In 1996, Ted Karkus invested in Doylestown-based Quigley Corp., the developer of Cold-EEZE. His investment provided the working capital the company used to ramp up manufacturing of its new cold remedy.
A decade later, he found himself a large investor in the company, but didn't like its direction. “I launched a proxy contest, won control of company, cleaned house and took it in new directions,” recalls Karkus, who is now CEO of the company, which he renamed ProPhase Labs.
Around 2009-2010, Cold-EEZE sales began to decline and the company’s financials suffered.
“I had to turn around the company and turn around the brand,” he says. “I over-invested in the brand to regrow it. In over-investing, we were losing money. Because we were losing money and we were a public company, the stock price was undervalued. My hands were tied. I couldn't use my stock price to raise money. I couldn't use my stock price to make acquisitions.”
So what did he do? He sold the brand.
“I sold because there's a certain amount of overhead that you need to manage a consumer product,” he explains. “So it's either acquire more consumer products to leverage the overhead or we shouldn't own one brand, because to own one brand and have all the infrastructure that is needed to manage it, it just created a situation where obviously we were losing money, it was inefficient. So it was either add more products and leverage the overhead or sell the brand.”
Karkus shared his strategy behind the 2017 sale of Cold-EEZE to Mylan for $50 million at the ASPIRE Dealmakers Conference earlier this year in Philadelphia.
Preparing for the sale
Karkus had been thinking about selling Cold-EEZE years, but he wanted to make sure that the brand was growing and that the company’s costs were in line with the brand’s size. He had been overspending on marketing to grow the brand, which meant he needed to wait to sell because selling while overspending would have made the net contribution margin — the selling price per unit, minus the variable cost per unit — low.
“They are going to value the brand based on a multiple and you're not going to get a lot of money,” he says.
So he had to first grow the brand and then cut back on the marketing to get the costs more in line so that when he went to sell it he had a decent margin.
“Once I put it up for sale, it was a longer process than you could imagine because first of all you have to put all of the due diligence paperwork together,” he says. “Then you have to track all of the companies that are interested. You then have to push them for deadlines to actually review your materials. Then you go through negotiation process. When you get to the final ones that are interested, they do significantly more due diligence.”
It was not, he says, a quick process.
Finding a rep
Once in a position to sell, Karkus talked to a large investment bank in New York, one of the biggest in the industry and a leader in consumer products. They wanted to charge a lot of money as their minimum fee.
“And I said, ‘I'm willing to pay it,’ but even after I said I was willing to pay I still couldn't get their attention,” he says, ultimately deciding weren’t the best fit.
“It's really important to find somebody who's going to represent you that fits with your size of business, that’s really going to pay attention to you,” Karkus says.
Instead, he went with an investment bank focused on the middle market. That firm ended up attracting attention from 75 potential acquirers.
“It didn't really make a difference to me whether it was private equity or strategic,” he says. “But, in general, strategics are probably going to pay more money if they already have the overhead and don't need my overhead. They're probably going to pay more when you look at it on a cash flow basis.”
Measuring expectations
A buyer not only wants to look at your financials — what your business is doing now — but what is going to be doing in the future, Karkus notes. “So you have to paint the picture of what the future could look like if they took you over and tell them how they have so many more resources.”
Critical to the sale of Cold-EEZE was a survey, conducted by an independent company, of consumers around the country to guage their awareness of Cold-EEZE.
“And it turned out the awareness and Cold-EEZE was as great as our competing brand that was three times our size,” he says. “That to me was critical to the success of the sale because I planted in the mind of the buyer that they can buy our brand for a third of the price of the larger brand, yet have the same brand awareness, which then gives them the idea that there's room to grow.”
Going once …
Karkus is a big believer in the auction process, if for no other reason than it offers the seller a psychological advantage. That belief came into play when the sale of Cold-EEZE was down to four serious buyers. It was not just about how much a buyer was really willing to pay, but how much each buyer believed the other buyers were willing to pay.
“We ended up with one serious buyer: Mylan,” he says. “And then it became a negotiation because I wanted them to know that there are other buyers that were willing to pay just as much as or more.”
He cautioned that it’s important that the buyer is convinced you’re serious about doing business with them because they have to go through an enormous amount of due diligence and they're not going to take on that time and expense if they believe you're not going to follow through and sell it to them at the end of the day.
“So you want to kind of tell the buyer, ‘You're the one,’ while also reminding them that you still have other buyers,” he says. “It made a significant difference to us that we did the auction process. If we hadn't and we didn't have these other buyers, there's no question they would have dropped their price and I would have been scrambling.”
But when the chips are down, Karkus says, you better have the guts to be willing to walk away from a deal that you don’t like.
“It's a really interesting thing when you get to that point when you're ready to sell and you've gone through months and months of due diligence and putting in the work together and you're about to get a large block of money. You tell me when you're at that point that you're really willing to say, ‘I'm going to walk if you don't pay my price” and it's not really going to happen.”
