Selling Your Catalog: Prepare for the End Game

Sale, merger, IPO? It’s important to know, from the very inception of your business, how you will exit from it.

The end game is a fascinating concept. It is philosophically universal, therefore having definition and meaning relative to life and living, religion, art, war, sports, investments—and ownership of a catalog business.

When one thinks of the term “end game,” the two words “end” and “game” should be considered. First, it’s the end of a process, often the sale of a business or the harvest of wealth after a long period of creating and increasing value.

Second, it’s a game, that is, a strategic contest producing either a winner or a loser. By definition, then, the end game in a catalog business is a strategic process whereby value is harvested and maximum wealth is won as a result of precise strategic planning.

The achievement of a successful end game is easily described; however, the preparation and execution of the steps leading to the successful strategic achievement of the end game are exceedingly difficult and subject to significant internal and external influences.

The Objective

After years of advising owners and CEOs about their end-game objectives, it’s clear to me that few owners actually have defined the end game for themselves. When the question, “What is your end game?” is asked and the answer is, “Sell the business,” little thought has gone into the objective. The owner is expressing a hope, not a plan.

Rarely, an owner will say something such as: “To improve earnings by 25 percent during each of the next three years in order to create a multiple of eight times EBITDA [earnings before interest, taxes, depreciation and amortization] instead of the present five times EBITDA, and to do that using disciplined segmentations of customer and prospect mailings through advanced RFM tactics, and to focus on universe penetration in four major SIC segments to sell the company to one of three strong strategic buyer candidates.”

That is a strategic plan to achieving an end game.

Too often, catalog management teams focus on multiple projects and objectives for improving the growth and performance of a catalog, only to discover that the owner has an entirely different end-game objective. The managers are investing for growth, and the owner is preparing to harvest wealth; the difficulties with execution are self-evident. The owner is unable to articulate the end game or is reluctant to let any of the managers know that a “harvest event” is imminent.

Consequently, owners and operators are out of synch, strategically and emotionally. The outcome is generally poor performance and a squandering of precious earnings.

If you think of a game of chess, you can draw striking parallels to the game of catalogs. Masters of chess are able to move from point A to point M in a skillful series of moves that may go from A to F to C to L to G and finally to M. The unskilled opponent may simply be moving from A to B to C to D to E and, ultimately, on the M in a linear, logical, yet uninformed series of steps having no relationship whatsoever to the catalog master’s strategy. How novel and refreshing it would be if they were both in synch.

Another analogy frames the end-game dichotomy. If you set out from Chicago with New York as your final destination, the route goes through Toledo, Cleveland, Pittsburgh, Philadelphia, Newark and into New York via the Holland Tunnel. This produces the greatest possible value relative to time, distance and cost.

On the other hand, if you simply left Chicago without a clear idea as to where you were going, you might reach New York via Los Angeles, Seattle, Butte, Minneapolis, Little Rock, Houston, Atlanta and Washington, D.C. This route takes much longer, is much more difficult and costs a great deal more money than the defined, straight shot.

Possible End Games

There are many paths to the end game; only a very few actual end games exist:

1. Sell the catalog to or merge with a strategic buyer (competitor);

2. Sell the catalog to a financial buyer (investment group);

3. Take the catalog company public, selling shares to the general public (IPO);

4. Sell the catalog to the employees (ESOP);

5. Sell the catalog to management (LBO);

6. Sell the catalog to existing partners buying out an interest (recapitalization);

7. Sell the catalog to a son or daughter (succession);

8. Liquidate the catalog and take the cash (liquidation).

Beyond these end games, the alternatives quickly become unusual and specialized; however, the bulk of catalog end games fall within these categories.

Immediately it becomes clear that having an idea as to the end game is preferable, as each of the end games demands different strategies and tactics. The tax implications alone require careful financial investigation to determine where the present and future benefits and liabilities fall.

If you spend five years preparing for succession, and suddenly the business must be sold to a strategic buyer, the financial outcomes can be entirely different. If the strategy is to sell the catalog to the top two managers, and suddenly liquidation is the only alternative, the financial harvest will be significantly different from what was originally anticipated.

In my years as an advisor to catalog owners and CEOs, I can count on one hand the number of owners who could clearly, confidently and consistently state and adhere to their end-game objective and note the strategic steps to its achievement. They are the owners who receive maximum value for their catalog companies at the time of harvest.

Financial, Intellectual and Emotional End Games

For most catalog owners, the end game is defined by financial objectives. The best end game is the one producing the greatest possible amount of wealth and the most favorable tax benefits.

Other owners are more concerned with the preservation of what they’ve built and its ongoing intellectual existence. Yet others are emotionally invested in their companies and primarily concerned with the culture and continuation of what they’ve created and built.

One is not better than another; all are legitimate end-game considerations provided they’re the true desire of the owner.

The danger comes when a financial end game is disguised as an emotional end game, or an intellectual strategy is mistaken for an emotional one. The point: The end game must be the end game if the outcome is to be acceptable and satisfying. I know a number of unfortunate owners who really want the money but who emotionally have to give the business to the not-so-talented son. That’s a failure of end-game planning and definition.

With the great bulk of catalog owners having a desired financial end game, it’s essential that those owners learn what elements of financial performance are positive for creating maximum harvest value and wealth. The cardinal element is, always has been, and likely always will be, earnings.

Great Expectations and Other Delusions

In a financial end game, earnings are the primary thing that matters. A catalog owner may believe that the catalog has creative, product or market dominance—and those aspects do add value. But earnings are the most important founding element of the transaction.

I’ve seen numerous catalogs that are exquisite from a creative point of view, but they have no earnings. They have no value outside the assets of inventory and receivables. No investor or strategic buyer is going to pay $4 million for a catalog doing $4 million in sales with zero earnings, regardless of how nice the catalog looks. The business has little value without earnings.

In the same manner, a catalog that represents great ideals or social causes is valuable only to individuals concerned with those ideals or causes, and those people often don’t have money to invest. If a catalog is socially important, the financial value becomes secondary to the social value. The point: Don’t confuse social or intellectual relevance with wealth. It’s almost always disappointing.

Typically, a catalog’s value will be determined by the marketplace, which uses earnings and a multiple of EBITDA to determine that value. To plan for and approach the harvest event or execution of the end game with an expectation different from this reality is to engage in self-delusion. And self-delusion is a terrible place from which to negotiate.

The outcome value of end-game planning can be summed up by the financial reality of the value of a catalog company. A catalog company with exceptional earnings can bring six to seven times its earnings upon sale. A catalog with $2 million in earnings can bring $12 million to $14 million at the time of harvest. The same catalog with average earnings of, say, $1 million, will likely bring only four to five times its earnings. The sale price might be only $4 million or $5 million. Compare the extremes: $5 million to $14 million.

That’s the value of end-game preparation.

The best end game is the one producing the greatest possible amount of wealth and the most favorable tax benefits.

Seven End-Game Principles

Catalog owners who want to harvest wealth now or in the future can benefit from these guiding principles:

1. Pre-determine the end game as far in advance as possible.

2. Describe the end game in detailed, active language, not generalities.

3. Develop disciplined strategies and tactics to efficiently achieve the end game.

4. Communicate to everyone the objectives, strategies, and tactics.

5. Measure the EBITDA (earnings before interest, taxes, depreciation and amortization) impact of every action and decision; stay the financial course.

6. Base the end game in reality, not delusion.

7. Think in depth about the end game and measure your progress in terms of EBITDA at least quarterly.

With these seven common-sense guiding principles and a consistent focus on the value of end-game preparation and planning, the catalog owner should create substantial additional value and wealth at the time of harvest. If the improvement to the multiple of earnings outcome is five times, every $1 of additional earnings is $5 of additional wealth in the owner’s pocket. That could be the easiest money you ever made.

The cardinal element is, always has been, and likely always will be, EARNINGS.

Donald R. Libey is co-founder of Libey-Concordia, a Philadelphia investment banking firm to the catalog industry. He is a worldwide advisor to catalog and e-commerce CEOs and boards of directors, and he has owned and managed numerous b-to-b and consumer catalogs in his more than 30 years in the direct marketing world. Author of seven books on cataloging, Libey also is recognized as an industry-leading strategic futurist. He can be reached through the Web site: www.libey.com.