Client Alert - How To Value Your Publishing Business
During the “go-go” eighties and into the early nineties, major publishers grew significantly by acquisition of smaller, generally entrepreneurial, publishers. While there is still an interest in acquiring entrepreneurial publishers, the focus has shifted to strategic acquisitions and scale.
Strategic Acquisition and Scale
“Strategic acquisition” is best exemplified by the action taken by John Wiley when it sold nearly its entire portfolio of profitable trade companies and reinvested in a series of companies in scientific and technical publishing, its core business.
The Random House Penguin merger defines “scale.” The merged companies represent approximately 25% of the book publishing business in the world, with 250 separate imprints, and the ability to publish 5,000 new titles each year.
F&W Media, an independent publisher with a vigorous acquisition program, has achieved scale as well by making strategic acquisitions in books and magazines.
The independent publisher seeking to be acquired has its best opportunity in today’s marketplace if it fits as a strategic acquisition, or if it is sufficiently large and profitable to make a significant contribution that will add materially to the scale of the acquirer.
Another major change since 2008 has been the “implied measuring rule” in estimating value. This was the formula of estimating the value of a transaction by using a multiple times net revenue—that is, gross sales less returns and allowances.
For many years, the sales multiple of publishing businesses were done on a scale. For example, in sales of trade businesses, the value was set at one times net revenue, so if net revenue were $10 million, the rough estimate a buyer would expect, if all else was satisfactory, would be $10 million. Major trade publishing businesses, including Random House and numerous others, were sold on this one times formula.
The traditional implied measuring formula provided for increases for what were considered to be more profitable, stable, and higher margins businesses. For example, the formula suggested that professional books would have an estimated sale price of 1½ to 2 times net revenue.
These measuring formulas are now gone. The test now for what is a fair price is governed by more conventional formulas used in normal commercial transactions, such as “cash flow” or “EBITDA.” Thus, what remains as a guide to measuring value today are some basic rules of the road.
The Willing Buyer and the Willing Seller
The fundamental foundation for making a deal is what a willing buyer would pay to a willing seller.
The willing buyer is one who has a real reason to buy. For example, the seller’s company must integrate well with the buyer’s current business, or be a foundation business on which the buyer wishes to build, or be cheaper and faster to buy rather than to gain entry by creating a new business from scratch. And most important, the willing buyer is one who has the money needed to complete the transaction, or can get it within a reasonable time.
The willing seller is one who owns all the assets or shares of the company or can obtain the required votes from shareholders, making it possible to sell the business. The seller should also have a reason to sell. for example, to realize the value of the business now rather than later (although retaining a future interest would allow participation in the growth) or the seller may be a sole or large shareholder, aging with no successor (or with a successor who is not capable of, or interested in, carrying on satisfactorily), or a need to establish a value for estate purposes. There are many other possible reasons to sell, but these are the usual motivations.
The sale process is disruptive and often very expensive. It also is traumatic, and neither the seller nor the buyer should be encouraged to enter into a buy-sell transaction unless their motives and objectives fit within the parameters that qualify them as willing buyers or willing sellers.
In addition to having valid reasons for a sale, price, terms, and timing are essential. Intangible factors may also be important, but price is crucial. The seller is looking for an acceptable price that will be attractive, and the buyer is looking for a price that will provide a reasonable return on investment. Early on, the buyer and seller should determine if the price sought fits within a parameter that would be acceptable. Looking at the buyer’s previous purchases is often a clue to its price range.
The following are the most important elements affecting price:
Nature of the Business. Within publishing, there are businesses that by their nature have generally accepted values. Journal businesses, with good cash flow, command higher than normal values. Scientific and technical businesses with strong backlists and revision possibilities enjoy higher multiples. Technology businesses even with low current or no earnings, have even higher multiples. On the other hand, paperback publishing, which is highly competitive and requires large cash advances with high risk, enjoy lower multiples. Often, publishing businesses with mixed trade and juvenile components have multiples assigned to the net sales flowing from each area of the business to arrive at a single compounded price.
Conversely, an unprofitable or marginally profitable business may have its price unfairly reduced. In theory, a business that is less profitable than expected but has expensed its development costs or shown losses because of conservative accounting treatment, and is ready to show ongoing future profitability, should not suffer in setting the price. Unfortunately, that is frequently not the case. Nevertheless, if the future sales are projected with some supporting logic, the price could be increased.
Future Profitability. Buyers recover their investment only from future profits. Past performance is only a guide to the future. In order for projections of sales, expenses, and investment to be believable, they must be rooted in reality. This can be done: A reasonable future sales estimate can be made by projecting the continuing backlist sales, adding the estimated sale of revisions, and also the estimated sales of new titles for which contracts have been signed. Sales of new books not yet under contract can also be estimated realistically by matching forthcoming books to previously published titles.
Expenses are more easily projected using the current expense base and adding anticipated inflation or planned addition to staff and facilities. If there are serious problems, such as an outmoded computer system or lack of office space or other facilities, these additional costs can be estimated and incorporated into the future expenses to be incurred.
While estimating revenues and expenses is not a science, the past can provide a guide to future revenues and expenses. Most buyers realize that only the projections of the first and second years after acquisition are reasonably reliable, but they still usually wish to see a five-year forecast to determine the long-term trend of the business.
Balance Sheet. The balance sheet is vital to the valuation of a business.
Some businesses have surplus cash or securities as assets. In many instances, the buyer will allow the seller to retain the cash on the balance sheet as part of the purchase. Receivables and inventory are generally the largest assets. The astute buyer will carefully review the inventory and the reserve for returns against these receivables, and the aging of the receivables. The buyer will also study the inventory for salability, the rate of sale of the inventory, and how (and whether) it has been written off. The buyer will also review how developmental expenses and prepaid royalties have been treated, and how they have been amortized, and then will look carefully for any unusual assets not regularly found on the asset side of the balance sheet.
The payables and loans on the liability side of the balance sheet must be reviewed carefully. The supplier payables must be reviewed for their currency. Payment of royalties will be reviewed very carefully to determine whether timely payments have been made. Loans, especially loans to the selling shareholder(s), will receive special attention. Of equal importance are the off-the-balance-sheet liabilities, especially the unpaid portion of advances, rental and lease obligations, and liabilities for employee benefits.
Buyer confidence is generated by credible, complete statements from a certified public accountant, especially if the same accountant has been reviewing the business for a number of years. A strong balance sheet determines whether the buyer will add value to the price or whether the problems on the balance sheet will reduce the price offered.
Staff. Probably the most important off-the-balance-sheet asset is the staff. Publishing is a people business. Experienced, highly qualified staff adds value to the business. The buyer will wish to capitalize on this asset by offering employment contracts to some of the key staff.
Astute sellers make their employees knowing participants in the selling process by informing them of the probable sale and then offering them bonuses to stay with the business or severance if they are not picked up by the acquirer.
Fit. Another crucial factor in increasing the value of a business is the fit with the acquiring business. By combining business functions, such as marketing, fulfillment and production, significant dollar savings by consolidation can become bottom-line profit. A combined ongoing business, without duplicate overhead expenses, can be much more profitable and efficient than the original stand-alone business. These savings are crucial in increasing the price paid for a business. For example, if a well-run, small, sound break-even business can be combined with a larger business, the “old” smaller break-even business will become immediately profitable by eliminating the cost of the duplicated functions. Where the buyer has the infrastructure in place, accommodating the seller’s overhead functions will increase costs only marginally. Some of these economies can be made immediately after acquisition and show significant benefits to the buyer.
What is it really worth?
One way to estimate the value for a business is to look at the last sale for a related business as reported in Publishers Weekly, The Wall Street Journal or the annual reports of publicly held companies where you can find the net sales of the seller’s business and the price paid by the buyer. Then review your business using the factors discussed above that might add or subtract from the price. Another way to establish an estimated value is to seek out a knowledgeable business broker or an independent appraiser who has experience in valuing publishing businesses.
In our practice, we often make a value analysis of a business to help a seller arrive at a preliminary decision as to whether or not they wish to look for a buyer. However, our experience has also taught us that most serious sellers of small businesses set an emotional value on their businesses because the business has become a part of them. It is only when this emotional price and the real price intersect is there the beginning of a deal. This is a complex process and the assistance of a professional is often useful.
A printable PDF version of this alert is located here.