Australian cosmetics distributor the Heat Group is continuing its strategy of growing through acquisitions by buying long-running personal care distribution company Doward International for an undisclosed sum.
Founded by Gillian Franklin in a coffee shop in 2000, The Heat Group turns over approximately $130 million each year and is home to brands such as MUD Makeup design, The Beauty Exchange, Ulta3 and Billie Goat Soap.
Doward International has been operating for 96 years and generates more than $40 million in annual wholesale revenue from more than 6000 clients, including the major supermarkets, pharmacies and chain stores.
It’s distributed and owned brands includes the likes of Speedo, Kobayashi, Simpkins Travel Sweets, Fleurique and the Wheat Bag.
Once combined, the Heat Group estimates the companies will sell 20 units per minute, or one product every three seconds.
Speaking to SmartCompany, Franklin says the acquisition is “a perfect example of when you take two companies and one plus one equals three”.
“We’ve been looking to expand our portfolio for a number of years now and we had very clear strategic objectives,” she says.
One of those objectives was to strengthen the group’s presence in the pharmacy market. While both the Heat Group and Doward International operate in the space, Franklin says Doward has a stronger foothold in the market and 80% of the company’s sales come from pharmacies. In contract, the Heat Group has a stronger presence in the non-pharmacy space.
“The opportunity for us to grow together is quite considerable,” she says.
While Franklin and her team knew they wanted to acquire another business to meet their objectives, she assessed a number of other potential options before deciding Doward had “so many of the attributes we were looking for”.
What happened next was a matter of fortuitous timing, Franklin says.
“I rang up the owner and the timing was perfect as they had decided to put the business on the market,” she says.
“It was an absolute fluke”.
The pros and cons of buying other businesses
Doward is the fourth acquisition for the Heat Group, after the business acquired Ulta3 in 2005, Billie Goat Soap in 2012 and OZK.O and CarloG eyewear brands in 2014.
Franklin is keen to complete another acquisition in the future, after bedding down the Doward purchase over the next 12-24 months, and says growing through acquisitions has several key advantages for businesses.
“You get growth immediately,” she says, referring to the immediate effects of adding additional revenue to the purchasing company.
“Most often, you get incremental profit growth as well because of the synergies behind the scenes.”
These synergies can sometimes result in redundancies, which Franklin describes as the “sad fallout” of such transactions. She says acquisitions also involve an element of risk, particular when it comes to combining the cultures of two organisations.
“Culture is the number one issue,” she says.
“You are essentially buying intellectual property by bringing on people and if the cultures are not complementary, there can be big issues.”
The other disadvantage, according to Franklin, is the cost of paying for the business. The Heat Group is funding the acquisition of Doward through a combination of debt and capital raised.
“You take a big risk when you pay a multiple,” she says.
How to make acquisitions work
Having successfully acquired a number of businesses, Franklin says the first thing other business owners should appreciate is the scope of what an acquisition involves.
“The first thing is to appreciate that it will be a lot of work,” she says.
“Take it slowly, that’s what we’ve learnt in the past.
The Heat Group has set up a number of practical measures to aid with transition this time around and Franklin says they are all designed to look after the employees of both companies.
“We want to be very respectful for what they’ve done; we’ve bought the business because it is successful,” she says.
The first measure is an online forum for employees of both companies to post anonymous questions, feedback or complaints. The posts land in Franklin’s own email inbox and she replies for all to see.
“Anyone can got and see what the mood is,” she says. “It’s a mood barometer.”
The company has also set up a foramlised buddy system, where Doward employees are paired up with a Heat Group employee who is not their manager and is not involved in their daily workload. Both employees are asked to commit to the process and come prepared for their weekly catch-ups, which will become less frequent over time.
There’s a “very well scoped out” company intranet that includes things like a floor plan with photos of who sits where in the office and what their job is.
Finally, all employees joining the Heat Group will go through an onboarding process over 30-day, 60-day and 90-day timeframes.
“We’re doing everything possible,” Franklin says.