Published in C21 Media, 2 July 2021
M&A activity in the media sector has come roaring back in 2021. Warner Bros’ merger with Discovery and Amazon’s acquisition of MGM have grabbed the headlines, but the relentless pursuit of high quality content and talent means well-run independent production companies could soon attract compelling offers from broadcasters, streamers, studios or private equity investors.
Many indie owners are fiercely protective of their status. But for those keen to embrace the benefits of being part of a larger enterprise, there are a few things that can make the sales process run smoothly and perhaps prove more lucrative. Below are five tips to ensure poor preparation doesn’t scupper the dream deal.
Identify where the value lies
It may sound simple, but the first step to a successful sale is understanding what makes the company valuable – and thinking about how to quantify that. For indie producers, the value is likely to be locked up in the people, the catalogue and the IP. The brand will also factor into valuation estimates. Is the company famous? Does it have a clearly understood proposition? Is it the kind of firm that gets invited onto high-profile pitch lists?
Profit and earnings are a useful basic measure, but limited in assessing the value of people-based businesses or future prospects. A priority for any investor is assessing what the company is capable of becoming with the right backing. So indies need to establish a formula that measures the worth of such intangibles.
Assess where the goodwill sits within the firm: Indie owners looking to sell need to ask – would the business keeping growing if I left? Would the phone keep ringing? The reality is that a lot of people businesses don’t sell because buyers are worried that the principals are entrepreneurial spirits who won’t stay on after the deal. Or if they do, they’ll just sit back until the end of their earn-outs.
To avoid this perception, indie owners need to be very clear and consistent about their own intentions. If they plan to stay, they need to deliver articulate messaging about what appeals to them about working for a larger company. If leaving, they need to demonstrate how management has been incentivised to stay on and grow the business. Share option schemes that give key executives a vested interest in the company’s performance are a way of reassuring the buyer.
Have high quality information on tap
From initial approach to completion, an acquisition can take six months or more. During that time, the buyer will ask lots of questions and expect prompt and accurate answers. If the seller isn’t able to deal with these requests quickly and easily, the buyer will get frustrated.
Key to avoiding this is to introduce processes that stay on top of critical business data. Companies need to avoid picking KPIs (key performance indicators) for the sake of it. Instead, they should identify measures that a) demonstrate the health of the business and monitor the future performance of the business, providing credibility to forward looking information.
Precision with data doesn’t just reassure the buyer, it also means that the process of integration into the larger firm is likely to be smoother.
Make sure the house is in order
Producers are creatives, so it’s understandable that considerations like tax can get overlooked. But failure to stay on top of such areas can come back to haunt producers if there are loose ends during the sale. It’s also worth noting that decisions about the tax status of key employees can be a lot cheaper if made in advance, rather than during the sales process.
Client and employee contracts is another area that can become problematic during sales processes, so ongoing oversight is crucial. The same goes for licenses and IP – especially if there is any fuzziness about rights ownership.
Above all, companies need to be transparent with their advisers. It is always best to disclose key information, even negative to advisers, as this means it can be proactively managed and reduce the opportunity for buyers to chip away at the price.
Start planning straightaway
Even if an indie isn’t planning to sell for 10-15 years, it still pays to develop a sales mindset. The fact is that a once-in-a-lifetime offer can come at any time. Furthermore, the methodology that underpins sales is good practice even if the company owner chooses never to sell. Building on the previous points, it means the company will have a clear sense of its growth prospects, an incentivised management and friction free information system. All this is valuable when recruiting top talent and building durable partnerships. All of this is likely to increase profits in the short term, as well as making the business more attractive to acquirers, meaning an off market approach is more likely.