How to become hot property: why private equity loves the information business model
Richard Fetterman, Managing Director at Arrowpoint Advisory, looks at why good prices are being paid for business publishers owning quality information, and why even higher prices are being paid for those that are genuine data companies.
Three things define a quality information business
You will be in a sector where people require information as a normal part of their day job. This sector will have a large number of participants (and if it is international, so much the better).
And your information has to be sufficiently valuable that your subscribers will happily pay up every time you increase your prices or introduce new products.
The automotive and financial services sectors are two good examples. They are big, international industries that are technical in nature and have lots of participants and money.
Trade buyers want to see subscription revenues
It will be tough to sell your business for a heady multiple if its revenues are led by advertisement sales, even if those sales are strong and come through digital channels rather than traditional media.
While different acquirers will have different thresholds, they will all certainly want to see more than 50 per cent of revenues coming from subscriptions in order to pay a top dollar price. And to achieve these revenues, you'll need to be providing useful, quality information.
Scale is increasingly important to trade buyers
Clearly, your business must be a strategic fit for a trade buyer. But size also matters. You are unlikely to be of interest to those who can (and will) pay a good price if your EBITDA is less than £1 million.
You have to be big enough to be meaningful. But beware of bulking up your revenues with quick-fix sales. You should not dilute the quality of your subscription earnings. And don't try to grow your subscriptions by heavy discounting, either.
There isn't a private equity house that isn't interested in investing in this area. It doesn't matter which sector your business serves.
Private equity investors will focus on the technical characteristics: the quality of your earnings such as subscription renewal rates, the competitive environment, and the potential growth of the market.
But if you think having a dominant market position is appealing, think again. If you have already captured 80 per cent of the market, private equity investors won't be interested. It is about both the quality of earnings and growth potential.
Get your subscription renewal rates to 90 per cent
Subscriber renewal rates are vital. You have to prove that your customers are sticking with you. If they are less than 70 per cent, forget talk about selling your business and focus on improving them. If they are above 90 per cent, you'll be fighting off the buyers.
Demand for information businesses outstrips supply
Significant multiples are being paid for good quality businesses in this market; in some of the deals in which we have advised, multiples in the mid-to-high teens of historic EBITDA have been achieved.
But the market is also very intolerant; many businesses are not finding any buyers because their metrics just don't come up to scratch.
An international market presence is helpful, but not essential
It's all about the scale of the addressable market. Ultimately, both trade buyers and private equity houses will look at the number of current and potential subscribers. If your domestic market still has scope for significant growth, that's fine.
It takes time to build a quality information business, but it can be done
You can't become a quality information business overnight. It requires patience and focus. Identify sectors that don't necessarily use data in their decision-making.
Think Moneyball here, where coach Billy Bean used data to select baseball players instead of relying on the sport's normal method of gut instinct.
Collect it. Package it in a way that is valuable. Then sell it.
At the very least, be the trusted centre of your community
If you are not a data business, by all means try to develop in that direction. But at least make sure that you are constantly increasing and improving the number of touch points that you have with your community.
Digital and print advertising, events, online forums, marketplaces , they can all create brand equity and trust. It may not be pure information provision but being at the centre of a community is still a valuable place to occupy.
To request a copy of the full article, please email Rosemarie Lamanno.