This appeared in Proseed Mag here
Dear Richard, during the past year I managed to build my company’s value. I would like to sell the company – get some money for myself for the shares and the rest of the amount dedicate to the company’s development and growth. What do you advise to do? It is a media related business. The team consists of 6 people. We have 200k zl of yearly income. There is no profit so far. How to prepare ourselves? How to act?
Dear „I want to sell my business and see it grow and develop”,
There is a slight contradiction in your goals. You want to get money for your shares, and you are making plans for your company, post exit. In a real sense once you sell your shares it is no longer „your business”. What the future owner does is up to him or her. However, as everyone who has tried to value a business knows, the present value of the business is the discounted value of future earnings. You need a plan and story that makes the company attractive to potential acquirers.
Let’s take the issue of maximizing the value of your shares. If you are not making a profit at the moment – the business is not worth much, except in very limited and unlikely circumstances. It’s a mistake I’ve made in my past to look for investors when a business I owned was losing money. A perfectly reasonable question I was asked by a potential investor „why on earth should I want to own a business that is not making money?” It’s often better to keep your money in the bank than own something that needs external cash injections to stay afloat.
However, let’s not be pessimistic – maybe there are reasons why your business might be worth something even if it is not making a profit. Perhaps your business has the prospect of making a lot of money soon. The best examples are companies like Amazon which historically spent a fortune on marketing, offering long term profits against short term results. If the reason for losses now is optional or one off investments in things like marketing that could be cut or will soon be over, then the current trading loss can be presented as an investment choice.
Maybe your business could be used as a platform to enter other markets. Media businesses are an example. If you own a newspaper, you can use your „near zero” cost of advertising to built up a position in other markets that would cost anyone else a fortune. News International were able to use their „near free” cost of print advertising to build up their now fabulously profitable satellite TV business. In Poland, ITI cross promote their various media channels (magazines, cinema, TV) very effectively. If you owned a loss making cinema, ITI might make more money out of it that you could.
Maybe your business could be profitable after tough cost reduction decisions. If this is true, a new owner could make a profit even though you don’t. After firing half the staff, closing the office, getting rid of the accounts department, keeping only the best sales and marketing people and the clients a new owner might be able to make money. You have to ask the question whether it is not better to do the things that need to be done first before trying to sell the business. You’ll get a much higher price if you do the tough stuff first.
There are exceptions to the rule that if you are not making money, your business has little or no value: think „Instagram”. If you are incredibly lucky, it’s just possible that what you are doing will be of strategic interest to a wealthy market leader who will buy you out at a premium price. It is however a very risky business plan to count on this. Looking backwards it is obvious how you could have made a fortune if you had access to capital 5-10 years ago (buying fields next to major roads on the edge of most Polish cities, for example, where now there are blocks of apartments and shopping centres). However these opportunities are not open to those without capital. And it is not obvious how to make a good return on capital from June 2012 for the next 5 years.
There may be people who want to buy your business for lifestyle or prestige reasons, or because you are a threat to them. Some businesses do have a glamour factor, and the media is one of them. High circulation newspapers, popular TV shows and web sites, and respected industry titles have a value as well, but it is hard to monetize. If you can buy favourable coverage in the press, then your value diminishes a lot. If some of my readers are cynically thinking, „this happens the whole time” you are sadly correct. As money flows out of traditional media due to the rise of the internet, the number of media groups that can resist commercial pressures not to be objective is falling, and the money that can be invested in content is going down too. In terms of being a threat, then most threatening thing to do is to make money. Being a loss making competitor is not so scary.
Having dampened your expectations of making money as a business, let’s briefly review what possible ways there might be of making more money from the existing business. Making the product better and different may be a good idea, but only if clients are ready to pay more for it. It is worth reviewing what your competitors (and/or organisations against which you benchmark yourself) do, and seeing if there are any of their activities that you could add to your range of services. Don’t outsource to a market research company, have the boss or a decision maker go see the top 20 clients in person and discuss whether they are getting value now, if they would be interested in new, better or different things in your product, and of course listen hard to any suggestions they have. This might yield some ideas. If this doesn’t lead to anything new, the only options are to increase revenue through intensified sales or cut costs. There may be marketing partnerships to be done with organisations that will distribute your product to their audience in return for adverts and there maybe be advertisers who have not yet been approached.
Is the sales team operating an international best practice? It is worth reviewing your sales process. Do you know what KPIs are common in your industry in other countries? It is instructive to find out, compare simple things like sales targets, numbers of calls, meetings and offers that need to be made per week by each sales person. Sometimes it is quite surprising how much less is expected in Poland. If you do this comparison, be ready for excuses about „Poland being different, not understanding the local culture”. If you want to be successful, you have to teach your organisation to work to international standards. If you can afford it, it can be worth hiring someone good, who has worked doing a similar job for competitors you admire, at least to review your processes compared to theirs.
Are there markets like the European Union programmes that can sponsor your product with large expensive adverts for example? I am not a fan of many of these programmes – but they do exist and spend a lot of money so perhaps you can get some of it. It is not a stable long term business to live off EU or government money as there will be less than everyone expects in the future.
Are there any opportunities to cut costs? Can the number of journalists be cut or can they be paid less/work harder? It doesn’t usually sound like much fun but for media organisations in high cost countries that work in English a lot of the content generation is now done in lower costs countries, with fewer jobs left at home. Could work be outsourced to Polish speaking Ukrainians ? Would it make a difference? Is it worth it?
Even with the best organisation in the world, if the market is not there, you will not succeed. You need to be sure that the clients are getting things they really value and are ready to pay for at prices well above your costs. If you have a market like that, you have a potential business.
If this all sounds rather tough and demanding, welcome to the exciting world of building a world class business. It is not easy, but it is worth it. Building a world class business can be very satisfying.