Many publishers think their
companies have unique characteristics that buyers will value and that standard
valuation approaches and methods are therefore not applicable. It is true that
each publishing company is unique, but buyers use standard valuation approaches
to help determine the price they are willing to pay, and the ultimate value of
a publishing company can be determined only when the buyer and seller agree on
the purchase price.

There is no exact formula for
determining the value of a publishing company, but considering certain
variables helps sellers and buyers arrive at a value range.

Sellers tend to start out thinking
in terms of higher prices than the market is willing to pay. Although the sale
of a publishing company is a personal event to the seller, it is a business
transaction for the buyer. Remember that a buyer will not overpay for a
publishing company. Your expectations need to be based on real valuation
approaches.

Types of Buyers

There are four types of buyers for
publishing companies, and their reasons for buying a company affect the value
they see in it.

Strategic
buyers want to purchase in order
to control a publishing category.

Investment
buyers are interested in owning a
publishing company and generally purchase smaller ones.

Financial
buyers are institutions or groups,
such as equity funds, interested in buying and consolidating companies that
publish in a particular category.

Liquidation
buyers want publishing companies
that are bankrupt or liquidating.

Valuation Approaches

In determining a purchase price
for a publishing company, a buyer may select among valuation approaches, such
as:

The
income approach. Often used for
validating a purchase price, the income approach generally focuses on net
present value of discounted future cash flows after tax, which tells a buyer
whether future cash flows can substantiate the purchase price, and what
additional capital investments in the company to expect.

The
market approach. Generally used to
provide a guideline or range to support the value of a publishing company, this
approach can be based on comparable sales transactions of private or publicly
traded companies that are similar to the company being sold in terms of revenue
size and product focus. Alternatively, a market approach to determining value
might focus on a multiple of profitability, typically EBITDA (earnings before
interest, taxes, depreciation, and amortization). The greater the EBITDA, the
higher the potential value. Each buyer will apply its own ratios and return on
investment benchmarks.

The
liquidation approach. Generally
used for companies that are bankrupt or going out of business, this approach
usually generates the lowest purchase price.

Publishing Categories

The kind of publishing that a
company does has a great impact on its value to buyers.

Medical,
legal and professional publishers
tend to have the highest value because of their high sales prices for products,
higher profit margins, evergreen titles, lower returns, and well-defined and
accessible end users, as well as because of the relatively high barrier to
entry for product lines of this sort.

Educational
textbook and supplemental materials publishers<span
style=’font-size:11.0pt’> constitute the next level in the valuation hierarchy
because of their mid- to high sales prices for products, higher profit margins,
lower returns, and evergreen titles.

Trade
publishers are valued more highly
when they have successful brands. Branded trade publishers with control of
their categories and consumer recognition of their names rank above general
trade publishers, which have lower valuations because of product pricing
pressures, high returns, greater competition, and a low barrier to entry for
product lines of this sort.

Revenue Size

Revenue size is a key component of
a company’s value, and companies with higher net revenues are, of course, more
attractive to potential buyers. In terms of general salability, publishing
companies can be divided into three net-revenues segments:

Under
$500K. A publishing company with
annual net revenues below $500,000 is very hard to sell. Buyers may purchase
author contracts because standard valuation approaches are difficult to apply
at this revenue level.

$500K
to $5 million. Publishing
companies with net revenues in this range tend to have titles focused on a
subject category, and standard valuation approaches can be applied. Sellers
must provide good financial information, evidence of smooth-running operations,
and a history of profitability (see “Preparing the Company for Sale: What
Buyers Want to See,” March 2006, page 23).

$5
million to $20 million and up.
These companies tend to have the leading titles in their subject categories.
Buyers find them most desirable and can easily apply standard valuation
approaches and use them to determine purchase prices.

The next article in this series
will cover strategies publishers can use to create more value in their
companies.

A co-founder and publisher
of two successful trade book publishers, Howard W. Fisher now operates The
Fisher Company and helps growing publishers with business development and
mergers and acquisitions. He is a former PMA president and a frequent PMA
University presenter.

Daniel R. Siburg, CPA, CVA,
a former company president and CFO, provides mergers and acquisitions services
to clients, and presents media industry operating statistics and commentary at
many publishing meetings.

For more information, email
howard.fisher@thefishercompany.com or dan.siburg@thefishercompany.com; or visit
www.thefishercompany.com.