Introduction
Publishing companies may increase their sales revenue and profitability through internal growth or the acquisition of titles and product lines from other companies. Although the acquisition method may not on the surface appear to be as rewarding as internally developing your own publishing program the advantages of acquisition may provide the acquiring company with many immediate benefits that cannot be realized through internal development. Some of these benefits include (1) increasing sales revenue from titles that already have a track record in the marketplace, (2) increasing operating profits by spreading fixed costs, such as overhead expenses, over increased sales revenue, (3) expanding the scope and market penetration of existing product lines and (4) entering new markets with new product lines.
Evaluation Of Product Needs, Product Search And Negotiation Of The Deal
The acquisition of titles and product lines is not something that can be accomplished without significant time and planning on the part of the acquiring company. As with any other publishing decision it requires investigation, financial analysis, successfully negotiating the acquisition deal and then merging the newly acquired titles or product lines into the purchaser’s existing business.
The first step in the acquisition process should be a thorough review of your business. This should include an evaluation of (1) future plans regarding the scope and size of the company, (2) future product line requirements, including the expansion of existing or development of new product lines, that will need to be filled to accomplish your growth plans, (3) prospects for potential sales revenue and profit growth and (4) personnel and financial resources that will be needed to internally develop and/or acquire new titles and successfully market them.
Assuming that a decision has been made to grow the company through acquisition, then the next step is to search for titles or product lines that meet your requirements. The potential purchaser could conduct the search by evaluating the competitions’ products or by hiring a publishing consultant, one who specializes in acquisitions, to identify companies that may be interested in divesting some of their titles or product lines.
After identifying a potential acquisition candidate and assuming that the seller is interested in discussing the sale of their titles or product lines, then the purchaser alone or with the assistance of a consultant needs to negotiate the terms of the acquisition. After the purchase price has been tentatively agreed upon, title and product line acquisitions are frequently easy to put together. This is because the purchaser is normally only acquiring (1) specific assets, such as contracts for published and unpublished titles, inventory, copyright registrations, trademarks, domain names and subsidiary rights contracts and (2) possibly particular liabilities that directly relate to these assets, such as royalty advances that have not as yet been paid, royalties that have been accrued but not as yet paid, and contract liabilities for work in progress. Large product line acquisitions could also include the hiring of the seller’s editorial and marketing personnel.
There are many factors involved in negotiating the price of an acquisition however, the key element is the purchase price and payment structure that ultimately works for both the purchaser and seller. Depending upon the size of the acquisition and the particular needs of the parties an acquisition deal may be financially structured in numerous ways that contain all or some of the following components: (1) a single payment to the seller, (2) a deferred payout schedule consisting of a payment at the time the acquisition deal is completed and additional fixed sum payments that will be made over a specified period of time, (3) future royalty payments based upon the purchaser’s sales of the newly acquired products and (4) payment for the seller’s inventory at the time the purchaser sells particular inventory when that inventory was not included in the initial purchase price.
RECOMMENDATION: A “Letter of Intent” summarizing the essential terms of the acquisition should be prepared.
Due Diligence
Once the purchase price has been tentatively agreed upon, based on the information and representations you have received from the seller, the purchaser should conduct an analysis, commonly referred to as “due diligence”, of the assets and liabilities that are being acquired and the previous sales history of the acquired titles. The due diligence investigation with respect to the intellectual property assets that are being acquired (contracts for published and unpublished titles, copyright registrations, trademarks, names of titles and product lines, websites and domain names) is necessary to (1) determine the origin of the intellectual property assets; (2) determine the extent of the seller’s interest in the intellectual property rights of these assets; (3) determine the scope of intellectual property rights that any third party may have in the assets; (4) reveal defects in existing intellectual property assets that have or may in the future diminish the value of these assets; (5) preclude or lessen the potential liability from third party infringement claims that may result from the purchaser’s acquisition of the seller’s products or development by the purchaser of new products that are based upon the acquired products; and (6) obtain a realistic financial valuation of the intellectual property assets that are being acquired. The due diligence should also include an evaluation of all contracts that relate to the assets or liabilities that are being acquired such as those for subsidiary rights, distribution, product development, manufacturing and fulfillment. After due diligence is completed, based on your findings you then conclude the deal at the tentative price, re-negotiate a new price, or terminate the deal.
RECOMMENDATION: An attorney or accountant, who is knowledgeable in publishing acquisitions, should conduct the due diligence or at the least act as a consultant to the purchaser on this matter.
About the Author: Lloyd L. Rich is an attorney practicing publishing and intellectual property law. He can be reached at 1163 Vine Street, Denver, CO 80206. Phone: (303) 388-0291; FAX: (303) 388-0477; E-Mail: [email protected]; Web Site: http://www.publishingattorney.com.
