This is an article that I have wanted to write for some time. It may clear up some questions you have regarding the fair market value of your own publishing company in comparison to the deals that you read about in Publishers Weekly or Book Publishing Reports. At some time, if you are lucky, you will sell your publishing company. The unhappy alternatives are that: (1) you go out of business and fade away; (2) you die; or (3) your children take over the business with very little real benefit to you. In today's society where few children succeed their parents in the same line of work, #3 is a less and less likely scenario.
Profits Are the Key to Value
I have written many articles on the subject of valuing publishing companies. To do the job right, we usually take a look at the performance of the company over several years to determine what the true "cash flow" of the business is. To this number, we apply a "multiple" on earnings to arrive at a suggested price. In valuing a publishing company, the balance sheet of the business tends to be an afterthought. The profitability of the business is the key. This article concerns itself mostly with multiples of earnings used to establish the value. The truth is that nothing multiplied by something is still nothing. Without profits, a discussion of multiples is moot.
A Closer Look at Multiples
In real estate, the "multiple" is expressed as the capitalization rate. If you have a building that is generating $100,000 a year to the owner, a "cap rate" of 15% puts the property value around $666,667. In the valuation of businesses, we express this figure as a "multiple of earnings." In this case, a company generating $100,000 in profits might sell for six, seven, or eight times its annual earnings. It may also sell for 20 times its annual earnings. The fact is that many publishing company owners want and expect a multiple for their company that is not justified by the market demand for their business. The following chart is our rough guide as to the multiples that are usually paid for publishing companies. You will note that as the revenues and/or the profitability rises so does the multiple paid for that company.
Multiplies Commonly Paid for Publishing Companies
|5% - 15%
|$100,000 - $500,000
|2 to 5
|4 to 6
|4 to 8
|$500,000 to $1,500,000
|4 to 6
|5 to 7
|6 to 8
|$1,500,000 to $2,500,000
|5 to 10
|6 to 10
|7 to 10
|$2,500,000 to $5,000,000
|6 to 12
|7 to 12
|8 to 12
|$5,000,000 to $10,000,000
|7 to 14
|8 to 14
|9 to 15
|$10,000,000 to $25,000,000
|9 to 15
|10 to 16
|10 to 20
|$25,000,000 to $50,000,000
|10 to 15
|12 to 17
|14 to 25
|12 to 16
|15 to 25
|15 to ?
Other Factors that Affect the Multiple
At every stage in a publishing company's growth, they gain more market penetration, better authors, more marketing clout, better employees, more respect from reps and distributors, better access to the book buyers, a better booth at BookExpo, and so on. This is what buyers are paying for. I tell my publishing clients that they have only two things to sell: their titles and their marketing channel. If either is found lacking, the property may be unmarketable. It is important to note that longevity has little to do with these equations. A publisher that has been in business just three years and is generating $10 million in sales is just as likely (or more) to get a high multiple as another that took 30 years to reach the same sales level. Another factor affecting the multiple paid for your publishing company will be the segment of the industry you are in. It is a fact that professional and science publishers are often sold for higher multiples than trade publishers. Educational houses can also claim higher prices than (most) trade houses. Why? Because general trade publishing is looked at as the most vulnerable area of the business. The vicissitudes of B. Dalton, Waldens, Crown, and Borders can do in even the most established trade publisher. The school or educational publishers work in a market that is very hard to penetrate by newcomers and are therefore somewhat protected from the willy-nilly free market that characterizes trade publishing. The exception to this rule would be highly targeted trade publishers with a specific "cache" or remarkable image. A company like Andrews & McMeel with their specific line of humor and gift books or The Pleasant Company with their famous "American Girl" series are examples of two major trade publishers that would command multiples beyond the norm. Most publishing companies have revenues under $5,000,000. It does take years and considerable marketing resources to build up a publishing company over $5 million in sales. That is why publishers with revenues exceeding $5 million get a disproportionately larger multiple than those with lower revenues. There is an old maxim in mergers and acquisitions, "You get paid for what you have done, not what you were going to do." In essence, your projections to reach $20 million in sales by 2005 carry no weight or validity with the buyers. If your current sales are only $2 million per year, that is what you will be valued against. The marketing clout and production capabilities of a $20 million publisher are so much greater than that of a $2 million publisher that there is no comparison. And the multiple applied to profits reflects this.
Observations about Buyers
The kind of buyer who is interested in a publishing company with $2 million in sales and the kind of buyer who is interested in one with $20 million in sales are very different. The following chart categorizes typical buyers.
Typical Buyers by Transaction Size
|Type of Buyer
|Under $2 million
|Individuals, small- to medium-sized publishers looking to add lines
|$2 mil. to $5 mil.
|A few high-wealth individuals, but mostly larger competitors or strategic players looking to build market share
|$6 mil. to $10 mil.
|Investment groups, public companies, and very large privately held publishers
|$11 mil. to $25 mil.
|Holding companies, publicly traded publishers, venture capital groups, and (some) large private publishers.
|$26 million +
|Same as above, plus large foreign publishers and major venture capitalists.
The single largest group of buyers is probably congregated in the $5 million to $10 million category. Buyers acquiring very large companies are often using O-P-M (other people's money), stock, or leveraged capital (which again is not their own). Small acquisitions are usually funded out of the buyer's own cash reserves and perhaps some bank or SBA funding. Public companies have a distinct advantage over private ones because their own company is valued on public stock multiples that can be 20 or more times their annual earnings. This allows them to purchase private companies at 10 to 15 times their earnings and still improve the value of their own company. Holding companies and investment groups only look at very large, stand-alone operations. They want to acquire something like Rand McNally, Career Press, or Publishers Group West. Look to individuals and strategically aligned publishers to do most of the small transactions.
Valuing Distributors, Wholesalers & Packagers
Unfortunately, most distributors, wholesalers, and packagers do not sell for the high multiples that their publisher counterparts do. A $20 million distributor could only expect multiples paid for his company in the 4 to 8 range, while a publisher with $20 million in sales could expect offers at least twice that amount. It is not fair, but it has to do with leverage. Buyers do not put as high a value on marketing capability as they do content. If a $500,000,000 publisher buys a $20 million publisher, the probable scenario is that they will close the $20 million publisher down in, for example, Kansas City, and consolidate their operation with that of the larger publishing company. But a $20 million distributor has a 50,000 square foot warehouse and 100 people running around. How are you going to consolidate them? There are few economies of scale in distribution, wholesaling, or book packaging therefore lower multiples are offered.
The High Price-Tag Acquisitions
When I take a new listing and give my client a preliminary valuation, I have often been confronted by my clients who pull out some issue of Publishers Weekly and attempt to compare their own company to some (usually much larger publisher) that was sold for 20 times next year's projected earnings. When you scrutinize these acquisitions, most were purchased with stock, or were highly leveraged. They are typically companies with a very special niche or particular marketing prowess, a command of a special market position vis-à-vis some special licenses that they own or runaway best-seller series, etc. In short, they have little to compare to your own company. Major public communications companies like General Cinema Corp., the Tribune Corporation, or Torstar, Inc. have bought their way into the book publishing industry by paying enormous multiples. These are the exceptions more than they are the rule. These companies mostly buy major, marquee properties with large revenues, top-notch management, and extensive marketing organizations. Most sellers find that large publishing companies are not run by fools. The business development managers who negotiate these deals have a sharp pencil and often come armed with more information about your company than you know. That is not to say that they do not pay some heavenly prices sometimes, especially in a competitive bidding environment, but most are sober negotiators with a definite limit as to their range.
When to Call an Acquisitions Intermediary
As a professional intermediary, it pains me to admit that most companies are not sold through intermediaries. One industry player contacts another and says, "We are interested in buying your business. Are you available for lunch?" When you get a telephone call like that, my professional advice is let them buy you lunch. The best prices for companies are often made by unsolicited buyers who have targeted your company and will not take no for an answer. If no one is knocking on your door, or you want to generate competitive bidding for your company, that's when you want to pick up the phone and dial the number of an intermediary.
This article is from the PMA Newsletter for April, 1998, and is reprinted with permission of Publishers Marketing Association.