Online Services Greatly Affect Valuation
There was a time when publishers embraced the Internet as a panacea. Here, at last, was the dream: Content distribution without paper and postage costs. Of course, a lot of publishers got burned by over-investing in the dot-com craze. Even today, many publishers, especially the smaller ones, find it difficult to make money with online services. Many view their Web site as a necessary evil.
Still, we read much about how online initiatives are changing the very complexion of magazine publishing today. Services ranging from daily and weekly e-newsletters to Webinars to digital directories to all sorts of content repurposing schemes promise a bountiful marriage between traditional print and electronic communication. Whereas the larger publishing houses have led the way in pioneering online services, smaller publishers are catching up, often with online programs that deliver relatively small chunks of high-margin revenue.
Like other low-dollar/high-profit ancillaries, these online services add up to nice increases in cashflow. More than that, they reflect a progressive, forward-thinking posture on the part of the publisher. Today's enlightened publisher, large or small, with creative new-media programs (and especially including the gathering, analysis and dissemination of proprietary news and information), is poised for the future.
Online Impacts Multiples
That's why a publisher's involvement in online services has an increasing bearing on sales price when it comes time to divest. Buyers may look less critically at how many actual dollars are generated by new media, and more closely at how these services leverage the brand. The publisher with an array of Internet options that better serve the reader and advertiser will command a higher price when it is time to sell.
How much higher? Well, that's impossible to say. But we can rely on these generalities: Smaller publishing properties that are sold based on a multiple of earnings will typically sell for between four- and nine-times adjusted EBITDA;a fairly narrow range in a market where the mega-deals command higher multiples.
Properties with high earnings histories in attractive markets will, of course, fetch the highest prices. But what separates, say, a five-times earnings deal from a seven-times earnings deal? Increasingly, the answer is online services. Buyers will look upon sellers with a weak new-media presence as anachronistic and not worthy of a premium price.
So How Much?
Let's do some quick math and see how this translates into dollars and cents. Publisher A has a lousy Web site and inadequate online services. It generates $4 million in annual revenues, with pre-tax profits of $400,000 (10 percent). After adjustments and add-backs, let's say cashflow to the buyer is $600,000. It sells for five-times cashflow, or $3 million (75 percent of gross revenues). This would be considered a low-multiple transaction.
Publisher B offers a host of online ancillary services (and, likely, a successful events division) and also generates $4 million in annual revenues. But because the Internet and events sales earn higher margins, its pre-tax profits are $800,000 (20 percent). Adjusted cashflow is, say, $1 million. Because it is a more attractive acquisition, this property sells for seven-times cash flow, or $7 million (175 percent of annual revenues). This would be considered a fairly rich deal;but not out of the question.
In this hypothetical (and, perhaps, simplistic) illustration, two publishing properties with the same annual revenues sell for radically different prices. If you are the entrepreneurial seller on the receiving end of this deal, the relatively small difference in selling multiples;5-times versus 7-times;makes a $4 million difference in your nest egg.
Shrewd publishers plan their exit strategies well in advance. One way you can increase your publishing company's value when it's time to sell is to prudently invest now in meaningful online services.
Michael D. Kreiter is director at W.B. Grimes & Co., a Gaithersburg, Maryland-based investment firm for the media industry. He can be reached at email@example.com.
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