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STRATEGY

For Cash-Strapped Cloudveil, it was a Very Hard Offer to Refuse
 

Could its founders sell the sportswear business without selling out?
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Stephen Sullivan just couldn't stomach the idea. He and his partner and friend, Brian Cousins, had spent seven years building Cloudveil, an outdoor sportswear company devoted to hard-core skiers and mountain climbers. And it had been a blast. Cloudveil, based in Jackson, Wyo., was the kind of place where the partners designed a prototype garment one day and tested it on the slopes the next. Yet, despite 2004 revenue of about $5 million, the company was cash-strapped, in a never-ending struggle to raise enough money to fuel production. The best solution, it seemed, would be to sell the business to a larger company with the capital and infrastructure Cloudveil so desperately needed. And that's what had Sullivan so worried. Selling out, he feared, could mean squandering the brand credibility he and Cousins had created. And that could mean the end of Cloudveil.

The partners, who had both moved to Jackson for its world-class skiing, met in the early 1990s while working in a local ski shop. When they weren't working, they skied the rugged Teton Mountains. Off the slopes, they dreamed of designing their own line of outdoor apparel. That dream became a reality in early 1997, after Sullivan received a pair of ski pants from a friend who had just returned from the French Alps. Every day for a week, Sullivan wore the lightweight pants on the slopes. Flexible and breathable, yet warm, they were unlike any ski pants he had worn. He set up shop in his cabin and started designing ski apparel using the same soft shell fabric. Cloudveil's first line appeared in 13 retail stores nationwide that fall.

From the beginning, Cousins and Sullivan focused on serving Jackson's hard-core backcountry skiing community. They sponsored ski competitions and rock-climbing festivals, and the grass-roots approach worked. By 2002, Cloudveil had 150 products, 15 employees, and about $2 million in sales.

Along with that growth came unexpected headaches. The biggest problem was managing cash flow. It took five or six months for clothes to be manufactured and distributed, which meant Cloudveil had to find a way to finance the next season's production before collecting on the current one. Sullivan began to spend less time on product development and more on financial issues—dealing with complaints from unpaid designers, for example. They brought on two partners—seasoned executives Jon Boris and Michael McGregor—who streamlined operations by automating Cloudveil's order fulfillment process.

Still, even as sales continued to climb, cash remained a persistent problem. By the summer of 2004, the partners knew they had to do something and began exploring financing options with venture capitalists and private equity groups. Cloudveil also began receiving cold calls from would-be strategic buyers who wanted to purchase the company outright. In many ways, that option made the most sense. After all, Cloudveil needed more than just money. The business also needed infrastructure and time to expand the brand without pressure from investors looking for big returns.

But a sale had never been in the game plan, and it was a tough pill to swallow—especially for Sullivan, who had been the company's creative force and feared that the Cloudveil brand would be neglected, or diluted, by a larger company with several apparel lines. Still, the partners agreed to meet with suitors and weigh their options.

The process came to a head last October, when Cloudveil's winter catalogs arrived at the company's Jackson warehouse. The catalogs—which were expected to drive about a third of the company's annual sales—were ready to be mailed to 300,000 potential customers. There was only one problem: The company didn't have enough money to pay for the postage. Cousins and Sullivan quickly scheduled a call with Boris and McGregor to find a way to raise the $56,000 needed. The four partners decided to forego their salaries for four months until the catalog sales began to roll in.

But enough was enough, the partners agreed. Just before the catalog debacle, Cousins had received an e-mail from Jim Reilly, senior vice president at Sports Brand International, a New York City apparel company that owns the Italian sportswear lines Fila and Ciesse. SBI was interested in an acquisition, the note said. Cousins called Reilly and liked what he heard. SBI was eager to capture a piece of the growing outdoor apparel market, and Cloudveil had the expertise it needed. Reilly seemed frank and sincere, Cousins recalls.

The Decision

After two or three more meetings, Cousins, Boris, and McGregor were convinced SBI was a good fit. Reilly's plan was to guide Cloudveil to about $50 million in sales without cheapening the brand by lowering prices or quality. Cloudveil would grow "without having to set foot in a Sports Authority, in Boris's words. Cloudveil, in turn, would create a new line of ski apparel for Fila, called Fila Mountain. Reilly pledged to keep the company in Jackson, which Cousins, Boris, and McGregor took as a sign that SBI understood what Cloudveil was about.

Sullivan wasn't won over as easily. During the next few weeks, he called Cousins on many nights asking the same question: "Are we doing the right thing? Each time his partner called, Cousins would rehash his reasoning, reminding Sullivan that, unlike a VC firm or private equity group, SBI had a global distribution system and a streamlined supply chain. "Steve's a romantic, says Cousins. "He's put a lot more sweat equity into Cloudveil and it was tough for him.

That December, Sullivan finally agreed to the sale. Under the terms of the sale—the price of which was not disclosed—the four partners call the shots for SBI's new division, Cloudveil Mountain Works. Cousins, the division's president, stays in regular contact with Reilly and sends quarterly reports to SBI's board. "They are in charge of the brand, the business, and all aspects of it, says Reilly. "I play the traffic cop.

SBI's Fila and Ciesse lines are now being produced at the same foreign factories as Cloudveil's products, giving Cloudveil more leverage. Thanks to the higher volume (SBI is now one manufacturer's third largest customer), Cloudveil can demand that more of the materials required for its products be stored at the factories, reducing turnaround time by weeks. Cloudveil apparel is now sold in almost 300 specialty stores in the United States, as well as shops in Japan, Canada, England, Australia, Taiwan, and South Korea.

Sullivan, SBI's new global brand vice president, is pleased so far. He's spending more time in his research laboratory—the Teton Mountains. Cousins, for his part, is refocused on Cloudveil's strategy. "Some naysayers felt like we were selling out and that the brand would go to crap, says Cousins. That hasn't happened, he insists. "We've been a Jackson company all along, and we're still a hometown brand.

The Experts Weigh In

The right stuff

"It's a great deal. Cloudveil's founders will get some of the resources they want, and since they're creating SBI's entire mountain line, they may have more control. But Fila is a fashion brand with no functional background. To what extent will Cloudveil's success be tied to Fila's success?

Nathan Pund
Partner
Silver Steep Partners
Atlanta

So far so good...

"If Cloudveil continues to grow at triple-digit rates, SBI will probably leave it alone to do great work. But if there's a hiccup along the way—if new product development costs begin to get out of hand, say—SBI's attitude might surprise Cousins and his partners. This may begin to create a sense of oppression and distance between them and their new parent.

Robert Bruner
Professor, University of Virginia
author of Deals From Hell

It's a risky move

"If Cloudveil continues to grow at triple-digit rates, SBI will probably leave it alone to do great work. But if there's a hiccup along the way—if new product development costs begin to get out of hand, say—SBI's attitude might surprise Cousins and his partners. This may begin to create a sense of oppression and distance between them and their new parent.

Mark Martin
Division president
Marmot
Breckenridge, Colo.

Last updated: Aug 1, 2005




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