Deal or No Deal?
Despite economic concerns highlighted by a slowdown in the housing market, merger and acquisition activity in the media and information industry remained steady through the first three quarters of 2006. Book publishers in the directory, reference, educational, professional and consumer books sectors have been especially busy, according to M&A firm The Jordan Edmiston Group Inc. (JEGI), recording 30 transactions through September of this year.
For publishers looking to acquire other companies or positions themselves to be bought out, Book Business sought advice from several M&A advisers on maximizing the value of your next transaction.
Tips for Sellers
“There are several factors that drive value, the most prominent of which are proprietary content, prestigious authors and a strong backlist. Also important are solid distribution networks, a presence in international markets, and digital content, as either an alternative format or a supplement to print content.
Other factors that weigh heavily in a potential buyer’s evaluation of a business:
1. Inventories. Keep inventory current and dispose of stale inventory.
2. Receivables. Collect aged receivables and write off uncollectible accounts. Deadbeat customers are a red flag to buyers.
3. Tighten up your backlist. Eliminate money-losers. Valuations are typically based on a multiple of profit, so low-margin and unprofitable titles depress enterprise value.
4. Cut expenses first. [It’s] better to operate lean than to try to convince a buyer of potential cost-savings.
5. Critical to a successful transaction is a reputable, experienced M&A adviser. Selling a business happens once or twice in a lifetime for owners, but investment banks do it many times a year. A good advisor can find the buyer for whom the business offers the best strategic fit and therefore may be willing to pay the highest price.
6. A good M&A adviser also can help negotiate the nonfinancial terms that can be important to the seller: disposition of employees post-sale, an ongoing role in the business, noncompetes, earn-outs—all of these are considerations that can impact the seller.
7. Finally, timing of a sale can affect value. Right now, valuations are at historic highs, and M&A activity is robust—a climate that is likely to persist over the next 12 months. While quality companies will always attract a buyer, the cyclical nature of the M&A market suggests that such a favorable M&A environment will not last forever.”
—Joe Berkery, president, Berkery, Noyes & Co.
8. “Having the No. 1 titles in fast-growing, complex industry sectors will always help to attract buyers.
9. Having titles that have shown consistent year-over-year revenue growth at rates in excess of publishing industry averages will be impressive to buyers.
10. Having a compelling Internet strategy that is revenue-enhancing will be essential.
11. Having titles that fit hand in glove with a buyer’s existing portfolio will convince buyers of the strategic sense of the deal.
12. But before publishers take the step toward offering their property for sale, there is a lot of thinking to be done to ensure that the business is in the best possible shape. Time spent in advance of sale usually equates to greater returns at the closing.”
—Richard Mead, managing director, JEGI
13. “Get the company ready long before it goes into a selling process.
14. If the company is big enough, get an audit done. Clean up financial statements.
15. Take a hard look at the business as a new, potential buyer would.
16. Get an advisor long before the time you are ready to sell to give you strategic advice.
17. The best time to sell is when you have had a good year, and next year also looks good.
18. Spend time on a realistic valuation. Shoot for the highest price, but have a sense of what other companies have been purchased for.
19. Be able to articulate to a larger entity all the positive aspects your company brings to them besides cash flow—market penetration, high-quality staff, deep customer relationships, etc.”
—Tom O’Connor, managing director, Berkery, Noyes & Co.
Tips for Buyers
20. “An important focus for a buyer should be to confirm the historical financial performance of the business, as this will provide the platform for the business. But the real key to valuation is the projected growth of the business and understanding where growth will come from, what it will cost to generate and whether management is capable of delivering it.
21. There are other ‘domestic issues’ that are important as well, including the ability to create new revenue streams. … Overall, however, growth from the core business is the driving factor in encouraging a buyer to step up and pay for the business.”
22. “I think you [should always look] very hard at the financials—revenue, EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) and … growth: How much has the business grown in the last three years? Those are the key areas I would emphasize. One of the things that you need to ensure is that the seller is properly allocating all of the expenses associated with running the business to the business, so that they are not showing an inflated EBITDA.”
—Reed Phillips, managing partner, DeSilva & Phillips
23. “Do extensive operation, financial and legal due diligence. Focus on the industry and the company dynamics. Where is the growth going to come from?
24. How dependent is the business on the owner/management team?
25. Get good advice from industry professionals—accountant, bankers and lawyers. It’s better to do due diligence before the deal closes than to find out later.
26. Look at historical results versus projections. High growth projections in the next couple of years if historical growth is low should be vetted extensively.
27. Ask why the company is selling. There should be a good reason.”