Enduring the Road to Divestment
In April, after an eight month-long process, my long-time financial partner, Frontenac Company, and I closed on the sale of b-to-b IT publishing company 101communications to 1105 Media, formed by two private equity firms.
The deal, which was reported widely in the trade press, was just one of many publishing acquisitions completed in the last year, a near record breaking period for the world of publishing M&A. Press reports never capture the nitty-gritty of the process, largely because the participants need to keep information confidential. Although I am bound by strict confidentiality agreements, I can offer some observations about what to expect, and how to handle it, just in case you have a small publishing company you are thinking of selling, or more likely, work for a company that was recently sold or may be sold in the future.
First, be prepared for a long and grueling process. It is a real roller coaster ride. Iâ€™ve been involved in many acquisitions on the buy side, but this was the first time I had sold a company. It is much more difficult and emotionally demanding, especially if itâ€™s a firm youâ€™ve built, or identify strongly with. Second, expect the unexpected. And third, and perhaps most important, donâ€™t take your eye off the underlying businessâ€”the sale process can be so consuming that you forget you still have a magazine to run, a Web site to improve, or a conference to launch. Thanks to the terrific efforts of our publishers and staff, we actually beat our budgeted profit during this process, but that is the exception not the rule.
A threshold question, of course, is to decide if, and when, to sell. The Frontenac Company had invested the initial funds to launch 101 in 1998, and owed a fiduciary responsibility to its investors. After nearly eight years, it was time. Frontenac had stuck with management and invested more money in 2001 when the company faced possible shutdown because of the perfect storm of 9/11, Internet crash and technology recession. In the last few years, profits had grown about 25 percent a year. The company had a bright future, especially with its recent Web initiatives, also making it a good time to get a fair price. The lesson: sell when things are improving, not when they are sliding.
In our process, we used what is called an â€śauction.â€ť The conventional wisdom is that you will get a better price if you have many potential buyers competing against each other under strict deadline pressure. However, it is very time consuming and demanding for management. For example, we had â€śmanagement presentationsâ€ť (long, in-depth sessions with potential buyers) with more than ten strategic and financial players. In hindsight, Iâ€™d be open to targeting a few buyers and reducing the work load and risk to the business by having so many executives sidetracked.
Dealing with Private Equity
Negotiations can be long and drawn out. Especially in the relatively new world of private equity and leveraged buyout companies, every player wants to â€świnâ€ťâ€”whether that means a good price, better than average legal terms, or refined accounting definitions. An entrepreneur has a real disadvantage when dealing with financial buyers like private equity firms. I was lucky. My financial backer, Frontenac, was a sophisticated private equity firm, having bought and sold scores of companies.
You also need a communication strategy for your employees. Many â€śexpertsâ€ť recommend â€śover communicating.â€ť While I usually subscribe to that management approach, I decided early on that â€śthe less said the better.â€ť I informed all of our employees in a note that the company was on the block, but then did not formally return to the issue until the day we closed the transaction. I decided that regular updates would only make employees more nervous and worried. Although probably impossible to avoid, I didnâ€™t want to encourage speculation about who the buyer might be, whether departments or offices might be consolidated, or any of the other worries that often go with a sale. I kept my formal employee-wide communication limited to routine business issues, while keeping members of top management informally abreast of major steps along the way.
A sale represents dramatic change, and change generates incredible amounts of employee insecurity, whether it affects an entry level editor, or the chief financial officer. In fact, it may be more nerve-racking for the chief financial officer, since most new buyers bring in new CFOs. But change is inevitable, and in the business world today, so are mergers and acquisitions. n
Jeffrey S. Klein is chairman of 1105 Media, a b-to-b publisher.