Long before you are ready to
think about selling your publishing company, you should think about what
creates value in it. The following are key factors in creating value.

Seller’s Reputation

A publishing company is a business
that reflects the owner’s character and reputation in the industry. Many
independent publishers use their own names or parts of their names in their
companies’ names, and a publisher’s competence and attention to detail become
evident through every aspect of the business. A prospective buyer needs to feel
comfortable with the seller, and with the reputation the seller has built up
over many years. A seller’s history can make or break a deal with a buyer.

Product-Line Quality and
Depth

A quality product stands the test
of time. Add depth to a product line with strong backlist sales and you improve
your company’s chances to achieve success and lasting value. Add a good forward
publishing list as well and you make the company still more attractive to
buyers.

Because buyers think in terms of
purchasing product for future revenue streams, strong backlist sales are a key
value component and help predict future revenues. Buyers analyze sales by title
and by channel, placing higher value on recurring sales at full retail and/or
in nonreturnable sales channels. Although they also want and need to see
products under development with signed author agreements, they generally place
limited financial value on the forward list because the costs of bringing the
products to market offsets much of the revenue stream.

Companies with focused product
lines that lead a market segment or a subject category have relatively high
value. Product lines that are scattered over numerous subjects and market
channels and that don’t stand out in any particular area are less attractive to
buyers, who know that marketing expenditures produce lower returns in the
absence of focus and synergy,

Not surprisingly, buyers want to
see strong sales in several channels, including trade, special sales, foreign
rights, and Internet, and they find a pattern of increasing Internet sales
attractive.

Intellectual Property
Holdings

Because publishing companies deal
in intellectual property, buyers may acquire author contracts, licensing
agreements, Web sites, company names, trademarks, and copyrights, as well as
product inventories. A publishing company’s most important assets—its
author contracts—must be assignable to have value for a buyer. Make sure
that you get the right to assign contracts in all your past, current, and
future agreements with authors.

In addition to reviewing author
contracts for assignability, prospective buyers check on ownership rights to
Web site names, trademarks, and copyrights.

Buyers see additional value in
intellectual property they can repurpose in their own product lines or in new
media formats, so you should also ensure that you have the right to use and
sell your company’s intellectual property in all kinds of media.

Financial Information

Financial information forms the
baseline for all valuation analysis. Prospective buyers use financial and
valuation analysis together to determine purchase prices. When financial
information is clean, easy to understand, and quickly retrievable, it does not
pose problems during the sales process. Otherwise, financial information is a
major issue, and the value of the company is greatly reduced.

A prospective buyer who cannot
rely on a seller’s financial information will perform more due diligence on the
seller’s company. And a buyer who cannot get comfortable with the seller’s
financial information may decide not to make an offer.

Audited financial statements, the
gold standard in accounting information, provide additional credibility and
support for the seller’s financial representations.

Profitability and Gross
Margins

Profitability adds value today and
for the future. A buyer sees historical trends of profitability as the
strongest indicators that it is making a solid investment in a healthy
publishing company with good potential that can provide a positive return on
investment.

A buyer also needs to understand a
seller’s gross margin. Gross margin analysis focuses on book-pricing
strategies, PPB (printing, paper, and binding costs), royalties, and inventory
storage and fulfillment costs (whether these are internal or outsourced).
Often, buyers analyze gross margin by title.

Business Operations

Publishing company acquisitions
are generally structured as asset purchases rather than share purchases of
company stock. The buyer usually purchases selected assets and consolidates
business operations for economic savings.

To make realistic financial
modeling assumptions for combining the seller’s operation into the buyer’s
company, a buyer needs to understand the seller’s operating costs. Buyers also
want to see sellers running operations efficiently during the acquisition
process.

As we have noted before, every
owner of a publishing company should run the business as if it were for sale
every day. Following this advice will equip you to respond to sale
opportunities, which tend to arise unexpectedly when you are a growing and
profitable publisher, while making your company easier to run and more
profitable whether or not you ever decide to sell it.

The next article in this series
will cover options for transferring ownership of a publishing company.

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.