The Art and Science of Online Media Exit Valuations
How much is a digital media company worth? That is a question that a lot of us have been grappling with as lots of these companies have raised anywhere from a few million to hundreds of millions in venture capital.
For even small companies with a handful of employees, fractions of a percentage change in a valuation can mean hundreds of thousands or millions of dollars difference in the ultimate payday. Yet, arriving at a definitive dollar figure can be a painstaking effort that encompasses a raft of factors which fluctuate based on everything from cash flows to psychology.
The discussion does have to start somewhere, though, and there are parameters. We’ve gleaned the ones below from research, our experience and interviews with more than two dozen media buyers, publishers, sellers and financiers. Surprisingly, there is not one IPO of a major digital first editorially driven media company, so selling is the only type of liquidity event on which we can base our analysis. There have been rumors that Buzzfeed or Vox could IPO, but until they do go public or get acquired, their reported sky-high valuation numbers are largely theoretical. Read on to learn what we’ve found.
A lot of discussions around a media company’s valuation start with a multiple of its revenue. Digital media companies tend to sell for between 2.5 and 9 times (2.5–9x) revenues from the previous, or “trailing,” 12 months.
Buyers, not surprisingly, are motivated by how much money they believe the company is going to make. Looking ahead, prices paid tend fall between 3–7x the predicted forward revenues for the upcoming 12 months.
That’s still quite a range. Should a media company with a predicted $10 million in yearly turnover sell for $30 million (3x revenues) or $70 million (7x)? A number of key factors can push the price to either end.
Profitability and Its Proxy, EBITDA
As many of the most-hyped tech companies have shown, taking in money doesn’t necessarily mean making any.
Many buyers demand their acquisition targets be profitable. They often have formulae for the multiple they’ll pay over that profit, usually operating profit expressed in terms of its proxy, EBITDA.
EBITDA, short for “earnings before interest, taxes, depreciation and amortization,” measures how much money is left after the “real” expenses — things like salaries and office rent — are paid but before any financial and tax wizardry that can make the reported income, a.k.a. the bottom line, look quite different. Most digital media companies sell for about 8–12x EBITDA.
Sophisticated strategic buyers look much deeper. They want to know not just the current EBITDA as a percentage of revenues, but also what they might do to improve on it.
Can they cut expenses from combining back end operations like bookkeeping or human resources? They might look to see what new profits they can add through new revenue streams.
“When we think about M&A it’s less about what the business is today and more about what are we going to be able to do with the business,” says Vivek Shah, the CEO of Ziff Davis who has overseen multiple media acquisitions. “With revenue growth and margin improvements, in 12–24 months, what is our effective multiple going to be? We push ourselves to be at 5x EBITDA” as a percentage of revenue.
Buyers also focus on how fast a company is growing. For media companies less than five years old, a revenue increase of 30–50% per year is considered a reasonable benchmark.
But those younger media companies also tend to put their retained earnings into expansion, hiring more staff and adding services in order to increase revenue growth. Higher growth then means lower profitability, which can lead to some intense discussions during the buying process and even foregoing certain types of potential acquirers looking mainly at immediate financial returns.
“Private equity-backed buyers want you growing fast, but they value you based on your profit,” says Scott Clavenna, CEO Greentech Media, acquired last July for an undisclosed amount. “So you’re in a situation where you have to be fast-growing and highly profitable to get a good multiple from a PE-backed firm.”
Type of Revenue
Certain varieties of revenue tend to add value in acquisitions, too, from a half-percentage point on up in the multiple:
- Subscriptions or memberships show an audience is willing to pay. Plus, the cash comes before the service is delivered and thus helps finance upcoming operations. (Financial professionals call this type of cash“pre-revenue.”) Subscription revenue is also more predictable than advertising or affiliate marketing, both of which can fluctuate wildly based on market conditions that are out of any company’s control. “The ARPU [average revenue per user per year] of a digital subscriber is 7x higher than the average non-paid reader of the New York Times,” wrote Frederic Filoux in his Monday Note newsletter.
- Paid research revenue is attractive because it shows that the company is able to package and sell information. That research can then be used to create other media that attracts still more revenue through additional purchases, advertising and, perhaps, events. It can generate press coverage and interest and lend authority to perception of the brand.
- Events. Some buyers of media companies like event revenue because it shows the company’s community is motivated enough to physically go somewhere for the experience the media brand creates. The events prove that a list of names the company has represents real people. Events also tend to have a high profit margin, 50% or more.
- Databases. Media companies that know their consumers are worth more than similarly sized ones that don’t. Basic lists — names, email addresses and zip code — help. Additional data the publisher may have, such as behavioral and purchase info, can add more value.
- Multiple streams of revenue are better than fewer, especially if they are offsetting and perform differently in different market conditions.
Type of Advertising
Endemic advertising specific to the content is better than more generic ads. Directly sold advertising is generally worth more than revenue via ad networks or exchanges.
Audience / Community
Readers of complex financial media are going to be worth more as media consumers than those with little disposable income. Busy C-level execs come at a premium. Being a must-read for executives in a specific sector helps, too. That’s all certainly an explanation of why Pitchbook, which publishes investment data and research, sold last June to Morningstar for a price of $255 million on reported 12-month trailing revenues of $31.1 million, an unusually high multiple.
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Ultimately, an online media brand is “worth whatever someone is willing to pay for it,” quipped Peter Kafka, as observers marveled over the nearly 9x revenues Business Insider was said to have gotten from German publisher Axel Springer when it sold for what equated to a valuation of $442 million. The deal did illustrate another factor that pushes up the price of a media company: if it happens to have what the buyer wants at that moment, such as entree to a new international market or particularly desirable expertise they wish to learn.
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