How to find the money you need to grow

Folio: The Magazine for Magazine Management, Dec 1, 1991 by Margaret E. Popper

There's a capital drought, no doubt, but if you know where to look, there's still cash to be found-whether you're seeking $500,000 or $ 5 0 million. or magazines, the 1980s were a time of exuberant investing buoyed by faith in the unstoppable bull market. Commercial banks developed magazine lending expertise in newly organized media/communications groups. investment banks and venture capitalists specialized in media deals with a particular emphasis on magazines. Magazines were in.

Magazines aren't necessarily out in 1991, but the recession has dampened the fervor of the eighties. Investors are in a conservative mood, looking for publishers with well-established track records and strong cashflows. As for lenders, says Mark Anderson, senior vice president at European American Bank, "Everyone who was making loans a few years ago, like Tarzan swinging through the trees, is now sitting in a cave watching the rain fall."

Is there capital for start-ups?

Despite the gloom, though, the basic realities of unearthing start-up capital have actually not changed much. New ideas have always been financed by personal wealth, friends, family or individual investors. investors, lenders and publishers alike insist that good people with a good idea will always be able to find capital.

In 1985, Robin Wolaner, who is now a vice president of Time Warner's Time Publishing Ventures, inc., as well as president of Parenting, raised the $175,000 she needed to test Parenting from 10 individuals, eight of whom she had never met. She simply picked up the phone and asked them for money.

Says Wolaner, "I asked everyone I knew who might be wealthy enough to invest, or have an interest in Parenting. I'm not saying it wasn't very, very hard, but it is no tougher today than it was in 1985."

Looking for a small loan

After you've been in operation for a year or two, a local bank less than $2 billion in assets) is an excellent place to look for working capital loans under $500,000. It helps if someone there already knows you, perhaps has handled your personal bank account, your mortgage or other business for you.

If your own banker can't help you, he may know someone who can. David Gregg, founder of Network Publications in Nashua, New Hampshire, tried three or four banks for a small working capital loan before ending up at Nashua's Center Point Bank on a recommendation from his personal banker.

Local banks are willing to make loans backed up by the personal credit of the borrower. Their pricing is generally a floating rate spread over the prime rate.

When you need more

Once your expansion funding needs have grown to the level of $500,000 to $10 million, you're ready to approach the next tier of banks, with assets between $2 billion and $15 billion. These bank don't specialize in magazines, but may have other publishing clients.

European American Bank's metropolitan corporate lending group calls on middle-market clients ($5 million to $250 million in sales) within a 50-mile radius of New York City, including Westchester County and New jersey. Although $20 million is its upper limit, the loans made by this group for various operating uses are more often in the $350,000 to $1 million range.

Mark Anderson describes EAB's lending philosophy: "We are relationship lenders. We get balance-related income. We ask for personal support of the facility, a personal guarantee, and we have a personal relationship. We're not interested in a one-year deal. We are in it for 10 years or so."

Anderson estimates that EAB's floating-rate pricing ranges percent to 1.5 percent over the prime rate.

State Street Bank in Boston makes secured loans of $ 2.5 million to $10 million to magazines nationwide for the purpose of working capital, refinancing or acquisitions. Barbara Flight, a vice president in State Street's publishing group, commented on the recession's impact on the bank's acquisition financing.

"If somebody's purchasing a magazine, we will look for him to put up at least 25 percent of equity, and sometimes closer to 30 percent. Whereas, three years ago we might have done the same transaction with 15 percent or 20 percent equity."

The bank values magazine publishing companies at three to four times cashflow, although it may go as high as 4.5 to 5 times, depending on the company. State Street may lend 70 to 75 percent of this value, but Flight said that the bank wants to see cashflow of 1.4 to 1.5 times principal and interest payments.

State Street's floating-rate pricing for magazine deals ranges from prime plus I percent to prime plus 2.5 percent. The bank charges a closing fee of 1 to 1.5 percent of the loan and a $10,000 to $15,000 administration fee.

Where the big dollars are

Banks with assets of more than $15 billion are mostly interested in acquisition financing for national publishers. Their minimum loan size is between $10 million and $15 million. They'll finance 50 to 60 percent of the purchase price of a magazine and charge 1.75 to 2.75 percent over LIBOR (the London Interbank Offer Rate, England's equivalent of the prime rate). In addition, they take 0.5 to 2 percent of the value of the loan up front.