Marcus Lemonis Develops a Growth Strategy for The Lano Company
The Lano Company is a Kansas City, Missouri based business launched ten years ago by Miranda when she developed a lanolin lip balm. Since then she and her business partner husband Layne have expanded the product line dramatically and grown the top line to $2.4 million as of 2014.
Let’s look at the situation using the 3Ps.
In a nutshell, Marcus decides that more lanolin-based products are the key to further growth. He is not impressed by the company’s Glam and Pure lines of cheap cosmetics and wants to dump them immediately. Ditto for ancillary lines such as makeup brushes. The future is in medical grade lanolin products!
The company manufactures all of its products in-house using a labor intensive process which offers a lot of room for improvement in terms of efficiency. Marcus quickly decides that it’s time to subcontract all the manufacturing out to a company that specializes in the task.
The Lano Company appears to have a pretty good crew in terms of both owners and staff. For once, there is no drama in a The Profit episode, which is rather refreshing.
The company is actually profitable and not about to go under as is the case with so many of the businesses Marcus looks at. Last year it had a net profit of $400K on $2.4 million in sales. The margins are quite high as well hitting up to 81% on some items. This year sales are expected to hit $3 million.
Marcus initially offers $500K for 30% of the company. (Not 33%.) Miranda and Layne counter offer with $500K for only 20%.
Marcus then asks them what they think the company is worth. Layne responds with $5 million. I really wish that Marcus had asked him how he came up with that number. Businesses are typically sold on a multiple of seller’s discretionary income (SDI). Let’s use the closest number we have to SDI which is the $400K. $5 million / $400K = a multiple of 12.5X. That seems rather high. My hunch is that typically such a business might sell for a premium multiple of 4x to 5X. Let’s be super generous and use 5X $400k. That’s a valuation of $2 million versus Layne’s $5 million.
Keep in mind that most small businesses sell for a multiple of 2X or under.
With the counter-offer things suddenly got very interesting. The deal-maker in Marcus came out when counter-countered with accepting the 20% if he could get 10% of his principal paid back first every year. The 10% or $50K would have top priority. On top of that any remaining profits wold be split 20/80 with Miranda and Layne.
This is just another way for the investor, in this case Marcus, to extract his principal investment over a fixed period. The rationale for doing this is because having capital tied up in a small private company as a minority shareholder often means having an illiquid asset for a very long time. It’s far better to extract your $500K, asap, and then use it to invest in another deal then to let it sit collecting dust in one business. In the meantime, you continue to share in the profits.
Miranda and Layne agree to the 20/80 split plus $50k each year off the top.
Oh, and by the way, Marcus also gave Miranda two weeks in which she had to come up with new product ideas just as he did with Precise Graphics. She passed the test despite the bad logo.
Marcus’s Growth Strategy
The Lemonis growth strategy includes:
– Subcontract all production to a specialty company manufacturer.
– Refocus the remainder of the company into R&D and marketing.
– Stick with healthy lanolin based products for skin and lip care.
– Rebrand everything.
– Go after big accounts such as Birch Box and QVC.
This was a good episode because it focused on a real business that was already doing well and has the potential to do even better.
Good luck to the gang at The Lano Company.