Exit Strategy: Production Co

EXIT STRATEGY: For Production & Post Production Company Owners
By Stephen J. Kerr

Timing, as they say, is everything. The value of any business is relative to the market demand for that business and the profits it generates. That has little to do with your retirement plans, your health or your personal business goals. Put another way: Choosing when to sell your studio can be more important than who you sell your business to, or what you will do after it is sold. This is particularly important for producers and those who own (audio, video, digital) post houses - because qualified buyers are in limited supply.

So often a production executive will come to us to sell their business when the time is convenient for them - but all wrong for the corporation. Too often it is because they have just lost a big account, or have been sick or they just want to go to the teller window and cash in their chips.

I'm afraid that it does not work that way. Even if you have had many profitable years of service to the industry - buyers will value your company based on its most recent performance and future prospects. They will not overlook recent disasters and a future possibly filled with rattlesnakes and bears. That is why we advocate that you strategize the optimum time for the business to be sold, over simply choosing the best time for you to sell it.

But how do you know when your business has reach a peak? One answer is, When your production company has grown so rapidly that it starts to tax your ability to run it and finance it's growth then maybe it's time to think about selling. When you have maximized the use of your facility and equipment, your talent and your financial assets to fuel your growth - the business might be reaching its maximum value - without a further investment of outside resources. Some people think that the party will never end. That one success just leads to another and another…but be wary of that trap and constantly assess if this is the right time, the right economy and the right value to cash in.

Why is it that business owners always seem to come to us one or two years after the company has peaked and is now on a decline to sell their interest. The answer is that, "It isn't as much fun when income is off 40% and your best clients are defecting to LA studios". It is often the case that we could have gotten that producer a million dollars more for their business a few years ago - but they lacked the motivation and foresight to sell their business when it was at its zenith. Worse yet, some post houses were contacted by major league buyers at the time they were hitting their zenith - but turned down their offers. (Only to wish they could have "the one that got away" back a few years later.) You need to take a fresh look at your business and come to understand that it is just like a house, an office building or any other asset that you own - it has a value that changes with the market. Too many business people (especially production executives) have their own self image and emotions enter twined with their company. It is important to remember that this is probably the largest asset that you will ever own and you need to treat it as such.

That is why I have been writing a book entitled, Exit Strategy. It is designed to help owners be in control of the process and plan the optimum time to realize the highest value for their business. The fact is that those who strategize when to sell their company and who to sell their company to, often do much better at maximizing its value.

So, how do you control the process and how do you maximize the value of your business? There are some simple and some not-so-simple things that you can do to greatly enhance the value of your business and virtually assure that buyers will come flying to you to buy it. Here are ten things that you can do:

1. Keep impeccable records. Many production companies can be rendered unsellable or certainly do not achieve the value that they should because their record keeping is so poor. Good records make for easy transactions.

2. Keep a high profile. It doesn't help your value if no one knows who you are. Get active and get well known by industry trade pubs, associations, vendors and competitors. Image is often more important than reality. If you generate $2 million a year in revenue - you want the industry thinking you do $20 million.

3. Hire key managers and shore up weaknesses in your organization. A strong general manager, hot shot sales person or super-efficient production manager might just be the key to upping the value of your business. Your shop probably wont be boxed up and moved to New York or San Francisco. Your people asset are important.

4. Rapid growth is more important than big profits. Buyers would rather see your company growing at 25% a year than making 25% profits. Most buyers know that high growth usually leads to high profits eventually.

5. Consolidate your power within your niche. Remember, it is better to be a big fish in a small pond. If your shop specializes in one specific end of the business, like training films, don't go out and start shooting TV commercials. The fun you may have in this diversion is greatly outweighed by the distracting effect it has on your business. Buy up weaker competitors if you can and eliminate the competition . Controlling market share even in a small niche market can contribute to a big valuation of your company.

6. Innovate and lead. Build on any technical or creative advantage you have over the competition. Your marketing presence, your Internet presence and your customer base might be more valuable than the actual works you sell.

7. Go national or global (while keeping within your niche). The best buyer for your company might be in the Chicago or even London. If they don't know that you exist - they can't make you an offer.

8. Star Power. Nothing increases perceived value more than having a hot client in your house. It is important not to let that client run past their prime before cashing in. One best selling video series, TV show or movie can catapult the value of your business to new heights.

9. Lock up as many rights and markets as you can. If you own all mediums and all rights to your productions you will be more valuable to others than if those rights are limited. Take equity in your works where ever offered. When all you have to sell is your time and machines - machines is all you have on your balance sheet.

10. Stay out of lawsuits, bad distribution deals and confining contracts. You can't expect a buyer to pay big bucks for your company if your talents and productions are tied up in disadvantageous relationships. Terminate bad relationships before they impinge on the value of your business.

I was recently contacted to sell a Colorado based producer, who had created an excellent foreign language learning video series. This program was very successful in the corporate market and was generating over $5 million a year in sales. The problem was that their distributor controlled all the marketing rights. The producer received little more than a royalty. Other than a studio, some camera equipment and an Avid…what did they have to sell?

The stories of others making millions off of your talents are legendary. You need to make sure that you control some part of what you create to obtain maximum value for your business.

Beware of the trap of spending all of your profits on equipment and technology. Your value is, and always will be based on your profitability. One can never recapture the full value of the equipment you have purchased. To reap a higher value, it is better to use slightly older or rental equipment - and earn more profits.

In planning the sale of your production company it is a good idea to strategize who you would want to sell to and what benefit they would derive from owning your business. Also, pick a buyer that can actually afford to buy your studio. Your nearest competitor probably doesn't have any more money than you do. Here's a priority list of potential buyers in order of highest payers to lowest payers: 1. Public companies; 2. Very big private companies in the same business (those with 10 times more revenue than you); 3. Large suppliers, clients or vendors that need what you do; 4. Roll-ups (financial buyers consolidating players in the industry.); 5. Competitors; 6. High wealth individuals. Forget the notion that there are a gaggle of millionaires out there who are dying to buy a pre or post production company so that they can "go Hollywood". It's mostly a myth.

Follow these ten suggestions and I guarantee that you will not only pump up the value of your production company - you will have more fun running it. Just remember that your company is a "storehouse of value" measured in profits. And someday that business can give you more than just a good living - it can make you wealthy.