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Guidance on Growth by Acquisition

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PUBLISHED MARCH 2008

by Linda Carlson, Reporter, IBPA Independent magazine —


Photo of Linda Carlson

Linda Carlson

Acquiring an imprint or an entire company is often the route to growth for publishers. Being acquired can be equally important, as a source of revenue or expertise so that your company can expand, or as part of an entrepreneur’s exit plan.

If you think there’s an acquisition in your future, PMA members have lots of advice. In fact, one said he could talk for at least eight hours on the topic.

Let’s start with making a purchase. That’s how several of our members got started, by buying one title—or more—from their employers or from other publishers. It’s also how many publishers grow, adding a complementary book or an entire imprint.

What’s key? No one said it better than Richard Peck, a South Carolina–based consultant and veteran of such firms as McGraw-Hill and Ziff-Davis:

Outline your goals for the acquisition. (Why are we doing this?)

Set your quantitative hurdles. (How do all the numbers—for example, sales, profits, discounts, outlets, market penetration, cost of goods sold, royalties—relate to what we need?)

Don’t let enthusiasm for the acquisition blind you to potential problems.

Be willing to say no. “A lot of us fall in love with our acquisitions as we work on deals,” Peck says. “So we tell ourselves things like, ‘Oh, I know their fill in the blank number turned out to be wrong, but overall it’s still a great company.’ The biggest potential problem with an acquisition is not knowing when to walk away,” he cautions.


Goals

Marion Gropen, who consults to the publishing industry with Gropen Associates, Inc., from Brooklyn, cites several reasons that an acquisition might make sense:

  • If the acquisition brings you higher sales without significantly increasing your costs, you may be able to reduce your fixed costs per title and therefore increase your profit.
  • If the acquisition allows you to serve different markets, you may be able to smooth your cash flow. Perhaps acquired titles will sell better in seasons or economies different from those that are best for your current list.
  • If the acquisition means you will be contacting media people more regularly because you will be releasing more titles, you may be able to strengthen your ties to media. Also, as noted in “The Rep Route to Nontraditional Sales” (January) and “Sell Direct to Nonbook Retailers” (February), you’ll be more likely to attract the attention of gift and specialty reps if you have several related titles.

Numbers

After you’ve considered your goals, look at the numbers. As Gropen warns, very small presses often overvalue their inventory and are often unwilling to write down the value of inventory—or to write it off entirely.

Another issue: accounting problems. Inadequate controls on royalties are the accounting problems most frequently encountered during acquisitions, Gropen says, adding, “Errors go undetected and accumulate into significance.”

Pitfalls include:

  • not allowing for advances that will not be earned out
  • holding too small a reserve (or no reserve at all) against returns
  • collecting sub-rights revenue but not paying authors their share
  • not paying royalties due and not showing unpaid royalties as a liability
  • inaccurately calculating royalties (sometimes overpaying)

Terms

And then, says Gropen, there are contracts, which are “often cobbled together without the assistance of an intellectual property attorney, with sad results.”

Problems can arise in a number of areas, including:

  • Assignability. Whether the author explicitly grants the publisher the ability to transfer all the publisher’s rights and obligations to another firm is a critical point for any acquiring publisher.
  • Clear grants of rights. Similarly, acquiring publishers need to know whether the selling publisher has explicitly been granted the right to publish the book(s) under consideration.
  • Formats and media. It’s essential to know which ones the contract covers.
  • Royalties. Potential buyers also need to know exactly how royalties are paid. A problem commonly arises, Gropen reports, when royalties must be computed based on when cash is received for each sale, despite the fact that distribution contracts spread receipts over several months. “The publisher has to determine which fraction of each month’s sale is received for each book in each payment month, and then begin calculating royalties,” she notes.

Investigation

Due diligence means more than examining the obvious numbers, as Alan Giagnocavo at Pennsylvania’s Fox Chapel Publishing points out. As Fox Chapel was building a book and magazine publishing business specializing in woodworking, it acquired a struggling publication that had outsourced certain tasks.

“I didn’t conduct due diligence on the quality of the files, because I assumed that the vendor specialized in this, and that everything would be OK,” Giagnocavo remembers. Unhappily, he learned not only that his assumption was wrong, but also that financial issues had eroded the value of the acquired company’s goodwill and reputation; the brand was worth far less than what he paid for it.

Something else to evaluate carefully: the inventory. Canadian business publisher Multi-Media Publications of Oshawa, ON, recently completed an acquisition of 50-plus titles that it knew needed new covers and new marketing. But once it received the inventory, Multi-Media staff discovered that text design also needed improvement.

“We were dismayed that many of the books did not meet our production standards—indeed, they looked amateurish. They will also need new interior layouts. Some even need reediting,” reports Kevin J.J. Aguanno, managing editor. “This increased our costs beyond our original forecasts, and delayed rereleasing the books.”

Based on two acquisitions, one more successful than the other, Giagnocavo offers this additional advice:

  • You’ll eliminate haggling over the future sales value of titles if you structure your offer with significant earn-out potential as well as upfront money.
  • Try to guarantee the ongoing involvement of the previous owner or key employees so that you won’t miss sales opportunities unique to a title, damage author relationships, or lose institutional memory.
  • Avoid acquisitions that require a continuing relationship with that previous owner or key employees unless you enjoy working with them, trust them, and share their values.

Aguanno has other recommendations based on his company’s recent acquisition. “We were careful to acquire the assets but not the debts of the existing publisher, so we didn’t expect surprises down the road,” he says. “One thing we insisted on was keeping the existing owner on to liaison with authors, since she had strong ties with them, and we wanted to allay any concerns about the transition.”

This emphasis on communication throughout the acquisition transition is echoed by Mary Lloyd, now of western Washington’s Hankfritz Press, who advises, “Make everyone in each organization feel they are being included as you shape things up. Question-and-answer sessions and timely written communication will keep the rumor mill down and morale up. Soliciting input is an even better way to keep employees upbeat about the changes. But don’t ask for input if you don’t plan to use it. Doing that will drain rather than enhance morale.”

Multi-Media Publications sent out emails to authors with regular updates on its transition, including Q&A-style messages addressing their concerns. A month after the acquisition was complete, Aguanno hosted an author teleconference, using a PowerPoint deck sent out prior to the call, to walk authors through what had already been accomplished, what still remained to be done, and the status of each of their books. He also had the entire session recorded for the few authors who could not attend.

“Many authors were amazed at the progress that had been made behind the scenes, and were pleased to see the before-and-after pictures on the cover redesigns completed to date. The question-and-answer period at the end was lively and quite useful,” Aguanno says, crediting this strategy with helping make his firm’s transition a success.


Right After an Acquisition

Other suggestions for handling an acquisition or merger come from Malverne, NY, consultant Edwin Fager, of Kensai International, who urges acquiring publishers to think about the immediate post-merger operations.

“The best way to keep the acquired company operating until you can merge the operations is to offer at least four weeks’ severance to employees who remain for the one- to two-month post-acquisition period,” he believes.

Another immediate task is defining what you want for the combined companies’ culture, says Lloyd. “Not paying attention to the need to mesh cultures can drain a company of vitality as each ‘side’ strives to maintain its old ways when that is no longer feasible,” she warns. “Take a careful look at what each company does well. Look for ways to combine those practices. Neither side should ‘win.’ It’s like adding a member to the family, not voting someone off the latest reality show.”

“Find someone to facilitate a candid discussion of how each culture perceives the other, what the obstacles are likely to be to working together, and how to overcome those,” Lloyd recommends.

“The greatest problem we see arising from acquisitions is that some publishers avoid the hard personnel choices that a merger requires,” Fager says. Pointing out that some employees probably won’t stay, he advises striving to retain the good editors.

One other recommendation from Fager: Make sure your operations can handle the increased level of sales that the acquisition is supposed to produce.


Being Acquired? Watch Out!

If you’re thinking about selling your company, you undoubtedly want a buyer who shares your commitment, the opportunity to involve an intellectual-properties attorney, communication throughout the merger process and with your new owner, and continuing support for your titles. PMA members with experience being acquired report these things aren’t always easy to come by.

Martin Shepard at Permanent Press in Sag Harbor, NY, says he and his business-partner wife were approached by a larger firm, but discussions fell apart when the Shepards wanted contract terms negotiated by an attorney.

“This refusal to involve an attorney didn’t sit well with us,” he says, “and we were also suspicious that this publisher would dilute the reputation of our list by accepting manuscripts we might not choose on our own.

“We are still interested in being acquired,” he adds, “as long as we can continue to choose and help promote new titles so as to ensure that, after 30 years of publishing prize-winning fiction, the Permanent Press will continue when Judith and I are no longer able to publish.”

Talk to Gary Poyssick at Against the Clock in Tampa, FL, and you’ll have an even better idea of the pitfalls that can characterize an acquisition. “When Prentice Hall/Pearson Education bought the manufacturing and marketing rights for a series we had at the time, we anticipated becoming the biggest deal in town. We were the first ‘desktop publishing’ series that PH had,” but within three years it had launched competing series and books.

“They killed our first series and had us start a second one, which they also ignored,” says Poyssick. “Finally, we didn’t renew our contracts with them.”


Linda Carlson (www.lindacarlson.com) writes for the Independent from Seattle. Her first book was published by a Boston firm whose list went through several acquisitions before ending up at John Wiley.

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