CDI Global

How is the Luxury M&A Market Evolving During the Pandemic?

At first glance, we can definitely ascertain that we are living a buyer’s time. Interestingly enough, there seems to be a significant disconnect between sellers and buyers on fashion company valuation, where sellers are looking for a premium price due to the company surviving the COVID-19 storm, while buyers are seeking a deal.

Different expectations are in part driven by different predictions regarding Covid-19’s impact on our daily lives and how and when the fashion industry will bounce back.

Looking back to 2008, the fashion & luxury industry had a severe contraction of sales (about 23%) which lasted approximately two to three seasons (12 – 18 months) and then came back very strong, starting the beginning of a multi-year positive run.

US Luxury sales evolution – B$

CAGR ‘09/2019 (10yrs,  about 5%)












2020 Fashion revenues in the US dropped between 30% and 50% versus 2019 and some experts do not expect a full recovery until 2024.

COVID-19 is incorrectly assumed to be the primary cause of the crisis. A school of thought claims that the pandemic is the accelerator of significant issues that were already there for manufacturers, brands, and retailers. Such issues pushed many companies into a cash distress situation after just 3-6 months.

As a result, the fashion industry is reshaping in many ways throughout its entire value chain.

Manufacturing - Mills, spinners, and faconeurs have been hit extremely hard due to:

  • The rigidity of their business model
  • Limited creativity, a consequence of “doing business as usual”
  • Years of insufficient focus and investments on R&D (fibers, technology, innovation, treatments, etc.)
  • Volume-driven - quantity over quality
  • Downward spiral of pricing policies, affecting margins and related profitability.


  • They have recognized the need for fundamental changes but are still in their “soul searching” process. For many of them, the outcome is not clear yet; however, there are some key elements that must be included in every company strategy to stay or become relevant again in the market.
  • Effective communication with the new generations (Millennials and Gen Z)
  • Circular economy
  • A real purpose instead of a meaningless vision and mission statement
  • Value for money
  • Time to market reduction and multiple product groups to purvey fresh products constantly on the selling floor
  • The human experience has to return front and center
  • Phygital - a truly balanced and cohesive integration of the two spaces, physical and digital 

In 2020 and Q1 2021 the fashion market recorded some successful and history-making acquisitions such as:

In times like these, new opportunities are constantly looming. In addition to the acquisition model mentioned above, the market is considering these scenarios as paths forward.

1. Vertical Integration

Vertical integration is a strategy whereby a company owns or controls its suppliers, distributors, or retail locations to control its value or supply chain. It benefits companies by allowing them to control processes, reduce costs and improve efficiencies. However, vertical integration has disadvantages, including the significant amounts of capital investment required.

The two of the most common include upstream and downstream integration:

  • Upstream Integration is when a company expands backward on the production path into manufacturing, meaning a retailer buys the manufacturer of their product.
  • Downstream Integration is when a company expands by purchasing and controlling the direct distribution or supply of its products. A clothing manufacturer that opens its own retail locations to sell its products is an example of downstream integration. Downstream integration helps companies cut out the middle person. By removing distributors, that would typically be paid to sell a company's products, overall profitability is improved. Downstream integration can also be pursued to gain more control on distribution channels to increase the brand’s value.

Vertical integration has remarkable advantages and disadvantages at the same time. Although it can reduce costs and create a more efficient supply chain, the capital expenditures involved can be significant overall.


  • Reduced supply disruptions from suppliers that might fall into financial hardship.
  • Increased competitiveness by getting products to consumers directly and quickly.
  • Lower costs through economies of scale. By buying large quantities of raw materials or streamlining the manufacturing process, per-unit costs are lowered.
  • Increase brand’s value.
  • Improved sales and profitability by creating and selling a company-owned brand.


  • Companies might get too big and mismanage the overall process.
  • Outsourcing to suppliers and vendors is efficient if their expertise is superior.
  • Costs of vertical integration such as purchasing a supplier can be significant.
  • Increased amounts of debt if borrowing is needed for capital expenditures.

2. Joint Venture

A joint venture is a business arrangement in which two or more companies combine resources on a project or service. The length of the agreement and what resources it will include will vary. Participant companies typically agree to split any profits the venture creates. As a result, joint ventures are potentially advantageous for companies in need of expanded resources with minimal (or no) infusion of capital.


  • Access to new markets and distribution networks.
  • Increased capacity.
  • Sharing of risks and costs with a partner.
  • Access to new knowledge and expertise, including specialized staff.
  • Access to greater resources, for example, technology and finance.
  • Sharing of resources facilitates companies’ expansion into new markets.
  • Relatively low-risk.
  • Scalable business growth.
  • More flexible.


  • The objectives of the venture are unclear.
  • The communication between partners is not great.
  • The partners expect different things from the joint venture.
  • The level of expertise and investment isn't equally matched.
  • The work and resources aren't distributed equally.
  • The different cultures and management styles pose barriers to co-operation.
  • The leadership and support are not there in the early stages.
  • The venture's contractual limitations pose a risk to a partner's core business.

3. Earn-Out Model

An earnout is a financing arrangement for the purchase of a business in which the seller finances a portion of the purchase price, and payment of this amount is contingent on achieving a predetermined level of future earnings. An earnout is often used to bridge a valuation gap. The seller only gets paid if the predetermined level of future EBITDA or other financial targets are achieved.


From the seller's side: ​​​​​​

  • They may be able to have the full benefit of selling a profitable business and not have to discount the purchase price as a result of the buyer doubting the value of the Target Company.
  • They can participate and contribute to the future growth of the Target Company.

From the buyer’s perspective:

  • They can ensure a more accurate valuation of the Target Company and protect against overpaying and uncertainty.
  • Deferring part of the purchase price can have cash flow benefits and reduces the buyer’s reliance on being granted a loan.
  • The sellers will be motivated to stay on with the Target Company and maximize profitability and performance, which may also assist client transition and retention.


Although using an earn-out arrangement can help to move a transaction forward, they also create the potential for future disputes. Also, the buyer may be pulling in different directions to the seller as the latter will want to maximize profit during the earn-out period and the buyer will want to make decisions to benefit the Target Company in the long-term.

When deciding on an earn-out arrangement, both parties need to carefully consider:

  • The extent to which the sellers retain control of the business after completion.
  • The length, timing, and structure of the earn-out period.
  • The definition and method for calculation of ‘profit’.
  • Whether there will be restrictions on Target Company’s activities during the period that could negatively impact the earn-out.
  • The seller’s eventual departure from the business and whether to include ‘good leaver’ and ‘bad leaver’ provisions. 

While earn-outs are useful to bridge valuation differences, as highlighted above, these arrangements can come with complications. To minimize the risk of problems arising, it is essential that both parties seek advice to ensure the earn-out arrangement is well structured and has protections for both the seller and buyer.

4. Acquisition Through Distribution Partners

The acquisition of a Company is funded by existing or potential distribution partners in different geographical areas. The partners provide funding for the acquisition, in exchange for exclusivity rights in their market and preferred product purchase terms for a period of time. The partners’ investment could be secured by collateral in the form of shares of the acquired company and/or a stock option plan.


  • Provide a way forward for companies operating in segments not very attractive for financial investors.
  • Mitigate investor risk through better returns from the local business side.
  • Accelerate business in selected territories creating synergies with local well-established partners.

Disadvantages for the Buyer

  • Distribution partners’ demand could significantly influence the company’s choices in critical areas such as positioning, aesthetics, and brand image.
  • Managing partners might have competing priorities.
  • May be locked to a distribution model in markets that might be better served in a different way.

How can CDI help?

CDI Global has been advising companies on mergers and acquisitions (M&A) for over 40 years. We have extensive knowledge of the Fashion & Leisure sector and understand the prime importance of making informed decisions in this complex global industry. We know the industry structure and dynamics inside out since our partners have been actively leading primary Groups and have an extensive network, particularly among privately-owned companies in the Fashion & Leisure sector. We focus on the best strategic fit, not just the best price.

CDI has cross-border M&A expertise and a global footprint. CDI Global has expertise on the ground in each territory and operates on the basis of cross-border cooperation.​​​​​​​

Carmine Pappagallo & Paolo Torello-Viera

CDI Global Partners, Fashion & Leisure Industry Group

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