September 04, 2003
How To
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Now that the economy is (slowly) getting better, are you
considering cashing in and selling your content Web site or email newsletter to another publisher? Or, are you eyeing acquisitions as a relatively easy way to grow faster?
Here in Part One of ContentBiz's Quick Guide, learn about the M&A (mergers and Acquisitions) scene from the seller's perspective:
a. Realistic valuations - What are you worth?
b. Should you use a broker?
c. What buyers are looking for
d. Who's buying online properties now?
e. How to plan now to sell in 2005-2006
f. Useful links
-> a. Realistic valuations - What are you worth?
Expect buyers to take a closer look at your real long-term profit prospects than they did in the giddy days of the tech boom, when online publications could be valued at 10–15 times annual revenue ven if they were running a loss.
Now, three times annual revenue is a good benchmark —- the same as for a non-Internet publication.
However, media companies with well-integrated print and online content have been selling for 8–19 times EBITDA, says Wilma Jordan, CEO The Jordan, Edmiston Group (who brokered Infogate's sale to AOL this March.
(Note: EBITDA stands for "earnings before interest, taxes,
depreciation and amortization." Buyer's review EBITDA to
estimate a publication's future profit potential, though some consider cash flow from operations to be a more accurate measure.)
For instance, Dun & Bradstreet bought the online stock-research service Hoover's this summer for 19.3 times EBITDA. Reuters bought financial-services website Multex.com earlier this year for 16 times EBITDA. (Eight times EBITDA is roughly equivalent to 1.5 times annual revenue for a publication with a fairly acceptable 20% profit margin.)
Media investment banker Jeffrey Dearth, a partner at DeSilva & Phillips, says "What's happening now is that people are strictly looking at revenue, earnings (if there are some), cash flow, growth and growth prospects."
-> b. Should you use a broker?
Going through a broker -— an investment bank with expertise in online publishing deals -— is the easiest way to find a buyer.
It's "too distracting," Dearth says, to try setting up a deal all by yourself while you're also running your business. Firms such as his maintain lists of potential buyers and sellers that they match up. If you want to go that route, contact a broker and let them know you're looking to sell.
However brokers typically don't want to take on publications whose annual revenue is less than $5-$10 million. However, even if you're smaller than that, it's worth letting them know you exist, because their larger clients might be looking to buy an online product just like yours.
Also, brokers will make an exception to do a small deal for a steady client who generates a lot of business for them. So if you plan to sell and/or buy multiple publications, it's worth speaking with a broker.
Be forewarned, Jordan says a publication that's too small to hire a broker may not be ripe for sale to a most established media companies.
Buyers won't undertake the effort of setting up a deal for such a small payoff. If you're worth only $1 million, she recommends that you focus on growing your business before thinking seriously about prepping for acquisition. However, other sources suggest small companies are still finding buyers via informal networking. One example is publishing entrepreneur Mark Ziebarth of Bongarde Holding's purchase of the Canadian publisher SafetySmart this March.
Back in 1999, SafetySmart hired investment bank Veronis Suhler to take them to market, but no one was willing to pay their asking price. In late 2002, SafetySmart tried running a three-line classified ad in the Wall Street Journal. It worked. Friends of Zeibarth's told him about the ad and he contacted SafetySmart directly to negotiate an acquisition directly.
Recommendation: If you don't go the formal route of hiring a broker because you're "too small," pick a trusted adviser — perhaps a banker, a lawyer or a publishing industry colleague—with acquisitions expertise.
Hire that person to handle the day-to-day search for buyers, so you can focus on making your business a success. Remember, once you've found an interested party, your current bottom line is the #1 item they'll be examining.
If you decide to go with a broker the two most important
questions to ask yourself about a broker are:
(1) Can you trust them?
(2) Are they knowledgeable and excited about your specific
business model?
Look at the work they've done for other clients. In particular, try to find out where their best contacts are.
When a broker says they know someone at the New York Times or AOL Time Warner, do they really have an inside line to a potential buyer, or is it just a name on a mass-mailing list that they bought? A broker who does "shotgun mailings" isn't really adding value.
Watch out for flattery.
"Don't always go with the guy who says, Oh yeah, you're worth $50 million, when deep down in your gut you know you're only worth $5 million. A lot of people make that mistake, and it's the old mistake of greed," Dearth warns. If a broker only tells you what you want to hear, you'll end up asking a higher price than anyone is willing to pay.
Trust works both ways. Whoever you choose to take you to market, be completely transparent with them. They don't want to be surprised with bad news after they've touted you to a potential buyer.
-> c. What buyers are looking for
If your product is based in print publishing, a strong online component (especially one that's not just "shovelware") can make a significant difference.
For instance, Ziebarth chose to buy SafetySmart rather than three other companies that published traditional print newsletters because of it's electronic database product, SafetySmart Online, which is its fastest-growing revenue source.
The database can be accessed online or, purchased as a CD that you can load onto your corporate intranet. This flexibility made the asset more attractive.
"There's absolutely no argument that the future of our kind of specialized communication is electronic," Ziebarth says. "We knew that if we bought one of those three other companies, we'd be buying an asset that was more likely to decline than appreciate...because they didn't yet have this critical online access to the marketplace."
Dearth agrees: "If somebody doesn't have an online component, the question is why."
If you're an online-only publisher, buyers are looking for the basics:
- steady income
- growth potential
- good renewal rates for advertisers and/or members.
With ad sales still down in most markets, subscription-driven products are selling better right now because buyers want a predictable revenue stream.
The following business models have been selling particularly well:
#1: B-to-B Databases
Kit van Tulleken, CEO of media investment banking firm The Van Tulleken Company, says database sales were among her firm's highest-value deals in the past year. In one all-electronic deal, they brokered the sale of QuickLaw, Canada's leading legal
information company, to the U.S.'s Lexis-Nexis. Van Tulleken also sold Current Drug, a British-based provider of research data to pharmaceutical companies, to Thompson Healthcare.
Buyers like niche databases with hard-to-replicate information so there's a substantial barrier to competition. They also look for information that's must-have for clients, so clients won't bail if the economy sours again.
Plus, expensive databases have to offer good tech support,
especially for a B-to-B product: professional clients can't afford to be offline for long. Investing in customer service now is a good way to make your database more attractive to buyers down the line.
#2: Integrated Print/Online Content
As the Internet keeps drawing ad dollars away from print
publications, smart publishers should develop well-integrated print and electronic products so they can offer advertisers a "package sale across print and online," Jordan says.
Great examples include Variety and AdWeek.
#3: Patented Technology
One way to stand out is to own an invention that the big players will need to complete their media strategy. AOL bought Infogate to acquire the latter's patented screen-saver technology, which AOL could use to push Time Warner magazine content out to subscribers of AOL's email service.
Because of the patents, this valuable invention couldn't be replicated in-house. AOL calculated that if it took the time to develop an equivalent product, it risked losing market share.
-> d. Who's buying online properties now?
In the past two-three years, the leading buyers of online assets have been private equity companies rather than media conglomerates. "The share price of many of the big [media] companies have dropped and they've had to really hunker down and not get distracted by deals," van Tulleken explains.
Consolidation with other small online companies is also a popular option, especially if you're too small to get the big buyers' interest.
One explanation for the consolidation trend: van Tulleken notes that it's easier to create a great publication than to fulfill it.
"A lot of publishing has a fairly low barrier to entry.
Electronic publishing in a way is even more so....The really expensive part, as a lot of entrepreneurs find, is sales and marketing and customer service." By pooling their resources, small companies can expand the market for their online content in ways that they could not do separately.
However, Jordan sees big media companies getting back into the market in the fourth quarter of 2003.
Confidence is back up, and many companies are looking to
acquisitions as part of their growth strategy. Buying an existing online publication that's already built up a good customer base can deliver growth faster and cheaper than creating similar products internally.
-> e. How to plan now to sell in 2005-2006
Even if you're not ready to sell for a couple of years, there are things you can do now to make the process easier down the line. Making your company easy to evaluate is one of them.
A small company doesn't need a complicated corporate structure. For businesses worth under $25 million, Dearth says it makes the most sense to be a limited liability company (LLC) or an S Corp.
Have an outside accounting firm review your books regularly, and keep good records. This may seem obvious, but the events of the last two years have shown that you can't overestimate the value of accurate accounting.
Plus, now's the best time to hire and train key executives who someday can run your company when you walk out the door. Buyers don't want to see an owner-publisher who's held the reins so tightly that their shoes will be impossible to fill.
Your staff's resumes and proven skills will be more important long-term than your own personal abilities.
Also, always keep upgrading your products and developing new product lines. Adding functionality now makes it easier for you to go back to your customers later and raise prices, rather than the other way around.
Yes, you can ask your accountant to create reports showing what sort of profits the property would have shown if you hadn't reinvested as much back into it. Buyers respect that.
But reinvestment and growth is critical. You can't just milk the cow dry and then sell it. As Ziebarth says, "potential buyers want to buy not just profits or cash flow -— they want to buy momentum."
Useful links related to this article
Jordan Edmiston http://www.jegi.com
DeSilva & Phillips http://www.mediabankers.com/home.html
Bongarde's SafetySmart http://www.safetysmart.com
Van Tulleken http://www.vantulleken.com
