The Climate for Smaller Catalogs

In our last article, we discussed the interest that large investment funds are showing in the catalog industry. Recent opportunities to acquire larger catalogers with sales in excess of $100 million have attracted equity investors like yellow jackets to honey. We think that this trend will continue and that quality smaller properties ultimately will benefit from the interest shown in larger companies.

But smaller catalogers, those with less than $30 million in revenue, are at the opposite end of the spectrum. Most firms in this category struggle to find adequate financing unless the founder is wealthy or the firm is part of a large corporation.

In contrast to what has happened among larger firms, recent months have provided few quality deals for smaller catalogs. In preparing for this article, my partner, Mark Swedlund, and I challenged colleagues to find examples of small catalog companies that had sold for a premium multiple of earnings or net assets in the past year or so. They could cite only The Popcorn Factory and The Children’s Group, both sold to 1-800-Flowers. 1-800-Flowers is an exception among consolidators as many, such as Cornerstone and Paragon Holdings, have been quiet in the past two years.

John Lenser of Lenser & Co., who works with some smaller mailers and founded the San Francisco Music Box before selling it to Warburg Pincus in the 1980s, commented, “It’s a really tough time for a small mailer to get additional funding or to sell. I cannot think of anyone who had been really successful at marketing his or her company of late.”

Larry West of West & Co. said, “I would not characterize this as a terrible time to sell, but [it] is a fuzzy time.” He said that he has been contacted recently by several sources seeking smaller companies and that interest appeared to be growing.

What is a small mailer seeking an exit or more financing to do? Many of the steps recommended by professionals in the area are also good business practice for all in this strange economic environment.

Face reality. This will not be a swift process. A company should start now to be ready in a few years. It’s like planning for your retirement: You don’t do it the day before you walk out the door. If a company needs immediate cash infusion or the owners want to exit, it will be unlikely to achieve anything more than bargain pricing.

The first thing an investor will look at is the company’s financial history. Is top- and bottom-line growth steady? Investors don’t like ups and downs. How do its margins and expenses compare with others in its size/product category? To succeed in a financing or sale, a company needs to show potential, and nothing does that like steady growth.

Get your financial house in order. Your reports should be clear and easy to understand. Most investors do not understand many of the nuances of cataloging, so be prepared to walk them through an explanation of the key drivers and how to read them, like sales per book. Another step is to invest in an audit by a respectable accounting firm. It doesn’t have to be a top-tier firm, but one that is more than a one- or two-person shop.

Have the best management team you can afford. The bromide that investors buy management teams is accentuated when buying small companies.

Build your strength in your niche. “Me too” competitors are unlikely to generate premium prices. Build your story line in the press and in the industry so potential investors will be reassured as they due diligence on your business.

Investors like a hands-on feel. You want it within an hour or two from investors by plane, and ideally in the same time zone. They like being able to come by and kick the tires, talk with management, etc. A large company’s sophistication of reporting, both financial and other, is normally of the quality to offset any distance concern.

The most likely investor for a small company is someone local. The angel investor route is the most probable. Nearly every locale has investment groups of high net worth individuals who meet regularly to explore investment opportunities. Network, network, network with your banker, lawyer, accountant, doctor and everyone else you can think of who might have contacts with someone who can invest. And as mentioned above, this will take time. It’s analogous to farming. You have to plant the seed, then spend time fertilizing and watering before you get a crop.

If you decide to move definitively into sale mode, retain a professional investment adviser. There are several who serve the catalog industry.

Just as you have to hunt for the right product and lists, you will have to hunt for the right investor. Start by setting your objectives and have patience.

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