Brandon Hance recently faced a critical problem.
The founder of Audiolife had built his Van Nuys company into one of the music industry’s leading merchandise distribution businesses, selling everything from band T-shirts to ringtones. After just three years in operation, his client roster included many of the world’s most famous artists, including Paul McCartney and Rihanna.
But Hance realized that his company was growing too fast.
“We reached a point from a logistics standpoint where we were at capacity in our existing facility,” said the 29-year-old USC grad. “Frankly, we were having a tough time keeping up.”
So Hance started discussions with a pair of local private-equity firms, Gores Group LLC in Westwood and Platinum Equity LLC in Beverly Hills, about selling the company. Last month, he agreed to merge Audiolife with Alliance Entertainment, a CD and DVD distributor based in Sunrise, Fla., jointly owned by the private-equity firms.
Whether to sell to private-equity firms is the difficult question facing a growing number of business owners in the tentatively recovering economy. The local private-equity industry has tens of billions of dollars in uninvested capital and investment professionals are scouring the business community in search of companies to buy.
Private-equity firms acquire businesses with the intention of boosting the value and selling later at a profit. But the industry also has a reputation for making harsh cuts to the businesses they buy.
Hance, who will remain with the company, said he has no regrets about selling, but admitted that it can be a tough choice. Making the deal meant that Audiolife will get the capital it needs to continue growing, but the new owners also plan to consolidate some of the operations with Alliance, which will result in more than half of Audiolife’s nearly 40 employees being laid off.
“Private equity’s job is to be extraordinary operators and they come in with a very objective perspective and in many ways help the entrepreneur run a more efficient, better managed company,” he said. “It’s just oftentimes that comes with a lot of hurt feelings.”
Sports star
Before turning to the business world, Hance, who was born and raised in Los Angeles, had appeared destined for sports stardom.
A highly touted football recruit, Hance signed with Purdue University, where he played quarterback for two years. Then he transferred to USC, where he joined the football team and backed up Heisman Trophy winners Carson Palmer and Matt Leinart.
But he didn’t have his sights set on a sports career. He graduated in 2005 with a degree in music business. Hance said he saw that the Internet and social media were upending the music industry’s traditional business model and he wanted to start a company that could capitalize on the changing dynamics by allowing artists to sell their products directly to consumers.
“It felt like there was an entrepreneurial opportunity,” he said. “We basically have the opportunity to re-evaluate the whole model.”
He raised $6 million primarily from angel investors, including the Tech Coast Angels, and launched the business in 2009. The company, which handles both online product sales and delivery of physical goods, quickly established itself as one of the fastest growing and most respected distribution companies in the music industry.
“Since launching in 2009, Audiolife has made its mark in the exploding e-commerce marketplace thanks to superlative direct-to-consumer technology, and a savvy understanding for what artists need and fans desire,” Mike Davis, president of Alliance, said in a statement.
Audiolife achieved profitability last year, Hance said. He would not provide revenue figures, but said this year’s sales were running more than 300 percent higher than last year’s.
Hance initially had no intention of selling, but he realized that such rapid growth would be difficult to sustain. The company had already grown out of its existing warehouse.
He was wary of private-equity investors, he said, because they don’t tend to pay high prices and they have a reputation for “flipping” businesses. But Hance was convinced that the price was fair and the new capital would allow the company to expand into new markets, including film and video games.
Through the deal, some of Audiolife’s divisions – including accounting, human resources and warehouse operations – will be transferred to Alliance, resulting in layoffs. Audiolife’s remaining employees will focus on expanding the technology, business development and marketing efforts.
If there is one piece of advice Hance has for entrepreneurs considering selling, it is to be ready for the change that comes when you’re no longer the one who calls the shots.
“The whole psychology shifts,” he said. “When you sell it, it’s no longer yours and that’s difficult for a lot of people. Even if you stay on board, it’s no longer yours.”
