Preparing to sell your magazine; buyers like to see your detailed business plan - and they won't be fooled by a bottom line dressed up for the occasion - column

Preparing to sell your magazine

Owners of small publishing operations have a variety of reasons to sell some or all of their properties: not enough capital to realize the dream of becoming the best and biggest in a field; a desire, after five or 10 years struggling alone, to interact with executives in a larger company; an appetite for some liquidity--or any other of a half-dozen good reasons. In some cases, somebody out of the blue will approach the owner with an acquisition proposal.

Avoiding mistakes

But often the small entrepreneur is not well prepared to deal with the complexities of buying and selling. A common mistake to which many such sellers are prone is focusing too much on what the buyer, after purchasing a property, could achieve by investing more money in it, or hiring more salespeople, or using other resources of the buyer's company to benefit the seller's magazine.

What the buyer can do to enhance the seller's property is relevant, or course--selling the potential is a key part of the pitch. But too many would-be sellers neglect a more important aspect: effective, thorough preparation to answer questions about the soundness of the business, the reasonableness of earnings projections and cashflow, and many other issues that arise during the prospective buyer's examination of the seller's financial representations and operations.

Generally speaking, what are the signs of good management--other than a healthy bottom line--that prospective buyers like to see?

* An honest-to-goodness business plan for the coming year--not just a budget, but a combination of figures and narrative that answers the questions, "Where are we now?" "Where do we want to go?" "How will we get there?"

* A well-organized sales program, including a target account management system and provisions for incentives and accountability.

* Consistent and sensible financial statements--not necessarily audited, but at least reviewed by a CPA firm. "Buyers like to see a three- to five-year revenue history," says Tom Mastrelli, partner in the accounting firm Leslie Sufrin and Co., which does a considerable amount of due diligence work in publishing. And, he notes, they want to know the nitty-gritty about ad sales: whether the seller takes liberties with the rate card, provides rebates, offers short rates, uses a barter system, or in other ways props up ad revenues.

Similarly, buyers look at whether circulation is inflated by bulk deals or reliance on sweepstakes agencies. "To get a true picture of circulation strength," says Mastrelli, "buyers look carefully at renewal rates as well as reader demographics."

* Clear signs of editorial vitality and commitment, such as sensitivity to changing markets and audience needs. The best evidence of vitality, of course, is audience growth and healthy renewals.

Credibility sells

Preparing a company for sale does not mean cutting costs to the bone, just before the sale, in order to show a big jump in cashflow. Some sellers, for example, change their direct mail patterns, avoiding that big mailing in order to save dollars. Some controlled circulation publishers fail to maintain one-year direct request at its customary high level. Others change a magazine's physical size or print order.

But most buyers will spot dramatic changes. They will probe deeply to determine whether the lower cost levels can be maintained, or whether the seller is doing some damage to the long term health of the business. Moreover, such tactics damage a seller's credibility, often with the most highly desired companies.

I strongly recommend the type of planning that inspires buyer confidence. That doesn't mean the selling document should reveal every problem or pimple--caveat emptor has its place here. But a reasonable presentation of the risks in the marketplace should be made. Respect for the buyer's intelligence creates the atmosphere I find most successful--particularly when the seller wants to stay on and grow with the acquiring company. The credibility of the seller influences the kind of employment or "share of future earnings" agreements that can be negotiated.

While we're at it, let me say a few words about the employment agreement. These agreements can take one of two forms: the seller gets paid the entire purchase price up front and agrees to work for the buyer for a specific period of time; or, in addition to an up-front sum, the seller agrees to earn future payments.

Buyers often need the sellers, if they were active in management, to ensure a smooth transition, explains media attorney Ed Smith. "They want continuity and familiarity with the publication and the field." But sellers who stay on sometimes mistakenly believe that they will be able to bring their old entrepreneurial approach with them. Buyers who pay between $1 million and $20 million for a property have a legitimate right to run it their way--unless the employment agreement stipulates that the seller can run the business in his accustomed manner.

If you represent or warrant something in the sales agreement, make sure you can follow through--because you will be financially liable for it following the transaction. If, for example, you know, but don't disclose, that the January issue will contain 25 ad pages rather than the usual 40, the buyer can hold you legally responsible for the difference.

Attorney Smith also points out that buyers like to be assured they are getting a property that is free of the claims of creditors. And buyers, he adds, "don't want to see other owners coming out of the woodwork." If there are other owners, the seller should document that they have agreed to the sale. In addition, buyers typically like to include a noncompete clause in the agreement--"they don't want a guy to set up shop across the street."

Buyers who want to ensure they are not picking up a morass of problems along with the publication sometimes arrange to buy only the assets of the publication, rather than the stock, which would include debts as well as assets. Moreover, an asset purchase has some tax advantages for the buyer in transactions under $10 million. The sales structure can become a point of some contention.

In the real world, of course, ideal presale circumstances are often hard to realize. Many smaller publishers have struggled and achieved prosperity using what appears to be an unsophisticated management style. Arthur Rosenfield of Business Development Group (a consulting firm serving the publishing and related information services industries) has pointed out that the entrepreneurial publisher is often a "jungle warrior" who operates by standards quite different from the smooth, corporate methods of the large publishing company.

An example of how different these two worlds can be is that small publishers frequently take "owner benefits" from the bottom line--six of his kids are on the payroll, the family cars are provided by the business, his family vacations in Tahiti every year, and so on. While such practices ideally reduce the amount of corporate taxes owed, they can become an important part of the buy-sell discussion: The seller will hardly need incur these costs upon taking over.

The moral of the story is that even though many small companies may be "diamonds in the rough," they can and must produce documents and elucidation that will help a potential seller understand their vitality and potential.

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