OK, time to ‘fess up: who’s jealous of Dennis Publishing founder and multi-millionaire Felix Dennis? The villa on Mustique? The New York apartment? The recreational drugs? The women? The estimated £500 million net worth?
And yet… inspect his companies’ published accounts for almost any period, you’ll see a business that was not, by any sensible definition, capable of supporting such a lifestyle; nor, indeed, the iconic publisher’s more recent philanthropic activities. In part, this is because it makes no sense to report high profits in high-tax regimes such as the UK or to keep cash inactive on a balance sheet. But it also demonstrates a point writ large in Dennis’ biography cum entrepreneurial bible, How To Get Rich: most businesspeople become wealthy when they sell their businesses, not through running them.
While it’s probably an overstatement to say that the only, or even main, reason why most independent publishers choose the entrepreneurial path is to make a mint, if achieving affluence is an aim, it is prudent to shape your business throughout its lifecycle in a way that makes it an attractive acquisition opportunity in due course.
Having spent the past eight and a half years helping people buy and sell media businesses and providing consultancy services designed to add value to clients’ businesses, I’ve identified six characteristics common to the companies that have achieved the most successful exits:
1. Sectors
The easiest business to sell is one that enjoys a dominant position in a single market that exhibits good growth prospects and that a number of well-resourced corporate publishers would desperately like to be in. I’m conscious that this is a ‘motherhood and apple pie’ statement, but by taking it an item at a time, it’s possible to tease out some sound business principles.
First, companies that dominate markets generate higher margins than those that are in second or third place. Selling the number two or three player, even if it generates healthy profits, can be difficult because potential acquirers really want the market leader, so will discount any offers for an also-ran. They may also take the view that, in the event of a downturn in trading, the leader’s margin is likely to be more defensible and others will suffer disproportionately, which again points to a lower valuation.
Second, a publisher that has breadth and depth in a single market is a very easy proposition to sell: it clearly possesses excellent reader and advertiser relationships and editorial and commercial expertise in that sector, and a potential acquirer will value these strengths.
That said, it can be risky to build a company around a single sector: if the sector sneezes, the business catches a cold. If you intend relying on just one market, it’s more important than ever to time your exit wisely. Alternatively, you may wish to operate in two or more verticals, ideally choosing ones that are not positively correlated, so that a decline in one either leaves the rest of the business unaffected or even results in growth. A good example of this can be found in B2B publishing, especially titles dependent on recruitment advertising. When the wheels fell off the economy two years ago, public sector recruitment boomed; today, the state is being wound back, while the private sector is recovering. While net hiring across the piece is well behind that seen in the boom years, a publisher that owned a balanced mix of public- and private-sector titles is likely to prove a lot more robust over the period 2008-2013 than one with a foot in a single camp.
If you decide to operate in unrelated sectors, chances are that your eventual exit will require two or more separate sale processes. If this is the case, you should structure your business with this in mind.
Publishers operating in growing markets are more saleable than those in declining ones, for obvious reasons. Sometimes, a sector becomes inherently ‘sexy’ and there’s a scrabble by major groups to get into it; if you’re an independent in that situation, it’s almost always best to sell: you’ll be able to achieve a premium price, whereas staying in would likely result in erosion of margin. Indeed, if you’ve read Dennis’s get-rich tome, you’ll see that his decision to compete with Ziff Davis rather than selling when the latter wanted to get into the computer publishing market in the 1990s is one of the few business decisions he now questions.
Finally, as the above illustrates, it’s great to be in a sector that plenty of cash-rich large groups wish they were in. There are some markets that are good for cash generation but bad for capital gain because, even though they throw off healthy profits, corporates don’t want to buy them; online porn publishing is a good example. Conversely, some independents have made good money by deliberately publishing products that corporates wish they’d launched but didn’t, either because they failed to spot the opportunity in time and subsequently decided that the market was too small to support a second entrant or because the opportunity was initially too small or specialised for them.
2. Scale
It’s very difficult to sell a business that loses money, unless it’s asset-rich, or the loss is small and easily reversible (in which case, it’s probably the wrong time to be selling). Likewise, it can be difficult to sell a business that generates a pre-tax profit of less than about £150,000, unless the turnover is significant (say £2m-plus) or it has substantial net assets (say £500,000-plus). This is because both sides will incur transaction costs which do not scale down in proportion to what the business is worth, and which represent a substantial part of the consideration if the company has a low value.
At the other end of the scale, really successful independent publishers can end up pricing themselves out of successful exits if they create businesses that are worth more than potential acquirers are able to pay. It’s worth periodically drawing up a ‘hit list’ of buyers and an approximate valuation for your business, then taking a look at the prospects’ balance sheets. If the acquirers all have net assets comfortably greater than the value of your business, happy days; likewise, if they have banking facilities in place that comfortably exceed their net liabilities and the value of your business and appear not to be under pressure to reduce their debts, there should be no obstacle to a deal. But if the value of your business is already near the top end of what your potential suitors can pay, unless you can see that changing, staying in and adding value to the business is likely to be an impediment to a sale.
I’ve worked with many entrepreneurs who have bitterly regretted failing to sell at the right time, but few who are sorry that they exited too soon. This is because few people can accurately call the top of the market, and it is human nature to want to maximise the proceeds of any sale. So the temptation to hold on until future growth is replaced with decline is difficult to resist.
3. Structure
A lucrative sale is usually a simple one. Build a company with lots of different subsidiaries with cross-shareholdings, lengthy shareholder lists, complex legal agreements and myriad related-party transactions and you risk having erected a series of barriers to selling your business for a good price. Faced with difficulties in establishing that the enterprise is as described and that there are no undisclosed liabilities, some buyers will melt away and others will renegotiate on price, because they recognise that additional legal and accountancy bills will be incurred and perceive enhanced risk.
Before beginning any sale, clarify whether you intend selling the share capital of a limited company that owns the intellectual property (brands, URLs etc) or the intellectual property itself. Generally, the former carries tax benefits. If your business operates in several different markets, there may be benefit to owning a single limited company for each, because an acquirer may want to buy the part that addresses a single market and have no interest in the rest.
Next, ensure that there is a shareholders’ agreement binding the owners of that company; it’s worth investing in having this drawn up, or at least reviewed, by a solicitor to ensure it contains nothing unpalatable. Then check that all employees, directors included, have contracts of employment and that there is nothing unduly onerous about them (if there is, terms may have to be renegotiated). Likewise, check any other contracts the company has with suppliers, distributors, customers, banks and its landlord, and renegotiate where necessary; in particular, acquirers don’t like contracts that tie them in with suppliers or to premises for longer than absolutely necessary, but generally welcome long, secure contracts with clients. Finally, bring all these documents together in one place, together with past statutory accounts and other documents that a buyer will want to inspect.
4. Numbers
I believe there are two kinds of publishing business: those that have their own finance directors, even if part-time, and those who don’t. The ones that do are almost unfailingly worth more than those that don’t. This may in part reflect the fact that a larger and more profitable company is better placed to afford to employ a qualified, in-house accountant. But it’s also the case that firms of a given size that have taken the decision to monitor their finances on an ongoing basis rather than rely on an external accountant (or nobody) to produce historic accounts to meet Companies House requirements generally generate more profit and have a better grasp of cashflow, which reduces the risk of failure.
Moreover, when it comes to selling a business, being able to provide monthly management accounts and demonstrate year-on-year trends in revenue and profit can give potential buyers valuable reassurance, making them more confident about up-bidding. Companies that are too small to justify or afford a full-timer can rely on a number of individuals and small businesses that provide ‘virtual FD’ services at relatively modest cost. Even if you don’t use one in the long term, doing so for the 12-18 months preceding a sale can be a smart investment.
5. Staff
If you’re an owner-manager, you face the dilemma of whether and when to tell your staff you are considering a sale. My advice is clear: don’t say a thing until you absolutely have to. Why? Because the gap between deciding to sell and a change of ownership is seldom less than six months and can be a year – if, indeed, a deal proceeds. And during that time, in the minds of your employees, there is doubt about whether the company that they chose to join, and enjoy working for, will change in ways they might dislike. Until you know whether the business will be sold, to whom and on what terms, there won’t be much you can say to reassure them. And as we all know, all you need is a few key people to leave, and you could find yourself managing a declining business that’s a nightmare to sell.
6. Stability
Just as the sudden departures of key staff can damage your business and the prospects of a sale – you’d have to disclose changes in senior personnel to potential acquirers – so anything that portrays the business as troubled or causes the numbers to head south should be avoided. For publishers of newsstand magazines, try to match the promotional activity achieved the previous year, because a year-on-year fall in copy sales, even if explainable through reduced marketing, creates concerns. Likewise, do everything you can to ensure that each issue’s advertising revenues are up on the same period the previous year. For online businesses, traffic is crucial: ensure content is updated frequently and is SEO-friendly and don’t skimp on marketing, PR and anything else that drives page impressions.
I appreciate it can be difficult to maintain stability in a business while also doing a second job trying to sell it. Representatives such as myself, who help owners achieve exits, can help lighten much of the load, as can all the other steps outlined in this piece.
