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Selling A Toy Business: How Mergers & Acquisitions Work In The Toy Biz

This article is the published script for Episode 102 of our PLAYING AT BUSINESS podcast. To listen to the podcast episode, just click here:



· Hello and welcome to Episode 102 of the Playing at Business podcast.

· I’m your host Steve Reece

· For today’s podcast We’re going to take a look at how Toy businesses are bought & sold. This might be interesting for you if you have a business to sell, but also might be interesting for you just to understand how these transactions happen and what’s involved. We’ll also look at how to pump up the price if you are selling & how to do your due diligence if you are buying.

· Before we get further into today’s episode though, just a few sponsors messages from, well me actually!

· You can sign up for our Free email newsletter on our Blog sites – www.ToyIndustryJournal.com & www.Boardgamebiz.com (not updated that often, but I keep mentioning for 1st time listeners who haven’t visited that blog yet!), sent out on Fridays when I have time, with links to our latest published content including notification of new podcast episodes

· Also, I recently began a series of Linked In Newsletters offering long form report style analysis & commentary on the Global toy & game business – just search on Linked In for Steve Reece toys or Toy Industry Journal Newsletter & you should find the newsletter. Please feel free also to send me a Linked In connection request, and then you should see everything I post on Linked In in your feed (algorithm allowing!). At the time of writing we have 25 editions of that newsletter you can check out, and with nearly 5,000 subscribers from across the Toy & Games business this is a Free resource you would be crazy not to tap into!

· Now a quick plug for our Consultancy business services:

1. Did you know that I have helped many companies review their Sourcing strategy & find new factories in new geographies, especially outside China in India & other places? For more info check out www.ToyTeamAsia.com

2. Do you want to increase your Toy export sales? We help companies grow their Export sales, over my career I have $hundreds of millions of Toy sales under my belt. I have to tell you though that sometimes I start helping a company & get almost instant success, but sometimes I get tumbleweed by way of feedback – some products are harder to sell than others. The difference with what I do is that if you work with a commission based sales rep they just move ontop other products which will sell more easily, my approach as a Consultant on a retainer is to help the company understand why their products are not selling & how they can improve the sales proposition. To find out more about these services, just go to www.KidsBrandInsight.com/services

· Anyway, that’s quite enough up front rambling, let’s get into the topic of today’s podcast:


PODCAST MAIN TOPIC – TOY BUSINESS ACQUISITIONS

· Acquisitions have been a major part of the Toy business for a long time. Mighty giants such as Hasbro and Mattel have a history of buying up tried and tested brands – from Hasbro’s acquisition of Games giants Parker Brothers and Milton Bradley (the latter bought for a now paltry looking $350m) through to Mattel’s circa $460m purchase of Mega Bloks, Toy companies have been growing for a long time by snapping up other Toy companies and brands.

· At the time of recording, Spin Master’s acquisition of Melissa and Doug has recently been announced with a reported headline price of $950m. This comes on the back of many transactions completed by Spin Master in the last decade or more, perhaps most notably the boys & girls from Toronto acquired the iconic Rubik’s Cube brand a few years back for a reported $50m.

· But it isn’t just massive corporations who purchase companies and brands – it happens at all levels and segments of the Toy & Games business.

· There are various reasons for selling a company:

o Firstly, many Toy companies are family businesses, and when the founder or current member of the founding family reaches retirement age, quite often they seek a sale of the asset they have built up or inherited.

o Secondly, companies often want to take advantage of recent growth to capitalise on a higher market value.

o Thirdly, many Toy companies end up hitting the rocks – these ‘distressed assets’ often get sold or at least some of the assets get sold to clear up the mess, debts and cashflow issues.

· From a buyer perspective, common reasons for acquiring another company are:

o Buying a distribution focused company in a different country as a way to a). grow overall group revenues and b). acquire an already established subsidiary to enhance group distribution in the new market.

o Buying intellectual property (aka Brands) or buying companies to get hold of their valuable intellectual property. Brands are a big thing in the Toy & Games business, and as we saw above with the Mega Bloks & Rubik’s transactions can command high sales values.

o Buying to remove an awkward competitor from the market to allow for higher pricing and / or increased retail shelf/online marketplace space. (This approach may subject to competition regulations in some markets, but nevertheless it happens surprisingly often!). I’m not at liberty to identify any transactions which might fall under this category for legal reasons, but there are some really clear examples over the past 10-15 years you could find quite easily if you were interested!

o Buying as a new market entry from a company looking to expand/diversify into a new market.

o Buying as an investment vehicle – this is quite common whereby an Investment company buys a Toy co and looks to either run it as a long term concern, or perhaps private equity style seeks to buy, pump up the value to 3 to 5 times the purchase value & then sell out again after c. 5 years. For this type of transaction, the buyers will need to calculate in advance where they can either add or buy in value to pump up the asset enough to merit selling on again.


THE TRANSACTION PROCESS

· So that’s the two perspectives covered, now we’ll look at how the process goes:

· Normally the parties looking to sell draw up a tender document which outlines an overview of the company, the people, the structure, the market, the key financials, the competition/competitive advantage and any other salient features. Having worked on many of these documents I could tell you all about over harassed business owners trying to do their normal job while cranking out what can become quite a hefty document in their ‘spare’ time. Quite often on the transactions I have worked on I was asked to take on a lot of the work involved, which is fine, but obviously cost the client for my time & knowledge. Overall I would say it’s a sensible thing to do to partner up with someone who can do the grind while taking input/guidance from the business owner, but other way a tender doc is needed to solicit interest.

· Normally the seller will have an idea of what they are looking for financially from a deal.

· Normally the buyer will also have an idea, and that idea will involve a lower price!

· After some haggling the parties will tend to agree an overall price, subject to some variables i.e. inventory ebbs and flows throughout the process, so there is always a final tally up of exact value of inventory & cash in the business.

· The most arduous part of the process both ways is the due diligence process by which the buyer seeks to validate the statements and claims made by the seller. I won’t go into all the details of what is asked for, because I’ll fall asleep from boredom if I have to replicate a full due diligence list, but standard things would be to look at audited accounts, speak to some key stakeholders and staff potentially, review inventory and validate the value, audit the dealings with customers to ensure that those relationships are true and strong and I could go on, but let me just say that with most transactions, by the time you get through this stage, both sides tend to be kind of sick of the whole concept of the transaction!

· One of the key elements of the process of selling a business is what happens to the owner once the transaction is completed. Normally the owner is a fairly critical member, if not the key member, of the management team. In such an instance the seller can expect to be tied in for anywhere from 12 to 48 months after the transaction to some extent to ensure the asset remains as valuable after purchase as it was before.

· Quite often these arrangements get terminated due to ‘irreconcilable differences’ and end before the agreed time, but for the seller to fully benefit from the sale there are often performance criteria the business has to hit for a while after the sale to fully benefit the seller.


HOW TO FIND BUYERS OR SELLERS OF TOY COMPANIES

· Now in terms of how you connect with interested buyers or sellers – that can be another fairly grinding process.

· Basically it’s like any sales process, you have to do the leg work to sell to find and pitch to potential purchasers/investors. To buy you need to find those companies looking to sell.

· You can work with Agents like myself rom either standpoint, in which case you pay the agent via a small percentage of the overall transaction value, and in return the agent helps you with all elements of the deal from due diligence to pitching.


· If you are interested in buying or selling a toy or game company, and you would like to discuss your needs, please feel free to reach out directly to me via my usual contact methods – via Linked In or the details on my various websites and we can discuss further from there.


OUTRO

· So, that’s all we have time for this time, thanks for listening to Episode 102 of The Playing At Business podcast

· If you like this podcast or enjoyed this episode, please give us a good review or rating on the podcast platform you are listening to, and a reminder again to check out our Blog websites: www.toyindustryjournal.com and www.boardgamebiz.com

· Please share the podcast with your friends and colleagues in the industry, and stay tuned for new episodes coming soon!

· If you’re interested to find out more about my work as non-exec Director and board adviser, or how I help Toy & Games companies find Export distribution overseas, just check out www.KidsBrandInsight.com/services

· If you want Consultancy help to boost your Sourcing efficiency – both in terms of finding reliable capacity & saving money, again, just check out: www.ToyTeamAsia.com

· That’s all for now, I’ve been your host Steve Reece, this has been the Playing At Business podcast and we’ll see you next time. Thanks and bye.



Again, just a reminder, if you want to listen to the podcast episode covering this topic, just click here:

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