Know When to Sell
Catalog owners tend to assess their year-earlier performance while on a short break after the holiday sales period, and often come back to the office ready to change or improve their positions. Simply, they ask themselves if last year was enough; now can I/should I sell out? And if so, what the devil are the next steps?
The proper answer requires you to ask yourself a number of questions:
1. Why are you selling?
2. What growth “storyline” have you accumulated (for a good valuation)?
3. If this is, indeed, the right time to exit, should it be all-at-once, or via a phased-out program for you and your team?
Why Some Catalog Owners Sell
Each year a number of catalogers sell as part of a typical scheduled retirement. And the sale of their businesses are relatively straightforward.
Others sell due to below average P&L performance. Successful cataloging (i.e. 8 percent EBITDA, with 8 percent to 12 percent annual revenue growth) is tougher to attain than ever before. Economies of scale have shifted in favor of “large” operators. Those under $50 million to $75 million in annual sales find there’s no longer a level playing field when competing with larger companies. This is especially true in freight out/in expenses, importing volume economies, catalog production and search.
Finally, another reason for thinking of selling occurs when an owner has good operating fundamentals, but can’t secure sufficient growth financing. Or he or she is just tired of the bank requiring a personal guarantee for an ever-expanding working capital line.
The Next Steps
In the case of retirement, employ a fairly standard approach to marketing the business. The first question to ask here is whether your business is large enough to allow use of an intermediary/investment banker to represent you. Typically, this means a transaction valuation at closing of probably $5 million or more. Smaller companies and transactions don’t get economic value from an intermediary as it’s somewhat expensive due to the time intensiveness of the sale and legal processes today.
On a $5 milliion deal, even a standard Lehman formula for the intermediary would translate to a fee of $150,000, plus at least part of a monthly operating retainer (typically $5,000 to $9,000 per month) that’s not credited to the success fee due at closing. Most intermediaries in fact now use at least a “modified Lehman” formula, which on a $5 million deal would generate a success fee of $200k.