Kendra Deal Spotlights Equity Investment

Private equity acquisition in the automotive, technology and medical industries has been making headlines, but it’s a rare bird in the salon business. That changed with the February acquisition of Indianapolis-based Kenra by Imperial Capital, a Toronto private equity group.

Spearheading the deal was Jonathan Sherman, Imperial vice president, and industry veteran Bob Goehrke, CEO of Dream Team Marketers International.

An attorney by training, Sherman has worked in private equity for more than seven years. “We at Imperial try to take an industry-focused approach to investment. Five years ago I started looking at the personal care industry, starting with food, drug and mass.”

When Sherman began investigating the salon industry, a colleague introduced him to Goehrke, a former senior exec at Clairol, Matrix, and Bath and Bodyworks with deep industry relationships. “I called him in the spring of ’04, and we were off to the races. Bob introduced us to a lot of quality people.”

While acquisition of a privately held company by a multinational has become commonplace in the industry, deals by equity firms have generally been limited to investment, even in Clayton, Dubilier & Rice’s massive $575 million purchase of a near-50% share of Sally Beauty in November.

But the salon industry offers attractive opportunities for ownership, says Sherman. He and Goehrke embarked on hands-on research that took them to seven trade shows and countless one-on-one meetings in addition to performing the usual market analytics.

“The key to finding the right company is patience,” says Goehrke. “A lot of great companies didn’t have the right attributes. Kenra was that wonderful little gem—the right product, with the right distribution.”

Imperial’s paradigm is different from that of other industry acquisitions, notes Goehrke, whose own experience has included stints on both the acquirer and acquisition side. “We’ve actually promoted and empowered the existing management team.”

“We don’t run the business,” Sherman emphasizes. “Both Bob and myself are on the board, we meet on a regular basis, but from our perspective, the work to be done is on a high level. We provide strategic advice and facilitate financing.”

Kenra’s management team is intact, headed by Kenra Brand President Patrick Ludwig, says Sherman. “They are co-owners. They have invested in the equity as testament to their belief in the business. They have done a fantastic job for the resources they’d been given. More could be done to support them, and that’s what we want.”

“They have great distribution, especially their relationships with their chain accounts and key distributors like BSG and Beauty Alliance as well as family-owned distributors like Peel’s,” says Goehrke.

Kenra’s  signature Volume Spray 25 product and the premium-priced Kenra Platinum display particular strength, says Sherman. “Unlike many other premium launches, KP has proven a sustainable brand. It offers an opportunity to introduce upscale products through 2007.”

“With more investment, more intellectual capital, this company can double in size,” Goehrke asserts.

While the acquisition also includes Elasta QP, an African-American-targeted brand sold outside the professional channel, the deal’s key leverageable asset is the  Kenra brand’s salon-only stance. “We have a great platform for complementary businesses in color, additional hair care brands, skin care or nail care,” says Goehrke.

“That does not mean there’s going be a change in avoiding diversion,” adds Sherman. “When we make an investment in a company, it’s part of a distinct platform. We are looking for opportunities that sell through the salon and spa.”

“What we’ve talked about, if anything, is to revert back to what built this business: sanctity of distribution, support of the salon,” says Goehrke.

Increased levels of diversion may be depressing industry growth overall, says Sherman, opening an opportunity window that benefits his firm’s investors.

“So much has gone on that has diluted and diffused professional beauty,” he says. “The stylist who is making the ultimate sale has a strong need for affiliation, and diverted product makes that stylist feel betrayed. We have an opportunity to be involved in a business with potential for greater-than-industry growth, to do well by doing good.”

Sherman and Goehrke argue that private equity acquisition is a logical next step for certain family-owned and privately held salon-centered businesses.

“We can present a good option for business owners in terms of their own personal financial goals and toward obtaining liquidity,” says Sherman.

He says that his firm looks favorably on a wide range of candidates. “We’re looking at $10 million to $200 million in sales.”

“As a marketer, we’re looking for someone with a strong brand: well-positioned, great product, loyal franchise,” says Goehrke. “We’re all about creating brands, and part of a strong brand is having pristine, salon-only distribution.”

“A brand needs a strong defensive position in the marketplace,” adds Sherman. “We don’t invest in start-ups. That’s a key distinction between private equity and venture capital investment.”

The pair is bullish on the long-term prospects of salon-focused businesses as growth vehicles.

“As we look at all the wellness trends, we see that this as a recession-resistant industry,” says Goehrke.

The industry’s value proposition is unique, notes Sherman. “Whether it’s the hairdresser or the spa, the product gets applied. You couldn’t have a more intimate relationship.”