Middle Market Growth
Shining Light on the Sale of Sun & Skin Care Research
KATHRYN MULLIGAN | NOVEMBER 18TH, 2015

In the business of sun and skin care products, there’s often a division between owners and producers, a bifurcation between a business with marketing expertise and one with manufacturing know-how.

Or, as Warren H. Feder of Carl Marks Advisors described the functions: “It’s like church and state. They don’t mix them.”

Feder, a partner with the New York-based merchant bank and co-founder of its investment banking group, advised on a deal earlier this year involving Sun & Skin Care Research. Unlike many of its competitors that specialize in either marketing or production, the company manufactured, sold, marketed and distributed three brands of sun and skin care products.

After Carl Marks brought the company to market, there was significant interest from buyers, including manufacturers interested in both owning Sun & Skin Care’s brands and producing its offerings. Before it sold, however, the company had to navigate myriad challenges, including keeping operations running smoothly and finding an interim manufacturer while also seeking a buyer.

Division of Labor

Three years ago, private equity firm Source Capital purchased the business, which at the time offered two well-known brands—No-Ad and Ocean Potion. A third brand, Bull Frog, was acquired in 2013; the purchase led to more debt on Sun & Skin Care’s balance sheet. The problem of additional leverage was compounded by some strategic missteps by a new management team and unusually cold weather in 2013 that hurt sales. Meanwhile, the company needed resources to relaunch some “tired” brands, introduce new products and expand its offerings.

Combined, these factors led to operating losses, and many of Sun & Skin Care’s lenders felt it was overly burdened with debt. Largely because of pressure from these lenders, the company’s management and board decided to sell, ultimately engaging Carl Marks to bring Sun & Skin Care to market.

One particular difficulty the team faced was addressing Sun & Skin Care’s manufacturing dilemma.

“One of the challenges of suntan products is that they’re—not surprisingly—very seasonal,” Feder said. That seasonality posed a problem for Sun & Skin Care, specifically because of the nature of its offerings. It built up its inventory at the start of every year to gear up for spring and summer, but production activity slowed dramatically with the onset of fall and winter.

“One of the challenges of suntan products is that they’re—not surprisingly—very seasonal.”

According to Feder, the inefficiency of this manufacturing model led the company to maintain its marketing and distribution functions while seeking a third party to manufacture its products. Through a request for proposal process, it found a co-packer—a manufacturer of products for outside clients—to handle production, allowing Sun & Skin Care to focus on branding and distribution.

Contracting with a co-packer while simultaneously seeking a buyer for the company was delicate—a private equity buyer might continue to use the co-packer after the sale closed; on the other hand, if another co-packer bought the business, it might choose to move operations to its own facilities and terminate Sun & Skin Care’s existing co-packing relationship. By being transparent about its plans to sell the business, Sun & Skin Care was able to outsource its manufacturing capabilities to a co-packer that fully understood the terms of the relationship and recognized that the company might be sold at any point.

Brand Equity

After going to market, the company attracted significant interest, Feder said. Carl Marks approached 200 potential buyers, 80 of which signed confidentiality agreements. It received 20 bids for the company.
“I think this demonstrates first and foremost that there is an interest in brands that resonate with customers, and that brands still have some meaning,” Feder said.

He noticed something else, too: A number of co-packers were interested in buying the business outright, bucking the trend of keeping marketing and manufacturing functions separate.

“I think this demonstrates first and foremost that there is an interest in brands that resonate with customers, and that brands still have some meaning.”

Feder explained that with existing manufacturing facilities, a co-packer could leverage production capacity and efficiency to increase its marginal revenue. Moreover, a recognizable brand name would distinguish its product from others, which would improve the value of the co-packer’s offerings.

At the time of the sale, Sun & Skin Care’s brands were sold to both domestic and international mass merchandisers, drug chains and supermarkets, among them Wal-Mart, Walgreens and CVS. Co-packers hoped these existing relationships might lead to private label opportunities, Feder said. They could further leverage their manufacturing capacity by not only selling No-Ad products to Wal-Mart, for example, but also by manufacturing products for Wal-Mart to sell under the retailer’s own brands.

Before Sunrise

Feder and his team had to work quickly. Carl Marks was engaged in the middle of June, and the deal closed the first week of September—much faster than the six months it typically takes to sell a company.

“It was important to do that because they’re a seasonal business, so they needed to be in production in time to start shipping product in November for the 2016 season,” Feder explained.

SolSkyn Personal Care, a strategic buyer, ultimately prevailed in the sale, in part because it was able to use its own funds to close the deal without relying on outside financing. The sale was ultimately completed as an Article 9 foreclosure. In this process, the secured lender acts as the seller and comes to an agreement with the buyer over terms. The lender is required to give 10 days advance notice to the company and any other creditors of its intent to sell, but after that, it’s free to close.

Feder said the Article 9 foreclosure process enabled the deal to close quickly.
“It helped facilitate a smooth transition to a buyer that was able to manufacture product and service customers for 2016,” he added.