Monday, May 1, 2017

Home Décor Business Passes the Torchére

In May 2017, CID Capital, a private equity firm based in Indianapolis, partnered with Grandview Gallery, a Memphis-based specialty designer, and wholesaler of lighting products and related home décor accessories. Hilliard Lyons Investment Banking served as the exclusive financial advisor to the owner, Angela Cook.

Angela and Tom Cook understand the value of relationships, both personally and professionally. Their ability to treat employees, customers, and suppliers like family infused the culture at Grandview Gallery. After quitting their “day jobs” over a decade ago, Tom and Angela built Grandview Gallery from scratch. From their initial modest quarters, the Cooks grew into their current state-of-the-art showroom and headquarters in Memphis, TN. Grandview Gallery now has over 25 employees, including a dedicated office and staff in China, and supplies some of the biggest names in retail.

Grandview Gallery

In late 2016, the Cooks and the business hit an inflection point: The company needs to take transformative steps to continue its growth into new channels and products, but Tom’s impending retirement obscured the path forward. Angela and Tom are the quintessential teams – working together in a way that many husband and wife teams do at home but rarely do in the workplace. While the couple had grown the company profitably every year, they knew they needed a professional partner to take the company to the next level.

Establishing Grandview Gallery: An Entrepreneurial Pursuit

Much of Grandview Gallery’s initial success came from Angela’s eye for design and ability to stay ahead of mercurial customer trends. “It was certainly a boy’s club in the early days, and still is to some extent,” Tom recalled. “But most of our current buyers are women, and they connected with Angela’s designs from a female perspective. And their consumers are women as well – it just makes sense.”

The Cooks’ knew firsthand the difficulties selling to “Big Box” retail customers, with their relentless pricing pressure and tendency to put inventory back to smaller suppliers at a whim. So they chose to focus on the off-price, “treasure hunting” retail segment. Grandview quickly became one of the industry’s leading suppliers of portable lighting products (lamps), and within a few short years became one of the top suppliers of portable lamps to TJX Companies’ stores worldwide.

Angela and Tom pursued a thoughtful growth strategy: “Become the best at what you do, grow with good people and good companies, and then go from there,” Angela said. “Then your customers will be more likely to listen to you when you bring them a new product or expand into different areas. You’ll be important to them, and they’ll know your character and the quality of your work.”

Nurturing customers with high-touch service has always been integral to the Cooks’ growth strategy. The Cooks remember specific customer preferences, ranging from typical order sizes to preferred restaurants to visit when buyers come to their Memphis showroom to see new designs. This attentive, customer-first mindset pervades Grandview Gallery’s culture. While work days often extend into work nights, the Cooks maintain a lighthearted atmosphere in the office. In the evenings, the company’s furry “office mascots” Jack and Missy, roam the halls.

Arriving at an Inflection Point

After years of hard work, the Cooks had largely accomplished their initial vision for the company – to become their customers’ #1 (or #2) supplier for lamps and portable lighting. While the company’s growth had come primarily from large off-price retail partners like TJ Maxx, Marshalls, and Ross, as well as Aaron’s Rent to Own and many of the top furniture retailers, a big opportunity was the online and direct-to-consumer channels. In late 2016, Grandview experimented with selling product via, with exceptional results. They quickly saw the need for an experienced partner to help leverage this new channel without alienating their core customers. “It was a lot of work to stay on top of,” Tom said. “It was clear we needed to bring someone on board with the right experience.”

Angela was increasingly burdened with administrative tasks as the business grew. Time spent managing HR functions and all the day-to-day tasks kept her from working on new designs and addressing customer needs. A couple of bad hires had impaired team morale. Fortunately, Angela was able to correct the problem and hired the right people. “Now, we spend a lot of time with people before we hire them. It’s a lesson we learned the hard way – we are only as good as our employees.”

Meanwhile, Tom had begun to transition into retirement, heightening the urgency of finding Angela a new business partner. “It’s lonely at the top,” said Angela. “There are a lot of important decisions that need to be made when you’re the owner. Tom and I have always made those decisions together. We’ve always shared ideas and brainstormed together when deciding what is best for the company.” In 2016, the Cooks had begun considering bringing on a partner with the experience and relationships needed, but they weren’t quite sure what that process looked like or how to go about searching for the right fit.

Selecting an Advisor

As it turns out, the Cooks’ neighbor at the High Point Furniture Market had ample experience with growing private furniture businesses and had been through several private equity transactions over the years. He introduced them to John Mascarich, a Vice President at Hilliard Lyons Investment Banking (HLIB), characterizing him as honest and experienced in the industry. The Cooks connected with John quickly.

“Unlike some of the other guys out there in his business,” said Tom, “John is a straight shooter. He’s trustworthy, knew our business, understood our goals, and was prepared to work with us through the good and the bad.” The Cooks ultimately entrusted John and HLIB to help them make the one of the most important financial decision of their lives.

Finding the Right Fit & Negotiating the Deal

After meeting with the Cooks several times, John and his team prepared an initial market assessment identifying potential partners and providing an estimated valuation range. John also explained what private equity investors looked for, and how they would likely structure a deal if they went down that path. “We interviewed a couple of firms, but the detailed work Hilliard Lyons did on the front end, combined with the track record of a firm that has been around for over 160 years, made the decision clear,” Angela said. Hilliard quickly began preparing for the sale process, digesting financial and oper¬ational details, drafting marketing documents, and identifying credible potential buyers. “Some of those guys we took off the list,” recalled the Cooks. “It’s a small industry, everyone knows everyone, and we didn’t feel comfortable going to our direct competitors, for obvious reasons.”

Hilliard’s process generated significant interest in Grandview, given its niche position in the market, strong financial performance, and an owner-operator wanting to remain with the company after the deal. One group emerged as the best fit early in the process: CID Capital, a private equity firm based in Indianapolis. While CID did not have any existing lighting or home décor investments, they did have significant experience in design-centric, branded consumer-product companies that sourced their products overseas and sold through various retail and online channels. CID’s key principals demonstrated the genuine interest in learning more about the company – and, on their first conference call, “it just clicked,” said Angela.

While there was mutual excitement early on, Hilliard Lyons advised Tom and Angela to take a number of meetings with other prospective buyers to make sure the fit was right. “There is no real sense in rushing this,” Mascarich said. “Owners are emotional when it comes to these decisions, and should be. Most folks will sell or recapitalize their business only once in their lifetime. It’s important to be methodical and look all your options to make sure you make the right decision. Often softer issues like personalities and gut-feel mean more than financial terms in the end.”

Ultimately, Tom and Angela had several offers to consider. “The process worked as it was supposed to,” Mascarich said. While CID’s offer was not the absolute highest valuation proposed, they were ultimately chosen as having the best overall fit. “They spoke the language, did their homework, and took time to understand the details of our business,” Tom recalled. “While other offers may have netted us more money eventually, CID was a great fit for Angela and our employees.”

After negotiations, a detailed letter of intent (LOI) was agreed to that addressed most of the potential deal killers too often negotiated late in the process. “The more detail we can get in the LOI, the better,” Mascarich said. “Once we choose a partner and give them exclusivity, we lose a lot of leverage.” CID saw the value in both Tom and Angela and structured a deal where in addition to cash at close, Angela would reinvest a portion of their proceeds to retain an ownership position as well as stay on as the leader of the company as CEO.

Tom would serve as consultant and board member for a time to facilitate his transition into retirement.

In addition to Hilliard Lyons, Tom and Angela engaged a well-respected law firm with experience in M&A and private equity transactions. “It just makes the entire deal so much smoother when you have quality, experienced advisors on both sides,” Mascarich said. The due diligence process can often drag out for months, meaning only bad things for both sides.

“CID’s team were true professionals,” Tom said. “The process was incredibly smooth.” After agreeing to the LOI, CID started diligence the next day, arranging for a third-party firm to begin the financial, legal, and customer diligence and ultimately closed the transaction within 60 days as agreed.

The Future for the Cooks

Closing the transaction lifted a weight from Angela and Tom’s shoulders. Angela was excited to realign her role to fulfill her passion for design and meeting with buyers and designers. Tom is relieved to know his wife and long-time business partner would continue to have capable support and guidance as she led the company in its next phase.

When recounting transaction experience and describing their relationship with Hilliard Lyons, the Cooks explained, “We couldn’t have asked for anything more from Hilliard because they completely understood our business, perspective, and goals.” Acting as advisors for the company and ultimately as friends, John guided the Cooks through the entire process from start to finish. “We trusted them with our deepest financial questions,” Angela said, “even those that went beyond their contractual obligations.”

Combining the Cooks’ existing product lines and well-established network customers with CID’s extensive industry relationships and experience, the future for Grandview Gallery is bright. Angela and CID are working together to take Grandview to the next level, expanding product lines into other home décor accessories, and expanding the company’s online sales presence through Wayfair and Amazon. “It hasn’t been exactly as I imagined,” Angela said when asked about how the transition has been for Tom and her. “For the entire month after closing, I was in the office every day, including weekends. But it’s a good thing – I am genuinely excited about the business and its future.” With the deal completed and most of the integration work underway, the emotional aspect of the financial security that comes along with completing the deal is finally sinking in. “It was definitely an emotional moment, that day of the closing,” recalled Angela. “We are so excited about the future, not just for the business but our personal lives,” Angela said. “We look forward to having fun and enjoying life!”