Chapter 20

The Valuation

Group 2Back to the Beginning

If we were going to get involved with a big company or private equity, the first step was understanding the value of lululemon. Naively, I had a ballpark figure in my head of about $25 million – a number which seemed intangible, surreal, and very weird to me. But my GM, Darrell, and CFO, Brian, had determined that the company was worth about $225 million, more than 10 times the number I’d come up with.

From my end, I knew we had a great brand. All our profits were being reinvested in the company because the return on each dollar doubled each year. Shannon and I were not drawing salaries, and we were only pulling enough out of the business to cover living expenses. In retrospect, I could have borrowed $40 million unencumbered from the bank to give my family a lifetime of security. But I had told the top-tier of our senior employees that I would give them 10 percent of the company if we ever went public. I had integrity to my promise, but this promise possibly drove the wrong actions by management towards going public, but I didn’t understand that at the time.

I would soon have three boys under the age of two, and my priority was to be present as a father. I knew lululemon’s future meant a lot of travel around the world to find perfect store locations, and to Asia, specifically, to maintain my partner relationships with mills and factories. I was not astute enough to gather and talk to experienced advisors. This may seem counterintuitive, but in retrospect, I needed to talk to people who had been through the experience of PE before. I limited my options to either continuing as CEO and prioritizing the business, or selling part of lululemon. Selling would allow me to bring in advice, partners, and financial oversight, and give me an opportunity to prioritize my family. I chose family, and I will never regret this choice.

“We had the best of both worlds,” says Darrell Kopke our GM. “Highly profitable growth in the front end, and timely, accurate, and useful information in the back end. We implemented software and payroll systems and then had to replace some of them as we grew. This paid off when we looked for the outside investors.” The reality was that we had such a great foundation of Operating Principles, a world-class people development platform, and a strong employee pipeline (based on ideas from the book The E-Myth), that the company was relatively easy to run. The hard work had been done, and we simply needed to replicate what we had built. The company’s profitability and cash flow were best-in-class.

I felt out of my depth, and I wasn’t confident that I could broker the deal I believed we deserved. Corporate finance and tax were a weak point for me, and I’d never been a natural negotiator. I was the best in the world at making an excellent product and asking a fair price for it (my theory always has been that customers could take it or leave it). I didn’t know what I didn’t know, and I wasn’t even sure where to look for help. I was too old to have joined YPO, and at that time I didn’t even know the organization existed.

I needed help with negotiations and valuation.

The Beauty Contest

I decided to work with a local Vancouver business broker who had come highly recommended. It took a month to create a package to send out to the private equity companies and retail operations that had asked about lululemon. The package profiled the brand, explained our history, and showcased our culture. We wanted to give them all the tools they needed to evaluate our company and understand who we were.

This was a process called a beauty contest – introducing a client to people who could provide financial solutions or make potential investments in their company.

One of the first retail operations we met with was Liz Claiborne. Executives from the longstanding women’s apparel company were in Vancouver conducting due diligence on another deal when they came across lululemon. The Liz Claiborne people offered $500 million at $100 million per year to be paid out over five years. They also asked that lululemon perform within their overall corporate structure, meaning we would have to conform to their system for finances, shipping and receiving, and technical infrastructure.

After some deliberation, I turned down the Liz Claiborne offer. I felt the $100 million a year for five years was too thin a spread, but more importantly, that their culture was not the right match for us. I was worried our people would have a tough time working under that much structure. All things considered, Liz Claiborne was a little bit too corporate, too big. I thought the culture clash would be too big an obstacle to overcome.

Another retail giant on our radar was the Gap, but it seemed nearly impossible to get a real read on what they wanted. As a public company, the Gap had to be very cautious about who they met with and what they reported. The whole thing was secretive to the point of being unproductive. They couldn’t discuss concrete terms or put a single word on paper.

When the Gap finally made an offer, it was inadequate – $200 million for a full buyout, which was much less than valuations we were getting from private equity.

I was frustrated because I felt it was a bad move by the Gap. The Gap, as a brand, wasn’t thriving. It was a commodity product, and the stores were underperforming. I thought they were too big. Their stores looked like bowling alleys. I thought if the Gap would replace half of all their oversized 5,000 square foot retail stores, which had the best retail locations, and insert, in their place, 3,000 square foot lululemons, the Gap would be victorious. The Gap would be stronger because they could better focus on their “best- in-class” product, and lululemon would be able to grow exponentially in one year.

I was bursting to tell the Gap what I thought they should be considering. I wanted them to buy lululemon for $500 million. A rapid roll-out of lululemon would be a home run for them. I believed that lululemon would have brought a lot to their organization, beyond that which I felt I could personally contribute.

Over the years, the Gap suffered because they became driven by numbers and metrics instead of staying in touch with their core customers. I surmised the “new” digital e-commerce team was telling Gap’s leadership to make more of the same thing because, at the time, commodity products were e-commerce’s bestsellers.

I thought the Gap should have dropped half of their merchandise and focused more on innovation and selling only their best products. To me, innovation is delivering to the customer that which the customer does not yet know he or she needs. I felt if the Gap brought in lululemon’s product development, buying principles, and shared store space, the Gap could quickly be worth $20 billion more by 2012. The Gap didn’t know how to morph. It was resting on its laurels.

Interestingly, just after this, the Gap brought on a Canadian – Glenn Murphy – who had run Shoppers Drug Mart in Canada. Murphy made a good decision at the Gap to buy the e-commerce and catalogue-based company, Athleta, and move Gap into the future. I believed the commodity thinking of Gap management would trickle its way down to Athleta. Because merchants, and not designers, ran the Gap, past sales metrics told them they should target a more sedentary, cost-conscious older market that didn’t sweat.

Interestingly, Glenn Murphy would become co-chairman of lululemon in 2018. More on this down the road.

Vetting Private Equity

There was a lot more appeal in a deal that got us less money but found us the right partner. That way, I could maintain a strong position in lululemon and find the right private equity people who could provide me with foundational guidance to build a billion-dollar company.

The things I wanted from a PE agreement were fivefold:

  • expertise in US real estate locations
  • help in hiring world-class upper management
  • to maintain a 70 percent interest in the company
  • advice on future needs and processes so lululemon could skip usual growth roadblocks
  • to have $40 million in cash to fulfill the goals my wife and I had set in 2002

By the summer of 2005, I was determined to find the right personality fit in a potential private equity partner.

Generally, interested private equity parties made a trip to Vancouver to have a look at our operations and meet our team. When they arrived, if things were going well, I’d take them up the Grouse Grind. Grouse is a local Vancouver ski mountain with a very popular, rugged hiking trail – the Grind – running up its side. If you’re in reasonable shape, it’s about an hour climb, straight up.

The Grouse Grind was a great way to measure culture fit. People were showing up at our office in suits, ties, and dress shoes. For someone not from the West Coast – or someone who doesn’t under- stand the Silicon Valley surf, skate, and snowboard culture – a suit and tie is mandatory. On the West Coast, the suit and tie uniform subconsciously says you are not in control of your own life.

When I suggested a hike, some of these visitors acted as if it was a root canal. Not a great sign. But there were others who jumped at the opportunity to do the Grouse Grind. Doing a strenuous hike with someone was the first part of assessing whether they might be the kind of person with whom I wanted to work. We had to be authentic. It was my way of meeting people in lieu of a round of golf.

“At one of our first meetings with private equity,” Sean Morrison, my broker says, “Chip was wearing flip-flops and shorts. If it was anyone else, I might have said ‘How about throwing on a jacket and pants,’ but that’s totally not who Chip is. Lululemon was and is a lifestyle brand, and lifestyle brands were a mega-trend at that time. I didn’t want to package it in anything fake. So, we ran a process, and we had a couple of really good partners to choose from.”

We ended up with offers from all eight groups of investors who came to Vancouver. Their proposals ranged between $225 and $270 million, but in the end, it came down to personality match.

Tom Stemberg

Midway through the beauty contest, I got a call from a man named Tom Stemberg. Tom was the founder of Staples. He’d served as CEO of the company for 16 years and as chairman of the board for another, taking Staples from a start-up operation to a leader in the office superstore market. Tom was also a partner at an equity firm called Highland Capital.

Tom first heard of us when both Staples and lululemon were up for a retail award. When we won, he decided to go and see one of our stores for himself. Tom’s wife was from Toronto, so he visited the Briar Hill location. He walked into the store and was shocked by the crowds inside. He noticed the enthusiasm of our customers and the quality of the products. His wife, who’d purchased several items, loved our designs and technical features.

“People were practically fighting over garments in the store,” Tom said. “I went outside and saw that there wasn’t even a name on the front, just the logo. I went to another store, and it was the same thing. I had to know what was going on.”

Tom and I met face-to-face in Vancouver. At the end of our conversation, he told me he wanted to invest if we ever took lululemon public. He would offer $20 million in return for a board seat. His investment meant lululemon would get the benefit of everything he knew about real estate locations in the US.

Tom also said we would need a board of directors to conduct lululemon’s governance. My only experience with a board was the advisors at Westbeach. The Westbeach advisors had been very helpful, so I was enamoured by the board concept. It seemed I had an ally in Tom.


Advent International out of Boston had moved to the top of our list. Advent was founded in 1984, and since then, had specialized in the growth and restructuring of companies around the world, representing tens of billions of dollars in capital.

Advent valued lululemon at USD $225 million. It wasn’t the biggest offer we’d received, but I still didn’t feel I needed the cash nearly as much as I needed the right partners. I had a good feeling that Advent would fit the bill. We must have been incredibly appealing to a PE firm. We had trademarked our name and logo worldwide, we were set up to be global, and we had the best apparel metrics in the world. We were a cash cow with a product the world wanted, and we were the only company that knew how to manage a highly volatile technical knit fabric.

David Mussafer, the managing partner of Advent, seemed to take a long-term view of what lululemon could achieve. Besides that, David and some of the other Advent people had a super hike on the Grouse Grind, which spoke well about their fit with our culture.

David and his partner, Steve Collins, completed our full development program and set out their goals. I was impressed with their due diligence and their desire to understand lululemon. They seemed like they would be perfect for us.

While we were in Boston meeting with Advent, we also saw Tom Stemberg again. Tom was still very interested in getting involved with lululemon – so interested, in fact, that he told me Highland Capital would come in for 25 percent of the portion I would sell.

Advent had reservations about Tom Stemberg, but it would take me a long time to learn their rea- sons. In any case, everyone agreed to the arrangement. All that was left was the due diligence that both Highland and Advent had to do on lululemon, plus the final negotiations. I had been clear with Sean that negotiations were not my area of expertise. I trusted him to be great.

Months were spent on due diligence, and this was a lot more time than I wanted. It was late September 2005 before we were closing in on a final deal, which coincided with the arrival of my twins. In retrospect, this put undue subconscious pressure on me to complete the deal.

I think Advent and Highland dragged out due diligence on purpose. They had their price set, and they realized we had a very junior negotiator. Each month the demand for our product increased in double-digit numbers, and the value of the company increased correspondingly. Advent and Highland were happy to let the deal drag on to confirm that our sales and profitability numbers would continue without their having to increase the price they would pay.

Shannon went into the hospital in late September. Our sons, Tor and Tag, were born minutes apart just before midnight. There wasn’t much time for me to celebrate or relax. Advent and Highland had called for a meeting in early October.

I went into that meeting assuming an agreement had been made. I was confident that the due diligence had gone well and that the meeting was mostly a formality to sort out the details.

I was wrong.

Steve Collins went through a list of criteria they’d used to evaluate lululemon. He said they were concerned that lululemon’s current sales compared to last year’s showed that sales were falling. Right away, he tried to bring the price down from USD $225 million to USD $200 million. I was stunned. I later determined that we were selling product far beyond our projections for two months and consequently didn’t have sufficient inventory to meet demand for the past month. I should never have been in the meet- ing at all. A good broker would have handled these discussions prior to accepting an in-person meeting with PE firms. I had hired the broker as a go-between so I wouldn’t be doing the negotiations on the spot. Another new development from Advent was that they wanted to take 50 to 51 percent of the company.

Looking back on it, I realize it was all negotiation and posturing. We didn’t need to negotiate at all.

When I replay the scenario in my head, I wish I had stood up, told them that the price had just gone up to $350 million, and walked out of the meeting. The power was all lululemon’s – I was in over my head. In retrospect, the incentive for a business broker was no different than that of a real estate broker.

Their number one goal is to do the deal. It is very risky for a broker to drive for the best price for their client and lose a deal. When the deal is lost, a broker gets zero. In final negotiations, the broker stops working in the best interest of the client and instead works to get the deal done. In retrospect, I paid for a negotiator, but I got a very smart broker who was only in it for himself, a great lesson for me. I was unable to communicate what I had expected.

We agreed to $200 million USD. The next issue was the 51 percent ownership. Steve Collins argued that with Highland and Tom Stemberg in on the deal, they needed 51 percent of lululemon to share be- tween them. I said no, but once again, I was just trying to hold my ground. Instead of the 30 percent I had originally proposed, I told them I would sell 48 percent so I would still have a majority interest. Advent agreed to this, and the deal was finalized. The PE people provided me advice that only worked for them. Neither my broker nor legal team were savvy enough to provide advice about what the 51 percent ownership would mean in the long run. It was all a great learning for me.

When we were at $110 million in sales, even more people told me I would not be able to run a company from $200 million to $1 billion, and that I should get help. Of course, I’d also been told I didn’t know how to run a company from $15 million to $100 million, despite how perfectly everything had gone. I had reinvented retail and people development models, and in retrospect, I was the only person in the world that understood the technical apparel vertical model, and we would have gotten a lot further with internal people than bringing in outside expertise with conflicting priorities.

I now understand the concept that ‘those with the most expertise and knowledge are the ones who feel they know the least’. It often happens, however, that the more a person knows about a particular subject, ‘the more they know that they don’t know’. Those with the most knowledge are reluctant to speak up in the midst of people who are older or who are highly accomplished in other fields of expertise.

As I would discover, the people I leaned on for advice thought they knew a lot and made decisions with tremendous confidence based on their previous business models. I now know the entrepreneur knows the multiple nuances for success and differentiation, and needs advice from people who can put ego aside and help leverage a new business model.

Still, I was satisfied with the outcome. The people from Advent and Highland had proven themselves to be savvy businesspeople and skilled negotiators. It seemed that having Tom Stemberg, David Mussafer, and Steve Collins on my side in future negotiations would only benefit me and lululemon. Since I had not operated a company of $110 million in sales, I trusted this group to provide the guidance I asked for and hold my hand into the future.

I have made many life decisions that were survival-driven, but never wealth-driven. In selling to private equity, I was motivated by a desire to develop an idea, a concept, a philosophy that was solid in its foundation into a global phenomenon to elevate the world.

To go from essentially owning nothing to having $100 million in my pocket gave me one thing above all else: an easier night’s sleep. I could breathe easy knowing my kids would be taken care of. But after years of basic poverty, Shannon and I still had a ’30s Great Depression mentality. We thought that at any moment it could all be taken away, or that it was all a dream, so we did our best to make sure our lifestyle didn’t change.