Be your buyer to determine your selling price

Floyd Lewis

Almost every owner has a selling price he or she would like for the business, including publishers. The publishing industry has used many methods to determine a publication's value; the most common method now used is a multiple of cash flow.  However, often sellers set a price by what their business is worth to them, and sometimes it is based on what they need, which is rarely related to the value.

The best way to not be disappointed is to become your own buyer.  Think about buying your publication as if you only see what the buyer sees.   Unless you are about to sell your publication now, you have time to make changes on things that affect your cash flow.

In the not too distant past, revenue was the main factor; today it is cash flow. When it was revenue, your owner discretionary funds did not affect your sales value.  Today, those "hidden" expenses hurt your value.  If you own your property and do not charge yourself rent (preferably the same amount you would lease the property to for a buyer), your cash flow decreases by the amount you would charge a buyer.

Let's determine your cash flow:

Like most, you prefer not to have a high taxable income, so let's pick $20,000 taxable income. To determine your cash flow, add back depreciation (you have been in business a long time and don't have any depreciation), add back interest (you have none, business is paid for). Some owner discretionary funds may be acceptable add backs to a buyer, but most buyers will feel that – if you expensed it – they likely will need to also. But, let's just say the prospective buyer allows for $5,000 of a $15,000 auto expense shown on your financials. 

Cash flow to the buyer is $25,000.  Then, of course, there is your salary. Most buyers will feel that this is also an expense they will incur, whether for them or for a manager. If it costs you that much to live, it will likely cost them the same, so no add back. There is an exception to this: if you can show you are not active in business, or that your salary is high compared to a replacement doing your duties.  

To make owner discretionary funds easy to identify, some owners have set up "corporate expense" accounts where they put things like their cell phones, auto expense, rent to themselves and profit distributions. In the example above, let's say you did this and the total was $28,000, plus your $20,000 profit. Now we have a cash flow of $48,000.  (NOTE: get with your CPA to set this up). 

The cash flow of $25,000 would likely bring you $112,500 for your publication, while the $48,000 cash flow would likely provide $216,000 for your publication. It is all in how you report your discretionary expenses. Yes, you may have to pay more taxes, but you also will get considerably more for your publication. In both examples, the revenue is considered to be the same, the multiplier used is 4.5 times the cash flow and rent was expensed.

But do we still have the right price for you, the buyer? Without property, most publications are expected to pay back their purchase price, plus a living (or profit) for the buyer over five years. So, as a buyer, if you see the owner has a salary of $80,000 a year on his P&L's, then you would expect to be able to have the same salary; since it is not figured in the cash flow, it has been accounted for.

With the example above, your purchase price was $216,000. Your note or investment repay would be somewhere around $45,000 a year for five years, leaving a cash flow or year-end dividend of $3,000 a year. Not much of a "cushion" for you, but enough to cover the purchase.

If your cash flow was $43,000 and you asked for the same $216,000, the cash flow would provide a negative income in the above example, and – as the buyer – you would want the price of the business to be lower unless you were willing to accept a lower salary for yourself. The lower price the buyer would be asking for might fall about where the cash flow shortfall was; in this example: a price of $193,500 using the same multiple.   

This is not what you want as a seller, but the value of the publication based on financials shown would be correct. The fact that discretionary funds are hidden in the P&L's will not matter to the buyer. He will only consider what is shown and identified as add backs to cash in the financials.

The more you report and show your true value on financials, the more likely you will receive that value when you decide to sell. You should do this for at least two years to have a buyer accept it as a consistent financial occurrence and not an abnormality, but it can work with one full year and a year-to-date that supports the previous year.

When you sell a business, you are selling profit. If you are not showing the full profit, you will be selling your publication for less than its real value.

Lewis Floyd is a senior associate with W.B. Grimes & Company, with responsibility for the Southern states.  He may be reached at (850) 532-9466 or lfloyd@mediamergers.com.