Multiples and Other Hillbilly Math (Part I) Share Thisi
Multiples and Other Hillbilly Math
First and foremost, one of the biggest myths in catalog valuations is the holy “MULTIPLE.” I’m asked every day what “multiples” are being paid for catalogs. The truth is most modern valuation experts and buyers don’t use “Multiples” as their primary valuation strategy.
Ok – there I said it.
I’ve literally been yelled at, laughed at, and badmouthed when I mention this bad news to sellers. I feel like I’ve given a 6 year old the bad news about Santa Claus. It’s why I hate to be the first bidder on many catalogs!
Please don’t shoot the messenger!
Seven years ago my investors first heard music-business people still discussing “multiples”. They said “that’s kind of quaint” – “we used to do that in the financial world.” But the music business didn’t get the memo.
The rumored concept of “multiples” goes kind of like this…
Take your annual earnings for the past few years, average them, and apply an arbitrary “multiple” – say 7x. So if your catalog has averaged $100k per year, then the purported value might be $700k. This generally implies that that a buyer will earn their money back in that same number of years.
So in theory, a more valuable catalog is worth a higher multiple.
Seven years ago when I started buying catalogs, I began using “multiples” because I thought you were supposed to. But I quickly realized it’s a good way to get killed in the catalog market!!
But now after reviewing hundreds of catalogs, I’ve dealt with many “experts” like accountants, business managers, attorneys, publishers, and other catalog buyers. I can assure you there is no uniform formula. It gets twisted into whatever story the seller wants to concoct. So the term becomes very relative depending on whose method you’re using that day.
But the truth is, many buyers threw out the concept years ago. I know because I’ve talked to many of the biggest buyers in the world. I was actually relieved to find out I wasn’t the only one thinking this way!
In truth we really don’t care much about what the catalog has earned. But we do care a great deal about what the catalog is GOING to earn. So if a “multiple” (of the historical earnings) helps predict that, we can use the concept as a partial tool. But there are many, many cases where it’s simply a lousy method. There are too many other factors to consider.
So PROJECTIONS are the big thing, NOT “Multiples.”
Next week I’ll go into a little more detail when I discuss “The Multiple Problem(s) with Multiples”