Following a lackluster year of M&A activity in 2023, the beauty sector is now seeing a flurry of acquisitions across the category during this early stretch of 2024. The higher interest rates, inflationary pressures, and constant rumblings of a possible recession we experienced last year contributed to the gloomy and stagnant M&A landscape, but it thankfully did not have a significant impact on the beauty sector’s overall success. Nor has it cooled expectations for the year ahead. On the contrary, we’ve seen a ton of M&A activity already in late 2023 and early 2024, with e.l.f. acquiring popular skincare brand Naturium, Unilever acquiring the premium haircare brand K18, and Dr. Barbara Sturm being acquired by Puig. Brands such as Kosas, Augustinus Bader, and Westman Atelier are also frequently labeled as potential acquisition targets in 2024 and beyond.

With McKinsey predicting the beauty market now expected to reach roughly $580 billion by 2027 thanks to exponential growth expected across fragrance, makeup, haircare, and skincare categories, beauty brands of every stripe should be focusing on fueling growth and scaling their business so they can take advantage of whatever opportunities may come their way.

It's not just private equity firms that are keeping tabs on the hottest beauty brands now. Major conglomerates are also on the hunt for high-end, culturally relevant consumer brands that expand their portfolios and capture new customers. Yet, in this crowded space, not every beauty brand will be fortunate enough to have a clear exit mapped out. But there are steps that brands can take now to bolster their funding and capitalization strategies, so they are well prepared and well positioned when the time is right.

Expanding into big-box retailers is one of the best ways beauty brands can double down on growth in 2024. But landing more doors domestically and internationally requires brands to have access to immediate liquidity to fund that growth. For brands that perhaps are already working with an existing lender but require extra liquidity to support expansion, purchase order financing can be an effective solution, especially at a time when founders may be reluctant to give up additional equity to outside investors. A short-term non-dilutive solution for brands looking to fund incremental sales growth opportunities, purchase order financing can fuel wholesale expansion to complement existing e-commerce channels. But diversifying sales channels to be everywhere your customers are can get expensive and requires the right kind of longer-term funding in place to work effectively.

Purchase order financing is a particularly viable option for brands that may be taking on larger wholesale orders with specific retail partners, who then run into untimely supply chain challenges. This is especially true for many younger, perhaps less-established brands that have historically paid for goods in advance and lack open credit terms with suppliers. When large wholesale orders can’t be filled from existing inventory—which can often be the case with beauty products—the result is an unfortunate cash crunch. So many beauty brands are now turning to purchase order financing to get the funding they need to cover the cost of goods until they can negotiate reasonable credit terms with their suppliers.

It's no surprise that beauty and wellness as a category, probably more than any other industry, is extremely capital intensive, thanks to years of R&D, managing multiple fulfillment centers, ever-increasing marketing costs, and trying to stay competitive in a saturated market. Given how expensive it’s become to run a business and compete today, there is only so much equity that can be allocated within the beauty sector. While private equity investors continue to seek out standout products and solid business models, they have become much more discerning when selecting brands ripe for funding. As a result, we’re seeing more companies explore working capital financing solutions through asset-based lending and factoring. And because beauty companies also have some of the best margins of any sector, most can afford the financial boost they can get from a seasoned alternative lender. This is especially important at a time when raising capital has become so difficult.

While M&A activity in the beauty sector continues to be hot, strategic priorities for acquisition have changed. And that requires brands to use a different playbook when it comes to growth and financing options. Brands can no longer afford to grow at all costs. Today, achieving profitability earlier and building a strategic, sustainable growth model are the name of the game. In the current market, the traditional financing options that brands relied on in the past may not be enough. In today’s active market, the brands that can secure a combination of both working capital supplemented with equity seem to be the ones best positioned for growth and perhaps a successful exit down the line.