Five Surefire Ways to Build Your Company's Value

Folio: The Magazine for Magazine Management, Sept 1, 2004 by Reed Phillips

Byline: Reed Phillips

For the past three years, publishers were happy just to keep their heads above water. But with the economy improving, the survivors can breathe a sigh of relief. Okay, that's long enough. Now it's time to get back to the business of building value. A stronger economy is creating a new wave of print competitors and the Internet is once again a potent threat to publishers. The best defense is to create value.

What exactly is value? Essentially it's the amount of money a buyer is willing to pay for a magazine com-pany. While value is important when you want to sell, it also widens the options for your daily operations by enabling you to borrow money or attract new investors.

Let's dispel one misconception right away. Value creation does not necessarily come at the expense of quality. Wal-Mart and Saks Fifth Avenue both create value, but in very different ways (e.g. Wal-Mart is universally recognized as a low-cost operator; Saks commands high prices for top-quality merchandise.)

As a media investment banker for 15 years, I have had an unobstructed view of how magazine companies create value. The suggestions that follow are based on that experience and insights from my colleagues at DeSilva & Phillips. While my list isn't definitive, it's based on working with hundreds of magazine clients.

#1 Allow for Nimbleness and Adaptability

In the ever-changing world of magazine publishing the surest path to obsolescence is to follow a rigid formula. The most successful publishers are open-minded about new and different ways to manage the business.

Anticipate changes in your market and business. Don't wait until the market shifts to react. For example, being decentralized has enabled IDG to constantly poke and probe its markets to determine where the industry and customers are headed before they get there.

Don't be complacent. If you are not challenging how you conduct business, your competitors will do it for you.

Don't stick too long with a losing proposition. If an operation in your company isn't working, be decisive about shuttering or fixing it. Set milestones with clear go and no-go trigger points.

Ask customers for suggestions. One business-to-business publishing company I work with credits its customers with telling it when to start new spin-offs of existing titles. Most of these new titles are winners.

#2 Measure Your Business Accurately

Magazine publishers need good information about their businesses to make good decisions.

"Bad" numbers can distort how you perceive your company's performance. For example, one consumer publisher only measured cash flow - not EBITDA - because its investors wanted it to maximize dividends. The company quickly realized that selling long-term subscriptions would create a flood of cash - and happy investors. Soon, the business had $25 million in revenues and was generating $10 million a year in cash. When it came time to sell, both the managers and investors believed, incorrectly, that the company was worth $80 million, based on a multiple of eight times the $10 million cash flow. However, buyers valued the business on its $6 million of EBITDA, meaning the company was only worth $48 million (eight times $6 million).

"Good" numbers allow you to properly present your company to banks, investors or buyers. If your numbers don't hold up to scrutiny, you fray the trust needed to complete any deal.

Use third parties to challenge your assumptions. Even though owners of privately-held companies are reluctant to share their numbers, they can benefit greatly from outside independent feedback from accountants, banks, consultants and board members. Outsiders usually bring a less myopic view of a company.

#3 Continuously Examine Your Cost Structure

Expenses are like weeds. If you don't monitor them constantly, more will appear and reappear.

Break down your business into as many profit centers as possible and measure each with its own profit and loss statement. This discipline will put a spotlight on every part of the business, so you can quickly isolate and investigate problem areas.

Use benchmarking from industry associations - such as the Magazine Publishers of America, American Business Media and the City and Regional Magazine Association - to compare your magazine's expenses with industry norms. In 2001, when my firm sold The Robb Report it had revenues of $22 million but was losing more than $1 million. Before the company went up for sale, we identified $3 million in potential savings based on inefficient spending in areas such as advertising sales, printing and overhead by comparing them with a typical magazine company's expenses. The eventual buyer, CurtCo Media, realized that these pro forma savings were achievable and acquired the company for a valuation of $25 million (a robust price for a business losing over $1 million) - more than buyers who were less confident about the savings would pay. The bet paid off for CurtCo, which quickly achieved the savings and tripled the company's value.