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

Mike Gelb
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Our guest today is Teddy Townsend, who is a director at CG Sawa Partners. CG Sawya Partners is a leader in consumer mergers and acquisitions and financial advisory services. Teddy focuses her time on the health and wellness space and their health and wellness practice. So this conversation naturally is all about health and wellness brands. We break down transactions.

We look at different parts of the term sheet that founders should maybe watch out for besides what your valuation is. That actually could deter, depending on how the agreement is set, a future transaction. We look at founder Investor Dynamics, we break down also subcategories within health and wellness and also the different profiles of buyers in the market, whether that's strategics, private equity groups, and also how each of them are unique. Without further ado, here's Teddy.

Teddy, thanks so much for joining me. I know we've like had this on the books. I've like canceled a couple times. So sorry about that. But thanks so much for bearing with me and coming on the podcast.

How are you doing? I am thrilled to be here and glad we finally got it, got it happening. Doing very well today. Awesome. Awesome.

I know it's a great day in New York. So that is fantastic news. We'll take the spring. It's been a long winter, Mike. You guys don't have to suffer here.

It's true. I will say, I mean, you're going to roll your eyes, but I will say it's been really rainy this winter for us. I know it's not snow, but it's been rough here. It's been rough here in LA. Really rough here.

Teddy Townsend
There's a lot of tears. Exactly. So what? So from the beginning, since I know that you are the deal maker, what are the reasons why a company might purchase another company in your world within health and wellness? Probably.

It's a really good question. I mean, there's always a bunch of reasons and it probably depends on the type of buyer. Right. If you look at a private equity fund, they are going to be looking at assets that fit their sort of core areas of focus that hit certain financial metrics because they are very much a financial animal. So that really comes down to an input to an LBO model and an output.

And for them, they also need to think through how they're going to get out of that investment because they typically have a three to five year horizon. So they have a much broader lens. They have a shorter timeframe, but they're less category specific because they're not reporting to a larger commercial organization. When you look at the well, and the other thing I'll add is there a little bit of a lemming situation going on, on the fun side where if something works, you start seeing everybody getting into it. And we've seen that in a couple of categories where like aesthetics recently has been like a big thing and everybody has gotten into the aesthetic space.

On the strategic side, it's a little bit more nuanced because it really depends on their own strategic initiatives, what their existing portfolio looks like. And for them, they're really looking at filling gaps, whether that's a demographic gap, that is they have maybe products that skew older and they need younger people or a product fit gap. It could be a distribution gap. That is they are trying to get into a new market or getting to a new type of retailer, new channels, things like that. We've seen that in deals recently.

We saw that with the OtsU, good deal with Bonafide, that there was a practitioner channel component that that was very attractive to them. So, you know, it's important when you think about selling your business to really understand, okay, it's not just one thing. Often it's multiple things. And that's why, you know, these, these big strategics aren't doing that many deals a year because they really need to find something that checks multiple boxes for them. No, that, that makes, that makes sense.

Mike Gelb
And also, too, in terms of, you know, price, usually a strategic will pay more for a brand typically than like private equity or that because as you say, private equity is trying to turn it around too, and also exit that business within three to five years. Yeah. And usually there's synergies. I mean, there's both top line and bottom line synergies for a strategic. Right.

Teddy Townsend
On the top line side, there's usually a distribution synergy of them being able to funnel a brand through multiple channels that they have. There's probably some kind of cost synergy in a lot of cases where their supply chain is obviously much more robust than a single brand might have. And so they're able to pay larger numbers for a lot of reasons. It can be the synergy component. It can also be because they don't have to sell the business in three to five years.

So they're not underwriting a three year exit. They're underwriting holding something for a much longer period. And so it's a little bit easier for them to be flexible. That being said, we've seen private equity participate in processes where they're very competitive with the strategic buyers. So it doesn't mean that you won't find those two types of buyers in the same price range for a deal.

Mike Gelb
Even just taking a step back from even before the exit. Let's say you're a small company, you're raising money. Maybe it's your know, seed series, a kind of in the venture space. When it comes to the term sheet, how should a founder analyze a term sheet? What should actually be important to them?

I think that there's a lot of kind of talk about, obviously, I think on the surface, the stuff that we don't see. Right. We just see kind of like, well, I mean, and sometimes we don't even see it, what the valuation is of the company at what they raise. Right. And of course, you know, and this is not just within consumer product businesses, across tech businesses, too.

Except it seems like. Except AI. AI is kind of a world. But, but valuations have kind of come down over the past few years, unless you have maybe like an AI component in your company, but non AI companies that valuations kind of, kind of come down, we've seen. But what other, apart from valuation, what other elements of the term sheet should founders really pay attention to?

Teddy Townsend
Yeah, so the first, I get a lot of calls from founders at different stages, some very early, and it's the first money they're taking some, a little bit later on, some, it's secondary. You know, there's all different reasons businesses raise money at all different stages. My first question is usually, what is the money doing for you? So, like, what's the rationale for raising money? Because I think often people just assume that's part of the consumer journey for consumer businesses to raise money.

But it really, really wasn't historically. Historically, venture did not exist in the same way it started to in the last five years. And so, you know, I usually founders have good answers, but the real question is, what are you thinking about this money for what is it doing for you? And then, you know, once they sort of walked me through, okay, this is what I want to use the money for and what it'll do for my business. Right.

Because there is a cost to raising money. You are giving up equity. So I want to make sure that there's a real reason that you're going down that route. The next question is, what are the terms? Because I think of things as there's two components.

There's evaluation, which is important because it obviously dictates what the equity that you're giving up looks like. But I'm finding more and more, and I think it gets often overlooked, are the terms, and those can take a bunch of different formats. There's the economic terms that impact what your exit profile looks like, and the investor economics in terms of how much they're getting out or how much they're entitled to. Off the top, we can go through that. But there's also governance board seats, exit timing, what they have approvals over.

Do they have a budget approval? Do they have approval over the amount of debt you can raise? Do they have approval over your hiring? I've had founders who are doing unbelievably well and haven't been able to raise their salary by, like, 5% because there was some investor who had a right who, like, wasn't. Wasn't calling them back.

And so, you know, when you. When you see a huge valuation, sometimes you overlook a lot of these things. But, you know, I tell a lot of people, this is not your moment. This is like phase one of what could be a lot of moments. And you don't want to set yourself up for difficulty down the line because you overlooked everything in the legal documents, because the valuation looked good.

Which brings me to the economic terms, which I think increasingly, people are seeing the negative side effects of those terms. And when I say that, I mean things like liquidation preferences, where there is effectively a floor of which an investor will take. So say you see something like a three x liquidation preference. That means that an investor clears three times their money before a founder sees anything. So if the valuation in the future is lower than three times the valuation today, it's coming off the top and the founder will be diluted.

I mean, we see all different things. That's kind of an extreme example, although we do see a lot of three times liquidation preferences for deals that were done in, like, 20 and 21 because the valuations were arbitrarily high, because the market was so hot. But in my view, that starts to misalign the investors and the founders, because at some point, a great deal could be had, but the investor may be taking so much off the top that the founder is diluted for their own business, which to me, doesn't feel fair. So a lot of the times that I talk to people, it's around, like, how do we construct a deal that's fair today to you, but also fair in three years when you sell your. Business, when you see a deal where valuation maybe was high, three x liquidation preference for the investor, what does that kind of tell you about the investor?

Mike Gelb
Meaning if they like. Meaning? Like. Meaning do they, like, believe in the business or not? Right.

Does that actually give you, like, a sign that maybe they actually might not maybe believe in the business quite the same way as you think they did, because it's such a high valuation? Oh, my gosh, this investor is in. In on the deal. Yeah. I mean, it does.

Teddy Townsend
Right. Like, and think about it from the opposite. Think of it from a private equity group, right? They're taking a majority deal. They're obviously.

So they can't have a three x liquidation preference. They get a one x, or, you know, a liquidation preference, right, like that. So whatever valuation they're putting on the business, they have to believe they can get their return with a multiple on the valuation. Now, obviously, there's, like, debt, logistics, and all kinds of, you know, things you can do to. To get your return, but just very simply, that's how it works.

So, to me, when I see a minority investor who underwrites a three to four times return, which for these bigger deals is sort of what they're looking at, and they have a three x liquidation prep, or even something higher than that, which we've also seen. To me, that says exactly what you just said, which is that there was a disconnect at the stage where they invested, because if they believed in the valuation and the business's ability to achieve three times, they wouldn't need to lock in a three times return, to me, what's fair is, look, lock in your principal, obviously, like your one x, like Prev. Maybe you have some kind of coupon or you've got a participation that's capped at some point, like something, so you can maybe get a little return, but that's not hurting the founder in a way that makes it so that when you exit the business, you are misaligned. And we're seeing great deals not get done for this, because there was an arbitrary valuation put on the business at the height of the market, a huge liquidation preference and they go to market and there's a deal to do, a great deal. We're not talking about 20 million, we're talking about 400 $500 million deals where the founder's not going to get anything.

And to me, that's not a good outcome if it's a fair value for the business. Well, also, to be honest with you, it's not great for the investor too. Right? Because the investor obviously wants their exit. That's the kind of irony here, too.

Mike Gelb
It's actually not great for that investor that actually set those. Not that the investor set the terms. I mean, the founder also agreed to this term too, right? It happened. But it's also like that.

It's blocking a deal for the business. So it's actually, the investor is not actually able to get their, um, um. To, uh, to actually get their exit either. Yeah. And they want that return.

Teddy Townsend
And, you know, the also thing, the thing that I find sometimes, and I saw this a lot with businesses again in like 2020 and 21, is that they raised probably more than they needed to support a growth profile that was not a sustainable growth profile. So that growth profile that were, you know, whether it was like 100 or 200 or 300%, whatever they were telling the market they were going to do required an enormous amount of capital to do it. And so it sort of got them hooked on this cash burn model to achieve a growth rate which was prioritized over the profitability. And again, now that's problematic because people look at that growth as very unsustainable. And so it's even harder to exit with those businesses.

We've also seen those processes fail in the last year because businesses that are 200 million of sales but have like high single digit or really low double digit EBITDA margins are just, it doesn't make sense. Right. From an acquisition standpoint, the question is, why is your margin so low? And the answer is, well, we're spending 50, 60, 70 million on marketing to continue to grow at this rate, and no one else wants to sign up for that kind of cash burn. So we see that it sort of resonates in multiple areas.

It's not just the valuation and the governance, but it's also the kind of behaviors that, that money can encourage. Totally. I mean, you know, obviously for marketing, spend like, you know, also if you're selling your products, for example, at discount or a sale in order to get, you know, people interested in them, will people actually come back that actually, like, buy, buy your product at what you believe, like the full price should be. And people are smarter now than they were. You know, there was the, there was a moment where d two c was, was considered sort of a new consumer business.

I think people now realize it's just a channel that you can sell through, which is shocking, but very, very thoughtful. And so, like, understanding what those, you know, people didn't know what LTV to CAC was four years ago. It was like a whole new term. There was like benchmarks all over the place. And, and then, you know, people started talking about, like, roas, and there's all, you know, it's like, all right, well, let's just talk about the fundamentals of the business.

Let's talk about how you're driving growth. Let me look at your p and l. But, you know, people, like, I talked to a strategic yesterday, and, like, they're not, they're not young. They're not like a cool strategic. They're, you know, european and older brands and things like that.

Mike Gelb
Hey, Europeans are cool. Europeans are cool, Teddy. Europeans are very cool also, but they don't own anything in the d to c space. And they were telling me about a deal that they looked at, and they were like, you know, look, the business was, I mean, I was shocked by how not educated they were because they're very smart, but just how thoughtfully they looked at something and how they keyed in immediately on this. It was a d two c, primarily business.

Teddy Townsend
And all of the growth was coming from existing consumers adding new products into their, like, their aov was increasing, but they weren't adding new customers. And their problem with that was at some point, your existing consumer's gonna stop buying new products. So if you're barely profitable and you're doing it this way, how are you going to continue growing when you can't force your existing consumers to keep buying? And again, that goes to the health of the business and the health of the growth. And so they came to the conclusion the growth really wasn't healthy.

And for them, that was a non starter. So, you know, there's a lot more thoughtfulness that goes into these assessments now, which I think is important for people to realize that it's not just about, hey, I'm growing 800% or I'm doubling year over year. What is driving that growth? How do I understand the fundamentals of the business? How sustainable is it long term?

And what can I, as an acquirer, do with it? Let's break down in terms of the categories that you kind of focus on within health and wellness. How do you see? I know that's so broad, and I'm so sorry, but health and wellness, how do you see about, in terms of the categories that you focus in and the categories that are interesting to you? For us, health and wellness is not super broad, but it's relatively broad, over the counter OTC products, vms, so vitamins, primarily, vitamins, supplements, functional nutrition, things like that, broader personal care, self care type products, and then skincare and a little bit of beauty, but less so on the cosmetic side.

So that's really where we spend time, which is in sort of this broader, I think of it as the broader self care, health and wellness universe, but that's what is really encompassed. I mean, there's a little bit, again, of healthy lifestyle in there, but those are the primary areas. And part of it's dictated by where we're interested in spending time, it's also dictated by the types of networks we've got and what they're looking at in terms of what we're best positioned to sell. Right. Are hiring me as an advisor for something I have no background in and no network.

I'm probably not the right advisor for you. And since I get paid when deals closed, it's in my best interest to be well suited for the deal. So I try to match those two things up so, you know, so that. Anyway, so that's where we spend time. And it's interesting, over the last, you know, there was a moment in time where Unilever and Nestle were looking at everything and they were great.

You know, there were these big deals getting done and a lot of it was this kind of broad based supplement business. So you saw brands like Ollie and Smarty Pants, and, you know, Nestle obviously did NBTY, which is a huge business. These were not like need state specific supplement businesses. They were huge. Not, well, not huge, but they were large portfolios.

In the case of MBTy or in the case of know Ollie and smarty pants, they were sort of more of like a product form play than an actual, like, product itself, ingredient play. And then you saw copycats of that, right? You saw the gummy vitamin craze go, go insane. Everyone had a gummy vitamin. All of a sudden, now we're finding it's actually more need based specific.

So people are actually looking, like I mentioned originally, like, for things that fill their gaps, right? So if you're a unilever, you don't need another Ollie, you don't need another vitamin brand that's going to be. And look, smarty Pants has not been a success for them. They've publicly come out and said that. So they're looking for things that are going to plug gaps for them.

Women's health, gut health, longevity is an area people are really focused on right now, thinking about the aging consumer. What kind of different products do they need? The other thing we're seeing a ton of, there was an article yesterday about is GLP ones, right. And the side effects. So that's another reason gut health is now huge, because there's all these side effects that people are dealing with.

So that's across the board. It's not just Unilever. That's like a broader common of, if you talk to P and G, you're going to find something similar. If you talk to, I mean, Nestle's been kind of publicly going through a little bit of a shift over in the last year, but I imagine that's how they'll start thinking about things is like, what are the gaps they've got in their portfolio? And so that's how we think about brands.

Like, when we meet brands, the question is, really, what is your reason to being to be here? Are you a fit for a strategic. Not that that's the only exit. A private equity exit can be a great exit, but really understanding what is the positioning and what is the best way to bring you to market so that you achieve the right outcome. Yeah.

Mike Gelb
So it seems like in terms of what strategics are interested in currently, today, it seems like it's going back a little bit to, as well as my conversation with Amrit, which focused on this a little bit and more in the food and beverage space, but it seems like they're more interested about what are opportunities or areas that we're not in versus threats versus. Hey, these are actually direct maybe competitors to eating up maybe a market share from our current, um, our current brands. They're not so much interested in, like, in, like, those types of opportunities, much more about, okay, we're not in this space. We, we haven't innovated in this space. We don't, maybe we don't need to do, but then we don't need to do, you know, our own R and D in order to get into this space, we'll just acquire brand.

Is that. Is that roughly right? Yeah, I mean, look at it from multiple different. Like, we, you talk to, like, the L'Oreals or the Estee Lauders or, you know, even Colgate's got a prestige skincare brand, right? You look at what's happening in Ulta and Sephora, and you're seeing consumers trading down like they're looking for lower price point items.

Teddy Townsend
They're not buying the 80 $9100 products. And so if you talk to them, one of the things that continues to come up is are there brands in their existing categories that have that lower price point? And part of that is driven by the fact that Ulta and Sephora are now adding products with lower price points. Two years ago, Sephora was not adding skincare products with a 1015 20, $30 price point. That wasn't what they were doing.

Now they're realizing they have to. Okay, well, now Sephora is carrying a massige product. If I'm a L'Oreal or an estee, you know, perhaps it now makes sense for me to add those types of products to my portfolio again, where that may not have been a priority historically, where they were more focused on their prestige side. So to your question about, like, cannibalization, defensiveness, it's really around plugging very specific holes that can be driven by category or they can be driven by a price point conversation. Or in some cases, what we do see is that it's a demographic question.

So, you know, if you look at a lot of these big strategic portfolios, a lot of them are legacy brands. Like, you know, for the ones that were acquisitive, they got a lot of brands that targeted the millennials. Okay, well, there's a whole new generation, multiple generations of consumers coming into the world who are purchasing in different ways, are purchasing different types of brands. We're seeing younger consumers engage with personal care in a very different way than we had historically. And so if you're a big strategic and you're thinking about, okay, how do I continue to be relevant?

Part of the conversation is going to be around finding brands, perhaps that are competitive from a product perspective with your existing ones, but are going after an entirely new demographic of people. And so, yes, there might be like overlap from a product perspective, but it's very accretive in terms of the types of consumers you're bringing into your universe. So different, different customer set maybe could be similar type products or similar categories, but it's a different demographic or consumer set that normally wouldn't maybe buy your product traditionally because. Because, because it didn't resonate with them, wasn't really marketed towards them. So, so, so you're able to bring in maybe like a new customer base into your portfolio if you actually purchase a brand.

Exactly. And a lot of them are struggling this. I mean, look, it's been, it's been like a wild year, 18 months in the health and wellness space. From a strategic perspective, this is the other thing I talk to a lot of early stage brands is wish I could only count on one hand the number of brands who have told me that they're going to sell to Unilever or to Kenvue or to PNG, and like, that's it. That's all they ever thought about.

Unfortunately, these strategics also go through transformations, and it just so happened that they all decided to go through their transformations in the last 18 months. And so there's been a massive amount of disruption happening and distraction. And, you know, as much as you sort of think, okay, like, when I go to sell my brand, if someone wants to buy it, they're going to buy it. If they're distracted, they're not. So you may have an audience of one, by virtue of the fact that the seven other people are going through restructures, have a new CEO.

I mean, look, we've seen on the consumer health side, we saw GSK and Haleon split Halion's, their new consumer health vehicle, Haly, on divested brands last year. So that was, that was what they were focused on. You've had Kenview now separate from Johnson and Johnson. I mean, they own big consumer skincare, neutrogena, Aveeno. That's all part of the J and J portfolio.

Canvue spent all of last year going through their separation. Now they're standalone, but their performance is now very visible. They're missing their growth targets. They're not performing as well as they thought they would. So how are they going to fix that?

You have Sanofi, who did the Qnol deal and then announced that they were going to be separating, going through some kind of consumer review. These are big businesses. Reckitt has a new CEO. Unilever has a new CEO. Nestle has a new head of healthcare.

These are very disruptive. Estes said that they're going through a full restructure and review of their portfolio. L'Oreal's going through their own thing. Laxitan is going private. These are very distracting moments for a strategic.

And so it's really important as an advisor, when you're talking to brands is to say, like, you know, and this is something you and I have talked about, is how you think about timing. You know, timing is important when you think about your own brand, right? What are your key milestones? How are you performing? What's happening over the next year?

But the other thing, and this really comes from the advisor is, what's the psychology of the buyer universe? Right. What if you, if you want a strategic outcome and every single strategic is busy doing something, it's probably not the best time to be talking to them. And so we do a lot of work around understanding what that landscape looks like as well, just to make sure that we can give people the right advice around how to think about an exit. Because if your success is entirely tied on one buyer, that's really not a good way to think about m and a.

Mike Gelb
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 acquirers, for example? And I understand there has been a lot of transformation, maybe a lot of turnover in the past 18 months at these strategic, but types of deals that, for example, a Unilever might be interested in or particular categories might be interested in versus a PNG versus someone else. I mean, look, it depends. They all have their own views and it changes, like, on a whim.

Teddy Townsend
But, you know, I think a couple things, a couple things have happened. One, they've all gotten slightly more intelligent. And so one of the things, you know, it's funny, when I, when I talk to, when I talk 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, and, 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 and a criteria is, number one is I don't want to get sued, which is pretty simple, right? I don't want to get sued.

So if you can get over that hurdle, which is not that high, you might be good to go. So that pretty much across all of them, 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, things like that. 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 PNG, for instance, right, look at how successful they've been with. This is all in 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.

There are other companies that have not been able to do that. We've worked with J and J for a number of years. One of their things that they were always concerned about, especially when they were with Pharma, was we just don't have the ability to scale brands, so 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, 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 does that mean from an m and a perspective, right. It probably means that they're not going to go do 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, again, like go back to Unileniver dollar shave club, not a success, you know, okay, perhaps if you're 100% d two c brand, you know, losing money, maybe Unilever is not going to be that interesting because they like, just had a bad experience, you know, making money like a neutral, 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? 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 a nestle or a PNG is sort of the easiest one for a lot of founders to sort of tag onto is because they did some very visible deals over the course of three years. That doesn't mean that they're the only player in town. In fact, you know, 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, it'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 some of the differences based off of past performances about strategics. And why, like I said, it changes all the time. On a whim.

Mike Gelb
On a whim? Yeah, just like, hey, we got a new CEO and now we're not, now we don't like this category anymore and we're going to only do this stuff and it's like, all right, well, now I know that 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 J and J was buyer for them. J and J sold all their women's health brands. No, they're not going to buy you. No.

Teddy Townsend
So now maybe perhaps as a standalone, but three years ago that was not a case. So I think education is really important for early stage founders as well. 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. How 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 and a exit a business, make sure that they actually would be attractive to the strategics.

Mike Gelb
And strategics right now really are for focus on does the marketing actually match the product? How do you do kind of your own analysis to make sure that the product, if it says, hey, we cure cancer, it actually is not curing cancer per se. Isn't that bummer? I know. Such a bummer.

Such a bummer. I mean, sometimes it's obvious, Mike, sometimes you're like, this doesn't feel right. Look, I'm not a regulatory reviewer. I'm not going to 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 and, you know, and also once you start digging into the numbers and understanding, okay, 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 find out the claims you're making are not valid.

Teddy Townsend
So whether that's like hiring a third party to do regulatory reviews, often we encourage people to do that after they're serious, 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 because 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, okay, if you're not saying these incredible things, perhaps the consumer is not going to buy your product, okay, well, then your sales are going to take a hit. So that's a valuation implication.

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. Things like that is really important to us, I think, you know, also understanding how their 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 clinical support. Okay, so that's a very valid approach. So anyway, so 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.

It'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 on the sell side you have to get. There's no standard anymore, you have to get really creative. What does that actually mean, getting creative in this market?

Mike Gelb
How do you put a pulse in terms of this market, when it comes to 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. And 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.

Teddy Townsend
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 more and more, we are, again, as I said earlier, a private equity exit can be amazing. It can give you a second bite at the apple. It can give you a transition, it can give you a great valuation. So constructing a process that enables that optionality, whether it's a private equity exit or a majority ownership, you know, 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 ten 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, what are your goals here? Because 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? This is why I use this in a pitch recently.

And then 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 $100 million 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, I don't know, 10 million of EBITDA and up 50 million of sales. And in my category, businesses typically transact for somewhere between 15 and 20 times EBITDA. Then my brain damageless 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 billion. So, like, what does that range look like? Because if you think about it from a financial engineering perspective, if you can find a private equity buyer, yeah, there's a decent chance you'll get higher than the lower end of your line. But 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 get 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. 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. So 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 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 and 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.

Making 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.

So really thinking through, like, how do you, how do you maximize the chance of getting a deal done? And if a regular way m and 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. We did videos with the CEO and different people so that, you know, all the execs, so that the private equity groups who were looking at the business at the time could really understand different components, components of the business and, like, watch it on their own time so that they could really look into it. 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 sun tan 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, the process so that you can make connections and really facilitate that, you know, the deal itself, again, in, like, more, I don't know, thoughtful ways than just being like, hey, I'm going to send out 100 books and, like, hope somebody likes it. So how do you typically, because I know that you've kind of given a couple ways that you've engaged strategics or potential buyers in general with, with some of your clients.

Mike Gelb
But what's your process when it comes to actually running a full process? Because obviously it's not doing a preview. I'd imagine that's a no no. How do you, you can do it thoughtfully. You have to be thoughtful about it.

Yeah, well, I mean, like, you want to tell everybody. Yeah. You know, kind of tell anyone that we kind of did this thing publicly. So, I mean, is it, is it first. I know it.

I know it really kind of depends on, on what the client is, what the client's interested in, if they're dead set on one or two strategics or what. But how do you think about your process? Is it still talking to, generally talking to strategics first and then go into private equity or other groups or what's your process at all for running it? Again, it depends, you know, first preparation is really important today because there's really no room for surprises. Like the market is such right now where if there's a surprise, it's really going to derail the process.

Teddy Townsend
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, because again, to my point earlier, like, demographic is really important now. 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. Okay, 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? Okay, let's make sure we have third party validation around that. So 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.

So making sure all of that is aligned before we ever pick up the phone call formally for anybody, that all happens long before we go to market. Then as we think about talking to the buyers, again, it depends. In every process we've done, processes where we run a dual process, half of the process is too strategic and full buyout situation, and the other half is a minority round. 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 that is 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 like, doing a separate process and doing the strategics first and then the private equity. It's more like, you know, 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 months, like, 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 that makes sense.

Mike Gelb
I mean, it's almost like prepping for a fundraise, right? But it's like you're going to run like a very tight process, whether it's venture or whether it's pe, but you're going to run a pretty tight process. You're going to 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 going to 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. Yeah, 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.

Teddy Townsend
So to me, that's more just like being a good advisor of knowing, okay, if these are like, five really important 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, switching subjects. But when we were talking before, you said that not all women's health is the same. Can you elaborate on that 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 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 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. Like 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, you know, in the venture space, especially in the last three years, a lot of those products have been very like, again, needs specific.

But for a moment in a woman's life, whether it's like a prenatal product, like a kneaded or a parallel where it's like a very clear, you know, fertility prenatal type supplement, you 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, paramenopause, menopause, post menopause, okay, so you can capture a woman for 40 years. That's a lot more attractive than a two year window or a one year window. And so 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 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, 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. How 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's scaled successfully and you're talking about like, o positive's done a tremendous job in terms of being able to sort of sub brand across multiple different lifecycle 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. You 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, again, partially because the funding environment just dried up when they all came to market. Do you find across many of these brands that since there is a lot of them, as you say, 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 a funding issue. I'm just wondering, I'm just kind of curious as well, in terms of differentiation, if that's been an issue for you. Too, not in women's health only because at the scale, and there's just not very many brands available.

You 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. People 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.

So, you know, I think especially on the vms side, differentiation is really important, whether that's clinical, like science, science support. 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. If your doctor tells you, hey, this, this is the vitamin D you should be taking. Like, you're gonna listen to that.

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 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 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 interesting. My final question for you.

Mike Gelb
What's one book that's inspired you personally and one book that's inspired you professionally? I mean, I read the stand by Stephen King, and so I, 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 in it.

Teddy Townsend
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, twelve 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.

And I obviously had some. Like, I had a little bit of a chip on my shoulder. But it was like a pivotal moment because it, 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 skillset really came out of being able to read that book in this transformative moment. And writing and telling stories is like, 90% of what I do now. Right.

I mean, there's the Excel component, but a lot of what my job requires is being able to talk to people 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 quite traumatic and not an acceptable book for children of twelve 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. And I went to college for writing.

And that was, like, my big thing. I thought maybe I'd be a journalist or something. And a bunch of things happened in college, and I realized that finance was cool. And so I sort of fell into banking. Sadly, I had no finance anything when I managed to convince a small bank to hire me.

And the way I convinced them to hire me was because they let me write all their marketing materials, and they told me that I could have 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, and I didn't know how it worked. And so I would go in, they'd have me doing 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 was my nickname.

And so someone 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 base understanding that really helped set a foundation for me. I mean, there's so many other things, but it was the first thing that gave me the confidence to talk about finance in a way that I'd never been able to before. So anyway, so that on the professional side was. It's not very creative, but it was very effective.

Mike Gelb
No, that's awesome. That's. That's amazing. And is it the one by Joshua Rosenbaum and Joshua Pearl? Yeah.

Teddy Townsend
I mean, I still. I've been doing this for 13 years and I still have a copy in my office, so, you know. No, that's great. Both these. I must say, Teddy, you are so original.

Mike Gelb
No one has mentioned these books yet on this show. And I'm. And I, and I. Well, I honestly hope you didn't have nightmares when you were twelve, um, after you read the stand. Are you kidding me?

Teddy Townsend
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 outperformed everybody else. It was like 900 points.

And, like, the other books kids were reading were like ten. So I was thrilled. There was no. I was, there was nothing traumatic for me. I was like, I am amazing on a high.

Mike Gelb
That's amazing. That's amazing. Teddy, thanks so much for your time again. Really appreciate it. Yeah, thank you for inviting me.

Teddy Townsend
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.

Mike Gelb
And if you really love the show, check out the newsletter@thegoodsumerbc.com. you'll receive weekly updates of all the consumer deals that are happening within the past week. And of course, right to your inbox. The latest consumer vc podcast. Thanks for listening.

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

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1: Introduction to Health and Wellness M&A

2: Deep Dive into Term Sheets

3: Strategic vs. Private Equity Buyers

4: Closing Thoughts

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