger:                     Now I should say, we’ve also changed some of our strategy so we’re not only selling to hair salons now. Now we sell to Sephora, and Ulta, and some of the other different retailers so because the whole world’s changing, right? Amazon and the internet together have worked wonderfully to kind of disrupt retail so it’s making everybody work harder and think differently and operate differently so that direct model that we used before, now we use a hybrid model in one of our hair brands where we use distributors and we use a direct force.

Tevya Finger:                     So as the game changes, so does the strategy.

John Warrillow:                Gimme the pie chart. So you invest ten million dollars in the brand, what are the big slices of the pie chart? Like where’s that money going?

Tevya Finger:                     Great. Great question. Obviously when you kind of first place your order, you’re looking at about a million and a half right off the bat. The minimum runs are quite substantial if you wanna get the big margin price.

Tevya Finger:                     The first year there’s no product, it’s building the product. So it’s all human resource. So it’s the salaries and a typical team can be about 15 to 20 people that work on it from art design people, the marketing people, the president of the brand. You don’t really have many sales people involved but you have one head of sales helping to strategize on what it’s gonna look like so you’ve got quite a big robust team of 20 people which is unusual. A normal startup, like when we started Bumble, was three of us and then we added people as we went but today the way we do it, we wanna move faster so we don’t mind spending more money to move faster ’cause time is money and money is time.

Tevya Finger:                     So people are probably the biggest expenditure out of that pie because it’s not just the first year. I should also say that we don’t put the money to get us through year one, right? The whole business plan is predicated on how much money do we need to get us to break even so we don’t need more money and then the business will self invest at that point. So that takes about three years, that process. So that ten million you’re burning 3.3 million a year. That’s the way to kind of look at it and then as you start getting some phenomenal growth, you actually need more money to fund those orders so it’s kind of a vicious, good vicious cycle that hits you and then you, because the margins are so goo, you get to a certain point where it makes enough profit to just kind of catch you up and you don’t need more money.

John Warrillow:                So in the case of Oribe, you invested six million dollars or you and your investment syndicate invested six million dollars in the beginning, did you get to the point of self funding the rest or did you have to do another round?

Tevya Finger:                     Great question. So we put in the six and that lasted actually for quite a time. It lasted about five years and in the fifth year, we actually took a loan from Luxury Brand Partners, our kind of mother company which is where I reside most of the time, we took a loan for three and a half million dollars at that point and reorganized a little bit and that was a lot of fire power to add on and it really helped the trajectory kind of explode after that.

John Warrillow:                It sounds like that’s what got you from the 20 to the 90.

Tevya Finger:                     That, yeah, so at that point three and a half years ago we were probably at about, yeah, about 25 exactly and now that three and a half extra just was the extra fuel to kind of push you. Without it we probably would have got to 75 maybe. So with that extra three and a half it gets you to 90. Now remember, the multiples are phenomenal so the difference between, the delta between 75 and 90 is what? 15 million? But you’re getting 15 million times potentially 8x so it’s a really good investment, that three and a half million. I would say [crosstalk 00:30:17] don’t be scared to take an investment on if you think the yield from it can, take a three and a half million dollar investment if you think you can get 35 million for it, a few years later.

John Warrillow:                Yeah, let’s back into the math though. So here’s what I know. Well, I’m fairly sure, you don’t have to comment, but I’m fairly sure because of what I’ve seen in the press and the media that the sale price of Oribe was around 400, I saw 441 million dollars. If the profitability of the company which you said was, it was generating gross revenue of around 90 million, even at margins of about 30% so ballpark it’s in and around turning out 30 million dollars of net operating profit.

Tevya Finger:                     Yeah, right around 28, 29, right in that range, exactly.

John Warrillow:                28, 29, you sold for 441, I’m not great at math but it looks like a better than a ten multiple. Maybe more like a 15 or 14.

Tevya Finger:                     Yeah, exactly. Correct.

John Warrillow:                Got it. So that’s impressive.

Tevya Finger:                     To your point, John, once you kind of understand the economics of it, it’s why it’s not hard to make a three and a half million dollar investment when you kind of know you’re gonna get those returns, right?

John Warrillow:                Right.

Tevya Finger:                     So that’s how you get there.

John Warrillow:                So you can look at it and say, well if we can get from 50 million of revenue to 80 million of revenue, that’s 30 million net, nine million on the 30 so now we’ve got nine times, I don’t know, 13 or 14 multiple so it’s like 100 million bucks and you’re gonna invest three and a half million to get there.

Tevya Finger:                     Right, that’s what I’m saying. So it’s actually, it really works out. Now again, that’s not, ’cause I’m always very aware that some of the listeners might be in a different industry where you don’t get those multiples, that might not make sense but if you get those types of multiples, like I know tech is a very good, unique, products generate pretty good. Sometimes food can be good, dependent on the type, but there are industries, you know, textiles. The margins are gonna be lower so that might not apply.

John Warrillow:                But it’s super helpful to know kind of the way you think about it in your own mind. One of the things that I’m sort of, I’m fascinated by, frankly, is it sounds like there’s a lot of hands in the cookie jar. So there’s Luxury Brands Partners where you’re a shareholder but there’s other shareholders and then there are, it appears to be, shareholders at the brand level. So when you at Luxury Brand Partners decide to give a loan to one of your brands, of three and half million dollars, how do you think through the risk of that? Is that you personally reaching into your pocket and writing a personal check? What essentially is a personal check to the brand or are your partners all sharing in that risk? Like help me think through the capital structure, if you will, and how you would make a decision to loan a brand that kind of money.

Tevya Finger:                     So what happened in the case of Oribe, we raised, at Luxury Brand Partners we raised money to start that company so we took some of our funds from that company and made that three and a half million dollar loan to the sub. In that case it was a very, what I call, a very friendly loan. It was an extremely low interest and it really was to kind of help the brand so because we were on both sides of that, meaning I had, a lot of the team had equity on Luxury Brands Partners as well as Oribe. It was kind of like a friendly loan and there were a few people that were members just on the Oribe side and they made out really well because it was like basically almost getting free money. So that was that.

Tevya Finger:                     In the other cases which more is more often the case, so you astutely recognized that there’s a plethora of people that are in a brand that can join that are not a part of the mother, right? So as an example, we have a brand called IGK and we’ve got these four incredible artists and this is a brand that’s sold in Sephora, it’s a haircare brand. It’s just fast, up and coming. Its sales in its first year did 12 million which we’re ecstatic about and looks like we’ll do about 20 this year, in 2018. And it’s a really fun, more millennial driven hair brand. Not as expensive as Oribe. Fun brand. That brand, we started off with a business plan that called for six but as we started realizing that Sephora has bigger marketing needs and the brand needs more money to be successful in there, we realize we need more money so what we did was we extended loans to the company and it was almost like a convertible note with a pick but we really don’t want to convert the note. I don’t know if that makes sense.

Tevya Finger:                     The reason that we don’t just buy equity in the company, is we really don’t want to dilute the founders because it’ll take the steam out of their ship especially if they’re doing a great job and you’re growing so quick. So these are the decisions you have to kind of make and if a brand is not doing great and the founders are mediocre, they’re only contributing so much, yeah then we would look at that and say maybe we shouldn’t take equity now. But we’ve never done that, we’ve always extended these kind of very friendly loan terms.

Tevya Finger:                     The loans we do now are much more aggressive than they were for the Oribe which was literally nothing. It was like 1% or something. Very small. The loan now, they are about 8% and they just kind of accrue as the balance and the idea is that when the brand starts making cashflow which they always end up doing, we then would pay down the loans and never have to dilute and everyone loves that. The founders love that of the individual LLCs, we love it because we want to see them have big exits. One of the things that we’ve become known for when it comes to artist brands, whether it be makeup artists or hairdressers that have great concepts and ideas, that we make our partners a lot of money and there’s no better calling card in an industry than that.

Tevya Finger:                     So that’s how that kind of loan mechanism works. We’ve never, yet, converted a loan to equity. That hasn’t happened to this day so hopefully it’ll keep working and we’ll just keep growing and getting the money to pay it back.

John Warrillow:                Excellent. And can you for folks who may not be familiar with the concept of a convertible note, can you just in layman’s terms describe that for folks?

Tevya Finger:                     Sure. A convertible note is basically saying look, I’m gonna put $100 into your business and in a year when you make your next raise, whatever the valuation of that raise is, I’ll convert at that point and say I put the hundred bucks in and the valuation is a thousand bucks, I’ll get ten percent of the company at that point. That’s kind of the standard way that a convertible note works. Obviously you can put a lot of tails onto that. You can say, well, I’ll put in the hundred bucks but whenever you raise that money, no matter what you raise it at, I’m gonna max out at $200 valuation and I’m putting in a hundred bucks which means you’re essentially gonna get 50% of the company at that point. So you can put tails on those convertible notes.

Tevya Finger:                     What we kind of do is an interesting hybrid. It’s a loan to the company that if the loan doesn’t get paid back in three or four years, we can then convert it to equity and we come up with, cause we’re not gonna do a raise, like a convertible note, so what we do is we say we’re going to just convert it at a multiple of sales times x and that’s what the valuation is and then we’ll convert this loan into it. Like I said, we’ve never actually done it ’cause we don’t want to do that but that’s how the documents are written.

John Warrillow:                But you’ve got that legal right to do it if you ever had to.

Tevya Finger:                     Yeah, and I think it’s very important to note as well, having contracts and documents that give you tons of power and control are extremely important but just as important is to actually try not to use those and fold in power. I don’t know if that makes sense. It builds a comradery and an understanding of your partners that wow, they could have diluted us but they didn’t. We also, in our business plans, once we raise the six million which is usually our target, if we have to go over the six million, they don’t really now that there’s this loan facility thing that we do. They expect a dilution, right? Their partner says oh, we’re gonna have to raise more money. We’re gonna have to lose and we actually say well, actually let’s do it this way. Let’s loan money and we explain how it works. So they’re very grateful for that but you wanna make sure that your documents are written really well, that you’re protected.

John Warrillow:                And you referenced a pick, maybe you can describe that as well.

Tevya Finger:                     The pick is kind of just like there’s this compounding interest that happens. Pick’s a little more, what’s the right word? It’s a little more devastating to the founders where you’ve got that 8% but it’s compounding on top of each other and then it converts at a target and it’s sometimes very hard as time goes too long, it can be very difficult to catch up to the pick and it’s a way that a lot of private equity companies end up owning a lot of companies by using these kind of aggressive picks.

John Warrillow:                Tevya, one of the questions that I, I mean you sound like the Richard Branson, frankly, of haircare products. You sound like you’re jetting around the world, building these incredible brands. In a few years they go from a couple million, it sounds wonderful and I think people listening will probably be like how do I get Tevya’s job? What portion, and this is a very personal question and you can tell me to go to hell if you want to, but what proportion of your personal wealth have you got tied up in Luxury Brands? And the reason I’m asking, and again, you can tell me to go to hell later, or in a moment, but the reason I’m asking is I wonder how vested you are and how sort of all in are you in Luxury Brand Partners versus almost thinking of it as sort of using other people’s money.

Tevya Finger:                     Great question. The easy answer is 0. The reason for that is the value that an entrepreneur has when they have multiple successes behind them is they shouldn’t need to put their money in. And you wanna raise lots of money anyway so you’ve earned the right to not have to take that huge risk if you have lots of successes behind you. Understanding in the very beginning, like in Oribe, we did have to put some money in and that’s just the way it is because you have to kind of, one success wasn’t enough, as an example, having Bumble behind us. But as you start going and have more and more and more and more, it’s incredible the amount of capital that starts coming your way that is not expensive because they want a piece of that big pie. They get. This is someone that’s worth investing in and this is a group that’s worth investing in because we get a lot of upside and a lot of kick.

Tevya Finger:                     So that’s kind of the easy answer so it’s kind of a nice scenario to not have to put the money in and have other people that are there to do it. With all of that said, for the first time in a long time, we are doing another round at our parent company because we need a little more cash to keep some of these brands going ’til the next exit happens and I’m actually gonna be putting in some money for the first time. So I’m not opposed to putting money by any means and I’m actually excited to write a check. I’m looking forward. As a percentage of net worth it’s peanuts but it’s meaningful to put some money into the company ’cause we need a little bit of extra cash right now.

John Warrillow:                And how do you look across the table from investors, and again I’m thinking first time entrepreneurs raising their first amount of money, may not have this luxury, but maybe they’ve got an exit under the table or they’ve built something successful and so they’ve got a little more credibility, how do you look across the table from investors and say, when they ask the question well how much do you have in this deal, Tevya? And you answer well nothing. Doesn’t that-

Tevya Finger:                     So my answer is always nothing, however, if that was a very important prerequisite and you needed me to, I would. It’s not that I wouldn’t it’s just that I haven’t needed to and if you find the right partners that meet your experience and your success, they kind of realize eh, so what am I gonna do? I’m gonna make him put in a million bucks. He’s already obviously committed because, look at the track record and look what these guys do, and ladies. Look what this team does.

Tevya Finger:                     So I think it’s not as difficult conversation, again, once you have those successes. In the beginning, you do have to and I gotta tell you when I invest, I invest outside as an investor, I invest in other businesses as well and the key thing I’m always looking at is if it’s a first time entrepreneur then heck yeah, they gotta put some money in. Unless it’s someone I know personally really, really well and I know the whole story and the background on who they are, maybe I would forego on that a little bit but I definitely think in your first one or two startups, even with one success behind you, you’re gonna have to put some money in. But that should get easier and easier and eventually you shouldn’t have to put a lot.

Tevya Finger:                     And there’s other entrepreneurs too, John, just to kind of balance it on the other side, I know a lot of entrepreneurs that don’t want any money. They want 100% of the company and that’s one thing that you have to, it’s a choice you have to make. I’ve never needed to own the whole company. I’m happy to own maybe 25 or 30% when it’s all said and done or 40%. Those numbers are okay with me. When I make investments in other companies, I can own the minority share, as an example. As long as all the protections are there.

John Warrillow:                Great thoughts, great thoughts. So let’s go into the Oribe exit and finish up with that. So, again, back to you’re at, I think, 90 million, very profitable, what was the trigger that made you decide that now was the time to sell?

Tevya Finger:                     It’s interesting, I think it’s different for every brand. In that brand we had partnered with a company called Goldwell which is a hair color company for like the last three or four years and basically we would do shows together and they would be the color and we would be the hair products and so it was a really great synergy. We would recommend each other to each other’s clients. Well the parent company, Kao, which is a Japanese company, phenomenal company, really well run and just an amazing team. They, I guess the Goldwell team basically said look, it’d be great if we could buy this company because it’s worked so well together so literally that’s what they did. So we never actually put it on the market or shopped it around which is generally the way you would do it. You would hire bankers and they would go out and shop the deals, to all of the conglomerates. This was unique. This was kind of a deal that kind of came to us and the reality is, like I said in the beginning, you build a brand trying to build the best brand, knowing if you do a great job someone’s gonna come and knock on your door and buy it, and that’s literally what happened.

John Warrillow:                In this case Goldwell came to you to wanna acquire you or was it the parent company?

Tevya Finger:                     Well Goldwell was kind of a hair color company that we partnered with to recommend each other so they must have gone and said to their parent company hey, we should buy these guys. This would be a great strategic move. So that’s how it kind of happened.

John Warrillow:                And the parent company is Cow like the animal? Maybe I’m not hearing that correctly.

Tevya Finger:                     Kao is, it’s a Japanese, a huge Japanese conglomerate. I think it’s K-A-O.

John Warrillow:                Got it.

Tevya Finger:                     They bought a brand called Molton Brown which was a really great product company about maybe a decade ago. So they’ve got some big acquisitions. They’re a very well perceived company.

John Warrillow:                And so walk us through, again, for folks listening who maybe have never gone through an exit before, it’s a little bit of a black hole, maybe a bit of a mystery. So how did they approach you? Was it over a cocktail at an industry event or did they formally approach you with a letter of intent? Like how did that look?

Tevya Finger:                     Well in the very beginning it was the president of Goldwell saying it’d be great if maybe, would you guys ever be open to getting acquired? And I think any entrepreneur if you answer that question no, I don’t think you’re an entrepreneur. I just don’t because by default an entrepreneur wants to make the most amount of money. They’re business people and they should be driving to get the highest price and we always wanna hear what someone wants to pay. I mean you should always hear it.

Tevya Finger:                     So we basically said yeah, we’re always interested to hear from you guys and then that conversation took some time. We said we’re not dying to sell our company right now but we’d be very open to listening and then that conversation goes another year and then before you know it you do get a kind of call from them that says look, we’d like to actually present you a formal offer, are you guys okay with that? Of course we’re okay with that. Let’s hear it. You get a term sheet and an offer and you kind of take it from there.

Tevya Finger:                     And then that’s the start of a very long negotiation. From the day that you kind of get that offer, in this case was probably seven months from the day we got the offer to actually closing because you’ve got legal teams and it’s just a plethora of stuff that has to be taken care of but the process was fairly easy in that case.

Tevya Finger:                     In the makeup brand that we have, that one we used the bank and we went out to the market and said hey, we’re ready to sell that brand, because, to be quite honest with you, we wanted to use the cashflow from that to grow our new roster of younger brands so that was one where we said oh, we wanna sell now, even though we know we can get more money for it later on but when you’ve got five brands that are hungry for cash in the beginning stage, it was more important to sell the brand and that worked out really well ’cause there was a buyer for it.

John Warrillow:                Got it. In the case of Oribe, through that seven months, how were you keeping, I mean to use a fishing analogy, keeping the fish on the hook? I mean that’s a long time to decide to go back and forth. Were there times where you felt like the deal was falling apart?

Tevya Finger:                     Oh, yeah. I mean it’s very interesting. We operated the business and tried to ignore the fact that there’s this deal happening on the side. Because, as entrepreneurs, it could absolutely fall apart and we still wanna keep growing our business and doing great so you have two minds and in one mind you’re saying to yourself operate the business, pretend the deal’s not gonna happen and try tell as few people as you can internally. On the other side, you do everything you can to make the deal happen. There were many times that I thought the deal wasn’t gonna happen. None of them to deal with Kao, as a company. Just internal things that would come up and we weren’t sure if we could get everybody across the finish line and we like to do things, yes of course you have contracts. Again, I kind of refer to that having control and power and not abusing it and always using it so we wanted to have every member of our company, all the investors and all the operators of Oribe, we wanted everyone to want to do the deal and sign off. Even though we could’ve dragged if we had one person that didn’t wanna do it, we could’ve dragged them, we don’t like to do things like that.

John Warrillow:                And so what sort of resistance did you get?

Tevya Finger:                     Internally?

John Warrillow:                Yeah, like why would somebody-

Tevya Finger:                     I think some people say to themselves look, maybe we can get a billion dollars. Let’s keep growing this thing. You had a couple of people that were on that fence. You had a couple people that said let’s try drag on a little bit longer ’cause we’re gonna get a big kick at the end of the year in the holiday season, in December, and that’ll really kind of set us up for the next years’ sale. You had that. We had an internal, one legal matter that we had to clear up and that took some time and negotiating to get that done. So it was kind of like a mix of everything. And of course, you know it’s interesting too, the entire time you’re looking at the market thinking, we hope the market holds up ’cause that could really turn off any buyer if you just got this plunge in the market.

Tevya Finger:                     Ironically, it’s just gone up and up and up and up since then so it’s kind of interesting. I don’t think you can ever really time the market. It’s a little bit of just luck.

John Warrillow:                And how is your head space through this? I mean were you firmly in the camp of no, this is a great offer, let’s do it? Or were you being swayed by these other investors and partners who thought maybe you should hold out?

Tevya Finger:                     I definitely thought, I’m a big fan of you get a big number like that, yeah you could get 500, you could get 600, you could try and get smart but you could lose a deal as well and I think it’s always better to, look, we’re in the business of investing six million and selling for 400. We’re not in the business of taking 400 million dollar brands and trying to make 6 or 500 million, right? So that’s not our core confidence there. Our confidence is startups from scratch.

John Warrillow:                Makes total sense.

Tevya Finger:                     I was very comfortable in that zone. I did think, there were times, I think as an entrepreneur you have to have your own coping mechanisms, whether you work out or do yoga or go out with friends and have a drink, whatever your mechanism is to deal with that stress I think is very important but 2017 was really a stressful year because we were operating our business with this big unknown of where are we gonna be in six months from now?

Tevya Finger:                     So that kind of sits on your shoulder like a weight. So it was like a weight came off when we finally signed the deal. More important than the money was just the burden came off of our shoulders.

John Warrillow:                So Kao made the first move in terms of valuation. Had you talked valuation at all or what the minimum number you needed to-

Tevya Finger:                     No, but our-

John Warrillow:                So they made the first move.

Tevya Finger:                     Yeah, our industry’s pretty, you know, you can look at analysis. You can see what all the brands kind of sell for so there’s a range.

John Warrillow:                Got it and so how much of it, was there a lot of back and forth on price? Where was the big negotiation point? Was it more on deal terms?

Tevya Finger:                     Actually, yeah, there was no negotiation on price. They made a really fair offer. We accepted and I think both sides were amazing. Nobody nickeled and dimed each other either. The most tricky part I wouldn’t really call a negotiation, it was really the mapping of which people, cause we had some shared services between Luxury Brand Partners and Oribe so it was which of those people do you actually need ’cause they have their own huge accounting departments and stuff so do they need any of our accounting people? Do they not need any? If they don’t need any of them and we sell Oribe, we’re a little bit over-indexed so we have to get rid of a few people. So really it wasn’t a negotiation as much as it was a puzzle that we had to kind of figure out together and they were, again, I gotta tell you, they were phenomenal. They really were. I have a lot of respect for that company.

John Warrillow:                That’s amazing. You’ve been through a lot of deals and you’ve been on, it sounds like, the buy side and the sell side so I ask this question and I’m hoping that you can wear both hats and think back in your history and answer what is the biggest gotcha, the biggest trick that buyers use? Clearly it doesn’t sound like Kao used any of these but I’m sure you’ve seen them and how can we outfit or arm entrepreneurs to avoid succumbing to the big tricks, the big gotchas that buyers use to-?

Tevya Finger:                     Yup. No, that’s a phenomenal question. We got burned when we were selling Bumble and honestly, it was simply because of lack of experience. You don’t have all this knowledge, you have to learn and a lot of the times as an entrepreneur, in fact I would say most of the time, you learn from mistakes. I think great entrepreneurs are the types of people that can make mistakes, get right back on the horse and it’s that old saying. You try not to make the same mistake twice, that’s really important but that’s gonna keep holding you back so for us, when we sold Bumble we kind of sold it in two parts and in one of those parts there was an earn out period and there was a linkage to a net operating profit having to be 28% and at the time we were 16 and if we didn’t achieve 28%, it had a big effect, down graft effect on our final buyout number so I’d be very careful when, sometimes if you sell a company you might sell 50% upfront and then they’ll be an earn out period. I’d be very careful in trying to give away that you’re gonna make huge amounts of profits as a percentage. Try do them more off of revenue ’cause that’s a little easier to control.

John Warrillow:                Great tip. In your case what made you think you’d go from 16 to 28%? What was your thinking there?

Tevya Finger:                     That was the naïve part in thinking that we would just easily get there and as we got closer to the end we realized oh wow, we gotta start making product for a little bit less and squeezing our margins down a little bit. So it’s just naïve. It was just a miscalculation.

John Warrillow:                Got it, got it. So the tip there is if you have to deal with an earn out tie it to top line revenue just so that you can control it more easily than bottom line profit.

Tevya Finger:                     Yeah be very careful and look, if you’re gonna tie into a profit, don’t tie into double what your current [crosstalk 00:56:45] because it might sound great but it’s making your life very difficult.

John Warrillow:                And I mean, how much money do you think you left on the table in that earn out?

Tevya Finger:                     I don’t know. Definitely a lot of money but I’m not sure. I wouldn’t know. It’s funny, what you try and do as well is you make the mistake. You don’t wanna, and I think it’s really important. Energy level, how much energy you use and have is very important and if you kind of make a mistake and you get mired down, you beat yourself up, that’s not a good thing because entrepreneurs, you’ve got to motivate your team. You gotta get investors excited about it. You can’t do it if you’re completely depressed and have low energy so I think it’s really important that when you do make a mistake say all right, got it. I know I left money on the table. Won’t ever happen again and you move forward. I think that’s the way that I’m kind of wired rather than kind of trying to go back and think, ’cause it’s gonna be a painful process if you kind of go through that.

John Warrillow:                You’re gonna need a drink after this interview. You’re like man that Warrillow guy is really a drag.

Tevya Finger:                     I really, I honestly looked at it and said this was a great learning experience and I’ll know in the future never to do that.

John Warrillow:                Tevya, I gotta ask because I just get this energy coming through the line, just a sense of positivity and a sense of glass three quarters full, sunny attitude, I mean. What’s your secret for staying positive? Are you a yoga guy? Do you read a lot of books? Is it hard wired from your childhood? How do you think about that?

Tevya Finger:                     Well it’s funny you say that, actually. My father was quite a famous yoga person in the United States so I do actually have kind of a yoga background but I’m not, I should put this out there from a flexibility point, I’m nothing to look at. I’m probably as flexible as you or anybody else so I’m not the kind of guy that can bend in a pretzel but what I did like about it was the meditation part which just calms your mind and kind of it’s like every day you get up and you brush your teeth and get the plaque off your teeth, you can do that to your brain every day and take five minutes and just clear out your brain, get all the thoughts out of it so that it’s fresh again. So that’s definitely help keep me grounded and when there’s storms which there always are, going through the storms there are tricks of the trade and probably the best I can give is there’s a book that I would highly recommend this. It’s all about the Ernest Shackleton expedition. There’s actually 17 books on it. I actually went to a seminar where they did this class where they actually taught a what did he deploy in his expedition to ultimately survive while there was another expedition going on in the North where they all died or most of them died.

Tevya Finger:                     And they had these two expeditions going on at the same time and they really talked about in an expedition, what are the team building things you have to do when adversity hits you? So I’ve taken the class, I loved it so much that I actually went to the teacher of the class and said can I be certified to teach this? And they said well yeah, who are you gonna teach it to? I said nobody, I just wanna be certified to teach it because my own employees, I wanna live by this code. And it’s a phenomenal, it’s a true story. It’s phenomenal and it was in the very early days of exploration when back then it was bigger than the Olympics, right? It was whoever explored the North Pole and the South Pole, those were big deals. And that story has motivated me to this day so I use so much of what I learned by reading all of those 17 books and getting certified which was a very long journey for me ’cause I’m a slow reader. That really helped me prepare for when storms happen and storms, like I said, I mean any business, you should expect storms to blow in regularly. It’s the way it is.

John Warrillow:                So what would you take-

Tevya Finger:                     If you can have coping-

John Warrillow:                What was the biggest takeaway from the Shackleton story that you applied to teams under duress? What’s the one thing that people can learn from that? I’m sure there’s hundreds of things.

Tevya Finger:                     God, that’s really hard, there’s literally hundreds. There’s a card that you carry that has ten of them on it. I would say my favorite one is be willing to take the big risks because in the Shackleton story when they finally got to the end and realized they were gonna die on the mountain, it’s like after this huge four year journey of being out there in the middle of nowhere, they get to this mountaintop and the sun’s setting and when the temperature drops they’ll 100% die so they took the risk and jumped off the mountain like a toboggan, literally, and they could’ve hit rocks, they could’ve gone off. They didn’t know where it ended and they went down and they survived. But a lot of people would say let’s just figure out how to stay on the mountain and might’ve died. You gotta know when you have to [inaudible 01:01:51]. It’s all like a poker game with calculations that you have to make on every single move and what are the highest percentages that are gonna give me a win and if you let those highest percentages be the decisions you make every time, you should end up with a good result.

Tevya Finger:                     Again, you can have bad luck just like in a poker game. You can go up against pocket aces and that might just obliterate no matter what you do but I think you can always try and pick the highest percentages of success, whatever they are, and you might not like them sometimes, but if you can stay in that zone you’re just gonna be more successful ultimately.

John Warrillow:                Well I think you have done that in spades. Tevya, what is the best way for people to reach out if they wanted to say hi? Do you have a LinkedIn profile they should check out or do you do Twitter? What’s the best way for people to reach out if they want to.

Tevya Finger:                     Yeah, LinkedIn’s perfect. I have a LinkedIn.

John Warrillow:                And you have a unique spelling of your first name which we’ll put into the show notes so people can get that.

Tevya Finger:                     Perfect.

John Warrillow:                Tevya, you’ve been generous with your time and your insight and your hard bought lessons of wisdom. I really appreciate you doing that today so thanks for sharing.

Tevya Finger:                     Thank you so much, John, appreciate it.