The Pet Industry

A “Frank” discussion with Cat Expert Jackson Galaxy

The Journey from Passionate Cat Lover to TV Star and Celebrity Licensor

Jackson Galaxy is the Host & Executive Director of Animal Planet’s hit show My Cat From Hell, New York Times best-selling author, and has over 20 years of experience as “The Cat Daddy”. He first found his calling while spending the better part of a decade on staff at an animal shelter.

Jackson has come a long way since cleaning cat boxes at the Humane Society in my hometown of Boulder, Colorado. I first met Jackson in 2010 through mutual friends and was immediately impressed with his knowledge, passion, and commitment to cats. He had some innovative, unique ideas for cat products and we discussed ways to get those ideas from his head to pet store shelves. I’m happy to say that he has accomplished that and so much more! I recently sat down with Jackson to learn how he launched his multi-million dollar licensing business with Petmate:

I heard you speak a few months ago at the Humane Society of Boulder Valley fundraiser. Your story of how you went from working as a shelter employee to being a TV star is incredibly inspiring. Can you share the abbreviated version with my readers?

It was actually 20 years ago this month that HSBV hired me to help out around the shelter. My boss at the shelter listened to my crazy ideas. I was passionate about animals, and I had the imagination of an artist, so there were a lot of them. We need to be like my boss was then: If we want to get to no kill, we have to listen to the guys who might be scooping litter.

I left the shelter to start my own cat, body-mind consulting business called Little Big Cat and I worked together with holistic vet Dr. Jean Hofve on Spirit Essences. Back then, flower essence therapy was just as fringe as cat behavior therapy!

I moved to California to live near the beach, and while I was scoping out the animal scene I stopped at an adoption events. In no time, I had a crowd around me, listening to me talk about cats. A guy who worked at a production company saw me in action and called the next day. I had a show within a year when Animal Planet caught a video clip on You Tube. That’s what started the whole TV thing.

How did you connect with Petmate?

I was in Austin for just two hours doing an Animal Planet event at South by Southwest. Someone from Petmate came up to me, said he was a huge fan, and gave me his card. Four months later I called him.

What are some advantages of licensing your name and product ideas?

The product line has been a lot of work. One of the great things about the partnership with Petmate is they know that this is a fluid experience. As the cats give them feedback, they change the product. The worst mistake they could make is not listening to the cats. Petmate has been very flexible about the changes. I won’t be happy until the cats are happy.

If you have strong ideas and can present them in a concrete manner, you can use them to solidify your brand. I’m so excited that some of my ideas for helping cats have come to fruition.

I’d love to be seen as the trusted messenger between cats and cat guardians. When people think of doing something great for their cat, I’d love them to think of me.

You have to be aware that in order to make the brand what you want it to be, it’s a LOT of work. If you aren’t overseeing every aspect of it, and aren’t careful, all of a sudden there will be a bad product with your name on it!

People are under the impression that cat people don’t spend money. But the fact is, they just haven’t had as many products to buy! I’m out to change that.

Why do you think there are so many cats with behavioral problems?

There are more cats than dogs in America. Therefore, there are more cat problems. Plus, cat behavior problems are more documented than dog problems. If the cat pees in your shoe, you will hear about it. But if everyone understood the basic intrinsic needs of their cats, there wouldn’t be nearly as many problems.

What are you favorite products that can help ease behavior issues?

Some of my favorite products include Comfy Cocoon, Comfy Cabana and Comfy Clamshell. But all of my products should increase mojo. My products go one step beyond environmental enrichment. I honestly believe they will keep cats out of shelters.

What are some steps that pet industry leaders can take to enhance the quality of life for pet cats?

Now that it can be proven that there is an ROI on pet products, I’m looking to further the cat movement. The audience is there! Part of the problem has been that we can present toys to cats – but we must work to get their attention and people didn’t realize that. Few people who have cats really know cats. Let’s ratchet up the cat culture! Dog people demanded more products, and they got them. Cat people can do the same.

What’s next?

We’re constantly revising our products. Over the next year, we’ll also have a lot more new products targeting both the environmental enrichment and behavior niches. I’m also working on a number of different TV shows and am busy with public appearances, all with the larger goal of helping fund my foundation (jacksongalaxyfoundation.org). The Jackson Galaxy Foundation works to make real changes in the rescue and shelter world.

From my first day at HSBV, it’s been all about making changes to the quality of life of cats, it’s about the welfare of the animals.

What advice would you give a budding pet industry entrepreneur with some creative ideas but limited resources?

Make your theories rock solid. Make sure your products work. We’re in a very unique time right now. The demand is there. We’ve barely scratched the surface – it’s an exciting time!

Carol Frank of Boulder, CO, is the founder of four companies in the pet industry and a Managing Director with MHT Midspan, a premier middle-market investment bank, where she specializes in Mergers and Acquisitions in the pet sector. She is also a principal at BirdsEye Consulting. BirdsEye advises in the areas of M&A, strategy, and licensing. She can be reached at birdseye@carolfrank.com.

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5 Key Elements of a Successful Pet Products Company Sale

As many of you know who have been reading my APPA columns over the years, it’s a great time to sell a high quality pet business. However, selling your company will require about six to nine months of intense effort, so it’s vital to have your house in order beforehand.

The pet industry is a fast-growing, $60 billion sector that is evolving rapidly. As consumer preferences and trends continue to evolve, the space has caught the attention of both private equity and strategic investors (many of whom have excess cash on their balance sheet) and deal volume has surged. While the companies and situations in the pet space are varied, I’m almost always asked the same question by shareholders and management: “What does it take to sell my company?” The answer is both simple and complex. In a nutshell, we like to think of the ingredients for a successful sale in five broad categories.

People
Companies are a reflection of the people who work there; the more good people at your firm, the better. A great team will also make it easier to sell your company. But if you have a problem, like a management void or a bad employee, you’ll need to deal with it in advance of going to market. Otherwise, the new owner might address it in a manner you don’t like, or they might pay you less than you had anticipated for their share of the business.

We recently sold an organic food company that, while innovative and growing rapidly, was unprofitable and will require millions in future investment. While this dynamic would normally limit a company’s appeal, the founding management team was appealing on an absolute basis and relative to their competition. So, the buyers paid a highly attractive revenue multiple to partner with them.

Processes
Much like a house needs a strong foundation, your company must have infrastructure in place in the form of processes, controls (financial, credit and quality) and precedent. Buyers (strategic and financial) are almost always interested in growth, and without the structure (or processes) in place, growth is unsustainable, if not impossible. Infrastructure is needed to scale a business. Again, you can sell your business without the proper infrastructure, but if significant investment or a bulked up SG&A is needed and you’re relying on your new partner for this, they’ll pay less.
Additionally, there is a multiplier effect. If you’re selling your $2 million EBITDA company for $20 million (10x multiple), but the buyer views your SG&A as $500,000 a year below what’s needed (perhaps for a VP of sales and a new IT system), then your EBITDA on a pro forma or adjusted basis just declined to $1.5 million, and the purchase price decreased from $20 million to $15 million, if all is else equal.

Several years ago, we sold a leading branded consumer company that operated on a bare-bones budget; its cost structure helped it generate industry leading EBITDA margins. We anticipated that interested buyers would factor in an additional $1 million or more in SG&A to account for a CFO, a VP of international sales and a much needed upgrade of IT. Indeed, the buyer made this adjustment, and the deal closed uneventfully, because our client was expecting this reaction.

Reporting
The report card of any business is its financial statements. If you can’t explain what has been happening to your business, produce a real-time view of what is happening and articulate a view of the future through a budget or projections, you are unlikely to sell your business. The importance of accurately reported numbers is of paramount importance to a host of parties in a transaction: Buyers require them for gauging strategic fit, valuation, management talent and accretion/dilution; lenders require them for determining acquisition leverage levels and working capital lines; attorneys will reference them in transaction documents.

Performance
The better your company has performed historically and the better it continues to perform throughout the selling process, the better the chances of a sale at an attractive multiple. Performance not only encompasses absolute revenue, profit and associated margins, but it also speaks to non-financial metrics. For example, customer concentration—not uncommon in early stage companies or in more mature companies with a presence in large-format retailers—can suppress buyer interest, valuation and, in rare cases, kill a deal. SKU, salesperson or supplier concentration also can dampen interest. A history of innovation and a pipeline of fresh products are critical. It is important to buyers that there be plenty of growth opportunity left on the table when they take over.

Selling your company (whether a majority or minority stake) will require intense effort for about six to nine months. Maintaining your company’s performance, while at the same time undertaking what can feel like a second job dealing with transaction details, can try even the best of management teams. It’s vital to have your house in order (people, process, reporting) beforehand and retain advisors who know how to shepherd you through the process and across the finish line.

Timing
Markets move on supply and demand. Understand where your market is from a customer/consumer perspective and a merger and acquisition perspective. If demand outstrips supply—as it does right now with too much money chasing too few quality deals—you’ve got a good situation as a seller. And while you know your day-to-day business, you may not know the landscape regarding financial and strategic M&A appetite, lender leverage levels and/or the Wall Street IPO pipeline. A good investment banker will. Understand this and the macro environment; use it to your advantage.

We recently dealt with a company that sold an organic product for which supply was massively lower than demand. Because of this, big box retailers were not able to exert the usual leverage on vendors, and the company enjoyed outsized growth and margins. Will this supply-demand imbalance last forever? No. Is it better to sell now into that dynamic than wait? Unambiguously, yes. A lot underlies these five points, but awareness of them and addressing them should lead to an easier, more enjoyable and more successful transaction.

Carol Frank is a Managing Director at MHT Midspan, a Middle Market Investment Bank, specializing in the pet industry. Prior to her investment banking career, from 1987 to 2007, Carol founded and operated retail, distribution, and manufacturing companies in the pet industry. Carol has an MBA from Southern Methodist University and a BBA in Accounting from The University of Texas at Austin.

Craig Lawson is a Managing Director at MHT Midspan and has over 20 years of sell-side and buy-side experience. He brings deep experience with consumer products and leads MHT Midspan’s Consumer/Retail industry practice. He has a particular focus on the pet space, having closed several deals over the past few year. Prior to co-founding MHT Midspan Partners, Craig served as a senior banker in the San Francisco office of Harris Williams & Co. Craig holds an MBA from The Wharton School at the University of Pennsylvania and graduated with a BA from Tufts.

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Raising Money through Angel Investors: The Third in a Series on Access to Growth Capital

dollar-symbolsWhat exactly is an angel investor and would they consider investing in my pet company? In furthering my quest to clear up the myths and realities behind raising growth capital, I was fortunate enough to snag an interview with Peter Adams, one of the angel investment communities’ most knowledgeable ambassadors.   Peter’s pedigree is nothing short of impressive! He is co-author of Venture Capital for Dummies and serves as the Executive Director of the Rockies Venture Club, the longest running angel investing group in the U.S. He also runs the Rockies Venture Fund, an early stage venture capital fund and is an Adjunct Professor at Colorado State University.

Given your years of experience in this field, what is YOUR definition of an Angel Investor?

 I think the definition of angel investor has changed over time. The first angels were people who would invest in impossibly risky companies, often because they were related to the entrepreneur or because the business was meaningful to them in some way.

Now, there are perhaps three characteristics that distinguish angel investors from other types of investors:

Accredited Investor: Net worth of $1 million or more excluding your primary residence, or income of $200,000 or more (or $300,000 for a married couple)

Angel Deals: To be an angel investor, you need to be investing in angel deals vs. later stage stocks or funds. Angel deals are characterized by being fairly new companies (usually under five years), low or no revenue, valuations between $1.5 million and $3 million, and total investment between $250K and $2 million. Angel deals are later stage than friends and family “seed” investments and earlier than a Series A Venture Capital investment.

Contributes more than just capital: Angel investors contribute a lot more to the deal than just capital. They are often advising, serving on boards, making introductions and otherwise guiding the entrepreneurs towards success.

 Can you name some characteristics of a company that would make it appealing to an Angel investor? What types of companies attract Angel money?

 Overall, clarity of strategy is particularly attractive. Companies who have considered alternatives and who have built a formal strategy do way better than those who wing it.

The main characteristics of the company that we look for are a great team with experienced leaders, ideally with experience in venture-backed businesses that operate faster than non-venture businesses and with fewer resources.

Next, we would look for someone who is in a large and growing market with lots of opportunity for growth and with bigger players capable of making an acquisition when the time is right.

A great product that isn’t just an incremental improvement is important. It’s hard to break into distribution when all you’ve got is another “me too” product. Patents should be applied for prior to seeking funding as well.

Go to market strategy is missing from many company pitches. When you consider that the NUMBER ONE reason for failure in startups is failure to get customers, you would think more companies would develop sophisticated go-to -market strategies with multiple channels, partners, and a strong understanding of metrics.

Finally, the number one question investors have is “how will I get my money back?” Entrepreneurs and many accelerators seem to think that this is not an important question. I often quote from the second habit in The Seven Habits of Highly Successful People which states “begin with the end in mind”. The first thing a startup should do is to think about its exit, and understand how they can create value for their future M&A partner. By focusing on creating value for a future acquirer, they will create wealth for themselves and their investors.

 How does a start-up entrepreneur know how to value his/her company?

 Valuation is challenging for angel investments and some people just throw their hands up and say it can’t be done. They’re wrong! Valuation is not a simple or intuitive process and its best to take some time to do the research and find best practices. I personally use 4-5 different valuation methodologies on each deal I do. The reason for doing different methodologies is that each method has its own uncertainties, but by doing several methods you attack the problem from lots of different directions and overall come up with a valuation zone that is relatively solid. Some valuation methods involve modeling exit values and then working a discount back from that in a sort of modified discounted cash flows model. Others discount based on risks and milestones to be accomplished. Others work by comparing valuations of other deals being done in a market pricing methodology that compares factors such as team, opportunity size, product, competition, etc. After you’ve done all the different methods, you work out an average and standard deviation to calculate a zone in which negotiation occurs.

 How do valuation multiples differ between Angel investors, VC’s and Private Equity?

 This is a great question because I once had an entrepreneur tell me that he didn’t want to have any revenues because he knew that investors would just value the company based on a multiple of his small first revenues. He thought that having no revenues was better than having a little. This is crazy, of course, but I understand how he came to this belief. He didn’t understand the fundamental differences between how angels, VCs, private equity and later, M&A valuations work. Since most startups have little or no revenues or EBITDA, the two most common baselines for multiples, they have to find other methods. But, once the company is more established, then VCs and especially private equity firms will use valuation multiples based on EBITDA or revenue. The multiples will vary depending on the industry and the difference between financial and strategic investments.

 What advice would you give an entrepreneur looking to raise Angel Investment Capital?

Do your homework. The main reason companies don’t get funded is that they’re not ready. Angel investment has a whole language and process all its own and it doesn’t make sense to go in to it without understanding the rules. A company that is ready to pitch should have a solid exit strategy with a strong set of comparables, a financial plan that outlines future rounds of funding, a strategic plan, a detailed and believable pro-forma, a written valuation model, an executive summary and a great pitch deck.

 What services does Rockies Venture Club offer entrepreneurs and investors?

The Rockies Venture Club, a non-profit organization founded in 1985, is the country’s oldest angel investing group. RVC offers a lot to investors and entrepreneurs alike:

Education: RVC has a curriculum of classes and workshops for angels and entrepreneurs that cover all the basics from how to pitch to due diligence, valuation, exit strategies, and pro-formas. We also hold mastermind groups to coach entrepreneurs through the process.

Events: RVC holds three major conferences and nine monthly themed events throughout the year. These are focused on networking and making connections, content and great pitches.

Execution: At the end of the day, it’s all about execution and RVC coaches entrepreneurs and angels through the investment process, facilitates due diligence and negotiation and gets the deals done.

Carol Frank of Boulder, CO, is the founder of four companies in the pet industry and a Managing Director with MHT Midspan, a premier middle-market investment bank, where she specializes in M&A in the pet sector. She is also a principal at BirdsEye Consulting, the pet industry’s premier consulting group. BirdsEye advises in the areas of M&A, strategy, and licensing. She can be reached at birdseye@carolfrank.com.

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Moving your Pet Company up the Valuation Chain: Steps to get the MOST from a Potential Buyer

The adoring eyes.
The unshakeable trust.
The opinion that you are indeed, the most important person in the world.

Wouldn’t it be wonderful if potential buyers saw your business the same way your pet sees you? You’d definitely get a better price for company.

Just as there’s a difference between how your pet sees you and how the rest of the world sees you (let’s face it, most people don’t literally jump for joy when you walk into their home), there’s often a rift between how potential buyers value your company and how you value it. It’s called the valuation gap, and it runs rampant in the pet industry. You consider all the energy, time and emotion you’ve poured into building your company over the years—the sleep lost, the hairs greyed, the pounds gained. A buyer, however, looks at what he can get out of your company compared to all the other options out there.

Understanding this valuation gap, and getting a clear take on how buyers put a price on your company is the first critical step in boosting that price. A new study noted in Middle Market M&A Almanac in an article by Gary Ampulski, a managing partner at Midwest Genesis, a business value enhancement and transition planning and execution firm, helps crystallize buyers’ views.

Researchers drew on input from 835 business owners who received written offers for their companies. The analysts concluded that buyers put privately-held companies on four different levels in the value chain: Below Average Profit Companies, Average Profit Companies, Above Average Growth/Profit Companies and Low Risk Companies. Along with the industry and company’s size, these levels are what drive valuation.

Yes, the valuation is a function of profitability. But the almighty valuation multiplier is relatively independent of profit. It’s mostly based on the company’s investment risk. And let me tell you, it can really change the way a buyer puts a price on your business. The research shows that moving from an Average Profit Company to a Profit Leader Company cranks up your value by 2.7 times. Keep on moving up to the Value Leader category and the perceived value of your companies increases another 2.2 times. That’s a combined improvement of 4.9 times the starting value.

So how do you move your company up that value chain? Over the years I have been selling pet companies, these are the areas I have identified that will most significantly drive up the value of your business:

  • Increase your gross profit margin. Most pet product manufacturers other then food companies should be above 40 percent.
  • Reduce customer concentration. Ideally no customer should represent more then 10 percent of your sales.
  • Realize double-digit sales growth over at least the last two years.
  • Have new products in the pipeline that will result in immediate sales increases to a new owner.
  • Do everything you can to have intellectual property protection like patents and trademarks.

Understanding and acknowledging the valuation gap (I refer to it as “being grounded in valuation reality”), as well as the levels of valuation and the effect that key elements have on your multiplier, is the best way to boost value. Buyers might not literally wag their tails when you walk in the room, but if you position your company in that top Value Leader category, with a 5x multiplier, you might just be wagging when you receive an offer.

Carol Frank of Boulder, CO, is the founder of four companies in the pet industry and a principal at BirdsEye Consulting, the pet industry’s premier consulting group. Carol is a registered Investment Banker, specializing in Mergers and Acquisitions in the pet sector.  She also consults in the areas of strategy, licensing, and executive recruiting.  She can be reached at birdseye@carolfrank.com.

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North America’s Growing Manufacturing Advantage

The North American Energy Revolution has resulted in the abundance of low-cost shale gas, which is helping the U.S. return to a prominent position among the world’s manufacturing leaders, which is great news to pet product manufacturers who would like their label to say “Made in the USA” or “Made in North America.”

According to a new study of the 25 largest exporting countries from the Boston Consulting Group[1], this year only seven have lower manufacturing costs than those of the U.S. Those countries are: Indonesia, Mexico, Thailand, China, Taiwan, and Russia.

Moreover, since 2004, U.S. manufacturers have become more competitive compared with every major export country except three: India, Mexico, and The Netherlands.

This is a dramatic reversal in just one decade! As I wrote in my May e-update column, it was unfathomable that I could have my Avian Adventure bird cages made in the U.S. for anything close to what I was paying in China. Even Mexico was 40% more expensive then China when I moved production from Mexico to China in 2002. Today it is only 5% cheaper to produce in China then the US, and the gap is continuing to narrow every year.

Why is this happening?

One factor, as we’ve already mentioned is cheaper energy. As energy demand soared, the cost of electricity has risen 66 percent over the past decade in China.[2]

 That’s more than twice the 30 percent increase in the U.S. over the past 10 years. The difference is that the U.S. started harnessing shale gas for energy in 2005, which has kept electricity costs from growing in North America as quickly as they have in the rest of the world. As a result, while natural gas prices went up by 138 percent over the past 10 years in China, they have dropped by one-fourth to one-third in North America.

At the same time, China’s labor costs are climbing. Since 2004, Chinese labor costs (adjusted to reflect productivity gains) went up 187 percent. Meanwhile, U.S. labor costs over the same period went up just 27 percent. In other words, in 2004 China wages averaged $4.35 per hour, less than one-fourth of the cost of $17.54 in the U.S.

By 2014, wages measured the same way climbed to $12.47 in China, more than half the cost of $22.32 in the U.S.

The U.S. has also benefited from shifts in the exchange rates, specifically the rise in value of China’s currency. Over the past 10 years, the Yuan has gone up more than 30% against the U.S. dollar.

But the U.S. isn’t the only country gaining a manufacturing advantage. Thanks to its close proximity to the U.S. and its own cheap energy and labor costs, Mexico is also developing into a manufacturing leader.

The Boston Consulting Group study found that in 2012, the cost to manufacture in Mexico (adjusted for productivity) fell to a lower level than in China. Think of how much faster and cheaper your products will arrive to your facility when they ship from Mexico versus China. Once again, lower energy and labor costs are the catalyst for the advantage.

That’s attracting the attention of global companies that once considered China the cheapest place to manufacture. For example, Honda has invested $1.3 billion to build production plants in Mexico over the past two years.

The U.S. and Mexico are now considered the “rising stars of global manufacturing” thanks to low wage growth, sustained gains in productivity, stable exchange rates, and a huge competitive advantage in energy costs. Based on these trends, experts have predicted the following trends:

• The U.S. will continue to hold a competitive advantage in energy costs until at least 2025.
• Because of the U.S. advantage in energy costs and the rising cost of labor in China, by the end of this decade it will be cheaper to manufacture in the U.S. than in China.
• Mexico, which has already surpassed China as a low-cost manufacturer, will continue to build its cost advantage and the U.S. will be among the beneficiaries. By 2015, Mexico’s average manufacturing labor costs are projected to be 19% lower than in China.

This is all very good news for those of us who make our living manufacturing pet products for the North American consumer. Perhaps those long plane rides to Asia, unfamiliar and scary meals, and less-then-pleasant factory visits will soon be a thing of the past.

Carol Frank of Boulder, CO, is the founder of four companies in the pet industry and a principal at BirdsEye Consulting, the pet industry’s premier consulting group. Carol is a registered Investment Banker, specializing in Mergers and Acquisitions in the pet sector. She also consults in the areas of strategy, licensing, and executive recruiting. She can be reached at birdseye@carolfrank.com.


[1] BCG Perspectives, August 19, 2014, “The Shifting Economies of Global Manufacturing”, by Harold L. Sirkin, Michael Zinser, and Justin R Rose.

[2] Milwaukee-Wisconsin Journal Sentinel, April26, 2014, “U.S. Manufacturers Growing More Competitive on World Stage,” by Paul Wiseman.

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