What’s a Seller to Do?

June 12, 2012 § 4 Comments

While walking the floor at BEA last week and meeting with a number of small to medium-sized publishers (as well as a few larger ones), it became clear to us that the Mergers and Acquisitions market in publishing is about to become active again after a couple of years of relatively light activity. On the potential sellers’ side, many are simply ill-equipped or unwilling to continue dealing with the massive change the industry is undergoing and would like to cash out while they still have an attractive ongoing business. On the buyers’ side valuations of potential acquisition targets, even those with very attractive content have reached levels at which a reasonable ROI is achievable and many of them believe that they can exploit sellers’ content further than the original owners.

Potential sellers often ask us, “If I did want to sell, what should I do to maximize the value of my business?” (because everyone is bashful about saying “I want to sell”). We’ll return to the subject of how to arrive at a company’s value in another post (it’s complicated) but for now, we’ll point out some things business owners can do to prepare for sale if and when they decide it’s time to pull the trigger. Many of them are common sense business practices, but following them can make it much easier for a potential buyer to embrace the company and ultimately to say, “Yes” at an attractive valuation.

An important part of any buyer’s due diligence will be to understand the publisher’s strategy and forecasts. Step one in this understanding is to have Written Strategic Planning Documents, including a 5-year business plan, Annual budgets, Operational goals and objectives, Key success factors (including a SWOT analysis), Organization charts for both personnel and operations.

Second, it’s critical to collect and organize complete and accurate Historical Financial and Operating Information, including Financial statements (audited preferred),  Financial forecasts, Corporate income tax returns (filed on a timely basis), Fixed asset and depreciation schedules, Accounts receivable history and experience, and Inventory analysis and inventory locations.

Third, you’ll need to collect and organize Important Business Contracts and Agreements.  (They are all in writing, aren’t they? If not, fix that now.)  These could include Shareholder agreements, including loans, Bank or other borrowing agreements,  Employee agreements,   Long-term leases, purchasing commitments and customer contracts, Facility/building lease agreements, Licensing, franchise and distribution agreements, Trademark names and patents, Author agreements and any other documents that are critical to the ongoing business.

Fourth, Prepare for the Actual Sale. You’ll need to create a transition plan, thoroughly Understand your business’s value,  Build flexibility in the company to survive if the transaction doesn’t take place, Find qualified partners to do the specialty work (Accounting, Tax, Legal, Sale Representation) so you can focus on the next point.

Finally, Run the Business as if It Were Going to Belong to You Forever. Buyers want to see an active ongoing business so continue to acquire, edit, produce and market normally. Trying to dress up or maximize for the short term before a sale seldom fools buyers.

Owners can increase their business value by developing and implementing an exit strategy. If you have (or might have) an interest in selling your publishing business at any time in the next five years, beginning to get these things in order will help maximize your company’s value in any market conditions.

§ 4 Responses to What’s a Seller to Do?

  • Kevin says:

    Don, great article.

    Our business has worked with an M&A firm right from the start. We did this for two reasons, resiliency and possible exit strategy. Doing this ensured that all business systems are in place, documented and functional – a big win when it’s time to exit. By building our business like it is always for sale, it runs smooth. Hasn’t been easy, but when it comes time to sell, we’ll be ready at any point in our growth. It might be in our long term strategy, but it’s not our immediate focus, and it’s there when the time comes.

    Having said that, running a business like you’re going to run it forever is great for staff retention, nobody wants to be a part of a flash in the pan – they want to be a part of building something meaningful. It’s difficult to keep some staff when the goal is to sell – they don’t see it as a long term position and act accordingly. Commitment from founders, shareholders and staff has to be long term, for customers and for the value of the business – this is where the real value is created and what makes certain brands more desirable than others.

    There is a difference on how a company is built vs. how it is run.

    • Don Linn says:

      Great comment Kevin and I couldn’t agree more. On the other hand, there’s an old maxim that those of us in the M&A business have said to company owners and managers for years: “Run your business like it’s for sale every day…because it is.” The truth is that a potential buyer may show up at any time with a proposal that requires you to respond with some thought or care and being prepared is important. The other way most small to medium-sized companies are for sale every day is the fact that owners or key staff could get hit by the proverbial bus, forcing a sale. I’d always want to know what my company was worth and have its affairs in order should circumstances determine a sale is necessary and/or desirable.

  • Peter Turner says:

    I wonder what the trajectory of valuations is based on percent of net annual revenues. Is it still that 1X or less is a good deal for buyers? (I know a lot of factors go into this.) The decline in value of Sterling and Thomas Nelson, were striking, and I wonder if that trend is continuing.

  • Don Linn says:

    It’s a good question and one I’ll be addressing in a subsequent post but the short answer, as I suggested above, is that valuations have come down and the formulas for determining them have adjusted to reflect the new publishing climate.

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