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How much for that newsagency?

I think it is time for change in how newsagencies are valued. The multiple of between 3 and 4.5 times net earnings where net earnings is a figure with too many add-backs is not viable for incoming newsagents. It is more important for us to make our money week by week rather than relying on a parachute at the end. Ill informed purchasers find they have paid too much.

These words which I published last week in a post here have upset some newsagents. I can understand that. I am challenging the traditional way newsagencies are valued. I am proposing that instead of a high multiple on an often questionable net profit figure that we let the market find its level. This approach makes incoming newsagents more informed and surely that makes for a healthier channel in the future.

Newsagents need to debate these matters since they go to the viability of our channel in the future. It’s this long term view we need to take. At least I hope that’s the view newsagents take on this issue.

I’m glad to discuss the issue of newsagency valuations with anyone. I’d be glad to participate in open debate – not because I think I am right but because I think we ought to debate these things so we can work out what is right.

I want a viable newsagency channel long into the future. Hopefully the stone I budged down the hill last week will, in a small way, support that.

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Newsagency challenges

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  1. Lorraine

    How many newsagents, having purchased a business, find themselves questioning the information on which they based their purchase decision.

    I suspect any negative comments received are because those people, having been subjected to paying too much based on suspect multiples and add backs, are wanting to do the same to the next buyer.

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  2. Y&G

    Well ,how about that? I google newsagency valuations and look what I find!

    I’m just curious as to how big a chunk of a newsagency’s selling price would / should account for whether the business is a primary or sub agency. In other words, just how valuable would/should a territory really be?

    I’m interested in opinions re this, given the current climate of uncertainty in relation to small business and the notion of ‘taking charge’.

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  3. Brad

    Not a bad question considering when this post was done it was during the height of business confidence.
    I would suggest that a territory based newsagency has its value level already in the form of net profit. I don’t believe that you should get an addition 1 times for example because of that. Some territory agents have too much influence over the subbies bottomline.
    Banks still use a muliplier as a yard stick for viability of an agent. This should still be the case when we look to set a price to sell. Add backs are different. I don’t know what they should look like but it still does come down to buyer beware and poor due diligence is only one persons fault.

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  4. Luke

    I don’t think you can use a formula to work out what a newsagency is worth anymore, I agree with Mark, let the market dictate what each business is worth.

    My business is worth more now
    (according to the bank) then when I had delivery runs, but the newsagent I sold the runs to has had his business increased in value because he has kept his cost down by increasing his volume.

    I do have a problem with buyers who are entering our industry without a clue as to what they are getting into and are struggling from the outset. The ANF offers a course for new buyers but something needs to be done to educate potential buyers as to the true cost and commitments required to be a newsagent. A great deal of people are getting misinformation about how much effort is needed to be a newsagent and are either paying too much for run down businesses or do not have the finances to keep up with cashflow needs.
    Don’t get me wrong, I think this is a great industry and it can be very profitable, but people need to come into the game aware of all the potential pitfalls, because if they don’t then it affects us all going forward.

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  5. Mark

    The territory value is tied to the perception of value of a contract. The reality is that a business is worth what one will pay for it and this is usually tied to profit – that is how it works elsewhere. In our channel with add backs and other mechanisms sometimes people pay too much.

    I am gald there is a discussion going on about this.

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  6. Y&G

    I’d just got to thinking about it all, now that the future of delivery runs seems to be up for so much conjecture at the mo.

    It would have to have some impact on the worth of a business, according to how much it would have been bought for in the first place, should what some have cautioned recently, eventuate.

    I guess other issues that could arise if that does happen, is whether further implications could be anticipated, such as leases dictating the nature of a going concern at any given time.

    These are all things I’ve pulled out of the air, but if they go down that track, we have a big set of questions to work through.
    Even the uncertainty around lotto in some places would raise similar questions, yes?

    Thanks for the forum to ‘think aloud’.

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  7. Mark 1

    Have been a lurker of this forum for quite some time but we are now moving ahead with purchasing a newsagency.

    We looked at no less than twenty that were up for sale.

    I must say the biggest concern was the lack of up to date accounting and the overvalue of almost all of them.

    Net figures without showing wages of any kind, missing vehicle costs, missing insurance costs just to name a few were so common it was very disappointing.

    To try and sell a business thats netting $50k year but wanting $350k plus stock is ridiculous..and there are plenty out there and they honestly think their businesses are worth it..

    The business we are looking at was purchased for almost $400k several years ago, was netting $140k clear, its been mismanaged so badly that it now is just breaking even in overall net figures………..needless to say they still wanted big money for it in the hope some mug punter would purchase…..they are now at a stage they need to sell out as they have no cash flow…

    My tip for anyone selling from an outsiders perspective: Before listing ensure ALL your figures are up to date and legit, leave out nothing when supplying net figures, buyers are not that silly nowdays……its no wonder so many newsagencies are not selling.

    Good luck guys…..i have some questions to put to the forum over the next week or so when i work out how to start a new thread…

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  8. Steve Wray

    I love the post and although old, I thought its well worth commenting.

    Firstly don’t get benchmarking and valuation mixed up.

    Accountants and banks may like to call what they do “valuation”, however basically they are only ever benchmarking. They also generally only ever look at figures to determine a suitable price

    Business Valuation takes into account a lot more than just the financial factors, what about the lease?
    What about the territory and the location

    If they understand our business, they will soon discover that 2 newsagencies with the same turnover and same profit can have two distinct VALUES.

    The size of the Profit makes a difference to Value also
    Ie a Business with $300,000 profit may have a multiple of 3 times
    Where a business with only $50,000 profit may have a multiple of 1 ½

    2 Businesses with the same turnover and the same profit with one in a nice clean shop in a sort after area will always attract a higher price

    A tip for a seller to increase the value of His/her Business
    In Order of Importance

    1. Sort out any lease issues
    2. Get your documentation ready, copies of leases, financials, staff lists, equipment lists
    3. Keep your figures up to date. Do Monthly trading figures as well
    4. Don’t try and oversell the business. It is what it is and presented correctly you will find the right buyer.

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  9. Bob Cameron

    I stumbled across this blog and would love some feedback.

    I am looking at purchasing a newspaper distribution business. I have some logistics experience but none in this segment.

    What are the main issues I need to be aware of? What might be some of the dangers in this type of business?

    And what is a fair earnings multiple on which to base the valuation? I see some long term risk in newspaper distribution volumes potentially meaning a PE multiple of less than 2x earnings is fair?

    Thanks

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  10. John

    The big risk in purchasing a delivery only run is the future.
    Down the track we may well be looking at free newspapers.The telegraph has been $1 for 10 years but no increase in sight.

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  11. Mark

    Bob, the critical issues are to be able to put together a distribution business of reasonable scale, ideally in an area where distribution is efficient (i.e. not too spread out) and where you have the opportunity to use distribution capacity for other activity.

    The cost pressure from publishers on distribution newsagents will increase considerably over coming months are years. You will be pressured to do more for less – however many will say this statement is wrong.

    A well run business with low overheads and a thin management structure can be profitable.

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  12. Bruce

    Interesting that in Feb 2008 Mark began this thread by questioning whether a profit multiple of “between 3 and 4.5 times” was still reasonable for a newsagency business.
    Fast forward to May 2011 and that multiple seems ridiculously high for all but the very best businesses.
    Maybe a multiple of between 1 and 2.5 would be more reasonable for most. Any body else got a comment on the loss in value of newsagencies over the past 3 years.

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  13. Mark

    Bruce we need to engage in an open and frank discussion about business values if our channel is to have a future. While selling high to an ignorant purchaser may help someone get get out of the channel with a fat bank account, it does little for the greater good and that is what we need to think abut … the greater good, a difficult and challenging as that is.

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  14. Paul Wallbank

    Hi Bruce,

    I think you’ll find that it isn’t just newsagents that are suffering this loss in business value, it’s right across the board in the business sector.

    The main reason, in my opinion, is the banks have made it much harder to fund business purchases so buyers don’t have access to funds.

    I suspect this problem is going to get worse as the property market stagnates as there’ll be less owners’ equity to guarantee against bank loans so less cash available for buyers.

    Some recent articles I’ve been reading are flagging this as a major risk to the retirement plans of baby boomer business owners who were looking at a good exit price from their business to fund their retirement.

    Interesting times.

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  15. Bruce

    Hi Paul n Mark,

    I fear you are right about non availability of bank funds causing a lack of buyers for businesses of all kinds. Banks do not take ANY risk for business. We are on our own. The best way for any of us to maximise our sell price is to have full figures I think. The days of incomplete figures and looking for a bigger fool are behind us I think.

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  16. richard

    The latest “blood bath” circulation figures for Jan-Mar, for both mag’s and newspapers won’t help sale prices.

    Would have thought with all the natural disasters and the royal wedding they might have held ground.

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  17. Mark

    Richard I;d expect the disasters to drive newspaper sales. The wedding was in April and this audit covered the three months to March 31.

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  18. richard

    Look out April to June, as Darrell Eastlake was fond of saying, it’ll be “huge” increases across the board.

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  19. Stephen Wray

    As a Business Valuer and Ex Newsagent, values of newsagencies are close to my heart.

    1stly the market is the market!
    We can talk values up all we like, but it comes back to what a buyer will pay.

    Bruces comments are right, many industries are suffering at the moment.

    Some of the reasons for
    values being lower the in past years
    1. Low unemployment, why would you quit a high paying job to buy a 7 day week business

    2. Lack of available funds

    3. Industry not sexy anymore, needs life put back into it. when was the last time we got a major new product?

    4. The Y generation, the hard working baby boomer are retiring and the lazy (generally speaking) gen Y’s dont want this type of life.

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  20. Gemma

    Hi all,

    I have been pouring over these comments for over an hour now. My husband an i are looking to purchase a business as we are young, enthusiastic and both want to work for ourselves. My husband has managed my families grocery store for the past 4 years and i have a background in bookkeeping. Recently a newsagents/post office caught my eye, however it’s price was about 25 times its weekly turnover. Does this seem excessive?? I havent even requested figures yet or spoken to our accountant, just stumbled across this before i had a chance.

    Thanks,

    Gem.

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  21. Mark Fletcher

    Gem, the price has to be looked in the context of real annual profit for you can only fund the purchase out of profit.

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  22. Geoffrey

    Hi all,

    I was wondering if I could ask for a little assistance please. Over the past 5 months my wife and I have been tying to buy the right Post Office, however one thing or another this has been quite elusive. However we have been advised that a News Agency that is close to us is for sale.
    The asking price is $875,000 + $80,000 SAV with a PEBITDA for 2014 being $312,859. can someone please advise if this is a fair asking price.

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  23. Mark Fletcher

    Geoffrey, the answer to your question depends on a few factors:

    1. Is the EDITDA real or manufactured for the sales document?
    2. Is the stock current or is some of it old?

    Regardless of the answers, any price you offer is the value you place on the business. The most control you have over the price is up to the time you sign the contract.

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  24. June

    2.8 x gross profit might be a little high but I think it is in the ballpark, Geoffrey, but Mark would have a much better idea.
    The demographic needs to be taken into
    consideration also.
    It’s the same as housing – location – location -location

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  25. chandra

    is that the net profit or gross profit?
    Does that include owners wages?

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  26. Steve

    If it was owner managed make sure the owners wage is accounted for in the figures. Otherwise you’ll effectively be paying the vendor 2.8 years of wages in advance for work you’ll be doing while they disappear into the sunset.

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  27. Ben Chan

    I been looking many months now. Beware private sellers.

    You don’t know, what you don’t know.

    I now using specialist broker. He had all this spelt out clearly in documents. Really knows newsagency. Other general real estate agent couldn’t answer things like this.

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  28. Mark Fletcher

    Ben, as with any purchase, buyer beware.

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  29. ikomen

    If your business is under management and you are selling it for 3X EBITDA, you are undervaluing your business. Here is why. 3X EBITDA meaning the buyer investment will return about 30% pa, one of the richest man in America become very rich by returning about 20% pa. I would like to buy such a business if there is one.

    3X profit is traditionally calculated after adding back 2 working owners salary – usually called owners profit before interest tax depreciation amortization.

    Prospective buyer beware, you need to make sure that this figure can cover your salary plus extra. With current bank deposit rate is about 3-4% annually, you want a figure more than that say 7-10% to accommodate for business risk.

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  30. Dean

    If you are making a 7-8% return on your business then it is not worth it. That is too small a return for the risk.

    I would be paying 3 times earnings after including a fair wage for the owners hours worked in the expenses, as I think a 30% return for the risk of owning a business is fair.

    I completely disagree with ikomen.

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  31. ikomen

    Dean, it is OK to disagree. However, if you had a business under management that is making you a $100,000pa profit year after year. Are you going to sell it for $300,0000? Be honest. I would actually be suspicious of the seller of such businesses.

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  32. Bruce G

    I think Dean is talking about an allowance for owners wages wherreas Ikomen means a business under an employees management. Big difference.

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  33. Mark Fletcher

    It is important that owners wages are costed to the P&L of a business as a real cost where a multiple is to be argued as a reasonable basis for a valuation.

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  34. allan wickham

    Whenever the discussion of worth and profit associated with newsagencies pops up I find that one issue is always missed…..”lifestyle”

    I think sometimes we as business owners need to remember why it was in the first place that we wanted to buy our own businesses. Everybody will have thier own reasons why but I would think that “lifestyle” would feature prominently on any ones list.
    I was talking to another business owner the other day and he reminded me of the pros of being our own bosses. It got me thinking of my own situation as a newsagent, I am certainly never going to be rich doing what I do but I have a great lifestyle in a beautiful part of the world. I have a great network of peers that I love catching up with a few times a year at various functions. I get to work with my beautiful wife everyday (although wether she is happy with that I dont know…LOL). I get to spend time with my 2 great boys every afternoon. And I am my own boss.
    Even though sometimes you feel like it`s groundhog day overall it`s pretty good being in charge of your own life. I dont want to be the richest bloke in the cemetery.

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  35. ikomen

    I agree with both Mark and Allan. The owners’ wages should be considered when looking at the financial statements. However, in reality, a breaking even business (any businesses not just newsagencies) after calculating owners’ wages (ie. $0 net profit) is not valued $0 – like what Allan said. Some buyers are willing to pay to work for themselves, and hence there is the term “buying a job”.

    However, I could identify at least one advantage of buying a newsagency compared to another business such as a café. The newsagency is usually more resilient to declining profitability compared to the café business. Café business is usually going down in profitability as soon as the new owner (especially first time owner) is taking over.

    Putting that aside, I would stick to what I said earlier, make sure that the business you are buying can pay for yourself (as what Mark suggested, put it in the profit and loss statement) and see whether there is an extra profit. If I were to own a business that is making $100,000 per year after paying my salary, I definitely would not sell it for $300,000 (provided I did not see any problems in the next 3, 5 and 10 years time). I would be 50-50 if someone were to offer $1 million for that (as If I were to put that 1 million in a bank deposit I would only earn about $30,000 to $40,0000 e year). Yes, there is a business risk involved (and hence that 6% premium compared to that bank deposit – Dean wanted 24% premium as a buyer – but I believe not as a seller), but on the other hand there is also the opportunity. Bear in mind that for a profitable business (that at least breaking even), additional 10% in sales is usually making you greater than 10% in extra profit. As my friend put it, “I do have the money, I just do not know where to put it so that it earns more than bank deposit interest rate.” Well, now you know, but always be cautious – as business could a double edged sword.

    Note: contrary to what most people think, a bank deposit is not 100% safe. It may be the safest but it is not 100% safe. Just look at the news and history. I would not extend on this one as the discussion could be very long.

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  36. Roy

    Hi All,

    Hoping this thread is still active. I am considering purchasing a news agency. The seller wants a multiple of 2.2 for next profit plus 1.5 times owner wages. For example net profit stated is $90k and 1.5 times owner wages is $75k. So the seller wants close to $340k plus stock. My thoughts are that I should only be considering net profit and not owner wages and apply a multiple of 2 or 2.5. Any advice on this please?

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  37. Mark Fletcher

    Roy any business if only worth what someone is willing to pay for it. The notion of some multiple determining a price is out of date.

    Make sure the net profit is accurate and provable.

    The wages claim is not something I’d agree to.

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