The right steps to take to ensure selling your association's exhibition is beneficial to both you and your future buyer or partner.
Editor's Note: See Douglas L. Ducate's feature article, "Should You Sell Your Expo?" in the June 2012 issue of Associations Now for a primer on the pros and cons of selling an association tradeshow. Below, Ducate examines the intricacies of the transaction when selling a tradeshow.
The decision to sell a major asset is not an easy one for any owner and is especially challenging for an association. When an asset, such as an event, does not have an established market value, it is helpful to have knowledge of recent comparable event sales and public-company trading multiples and the ability to negotiate purchase price and terms between buyers and sellers.
A buyer or future partner will consider a number of important factors, such as the quality of the asset and whether it is a good strategic fit, before considering value. Assuming the event passes the first two tests, the buyer will base its offer on either a multiple of revenue or earnings before interest, taxes, depreciation, and amortization (EBITDA). It is important for the buyer to have knowledge of the multiples placed on recent event transactions and the multiples at which public companies are trading in order to place a fair market value on the event.
Since most nonprofit associations are tax exempt, and since exhibitions have few if any capitalized assets, the earnings calculation reverts to the total gross revenue minus the anticipated general and administrative expenses (G&A) and third-party costs. Since associations may or may not assign G&A to the exhibition, the purchasing company will usually normalize costs using its own internal cost model.
The concept of G&A normalization and adjustment to EBITDA to reflect the true cost of running the event should not be viewed as a negative. These are professional event manager costs, not association management costs. And professional organizing companies have access to embedded best practices and contracting power that in the end should result in increased event profit.
Preparation in advance of a sale is critical to maximizing the outcome. This involves determining the association's ultimate goal of the proposed transaction (e.g., maximizing net cash proceeds to the association, aligning mutual objectives) and the cultural fit between the association and the new owner.
Associations should fully understand the value drivers of their event and where growth lies, as well as having thorough knowledge of the event's served market and its competition. Planning for a sale also involves numerous internal matters, such as ensuring that the financial information relating to the event, both historical and projected, is in good condition and that event-related contracts and other legal matters are in good order.
Tax advice is an essential first step. Nonprofit organizations may be limited as to the types of transactions to which they can agree without risking their tax exemption. They also need to understand possible tax liabilities, both federal and local, that could result from the sale. These are usually not insurmountable barriers or deal breakers. Buyers appreciate and expect honesty and transparency about taxes and other issues the seller faces. It is important to get these items in the open early and avoid wasting time and money or possibly complicating final contracting.
It is also important for associations to know their event's top competitors and how their event overlaps with the competitive events in the marketplace. If an association's event is not number one in the market, it should know why and understand the path to get there. Associations should be able to clearly articulate how the event is differentiated in the market versus competitive events and be able to answer questions, such as "What are your event's competitive advantages and barriers to entry?"
Finally, all discussions and negotiations with potential buyers must be protected by mutual non-disclosure confidentiality agreements. Important private detailed information will be exchanged in the process that could be damaging to the parties if it wound up in the public domain. Staff and volunteer leaders need to be briefed on their personal and professional responsibility to maintain confidentiality regarding all aspects of the transaction. Legal counsel should be involved throughout the process.
The buyer pool is a very important component of maximizing value. Strategic companies (i.e., commercial exhibition organizers) offer associations the following key benefits:
- potentially higher purchase price, due to strategic fit and importance
- strong defense against would-be competitors
- support for organic growth and acquisitions
- opportunity for quicker entry into new markets
- significant management and industry expertise
- strong understanding of financials and key metrics
Financial buyers (i.e., private equity firms) are opportunistic and are looking for leading, sizable event businesses. They will support organic growth and acquisitions. They require strong, ongoing management teams, as they are not in the organizing business. They are willing to share with management in the financial performance of the event, but pricing may be affected by current economic trends, such as interest rates and availability of debt. In addition, private equity firms generally look to exit their investments in three to five years.
Key Value Drivers
Regardless of the type of buyer, the following are key value drivers that buyers consider when analyzing an event for acquisition:
- strategic importance and fit
- financial performance (growth is key; margins in line with or above industry averages)
- size, trends, and overall vitality of markets served
- growth opportunities
- barriers to entry
- customer diversity (no single customer accounting for 20-plus percent of revenue)
- contractually recurring revenue, with long-time, repeat customers
- professionally prepared financial statements (preferably audited)
It is important for association sellers to be able to clearly explain historical financial performance and identify growth opportunities for the event, including entering new markets, potential acquisition opportunities, new platforms and technologies, and new products and services. The quality of the asset and the strategic fit to the buyer will strongly influence the level of buyer aggressiveness.
Hiring an Advisor
During the negotiation process, it is important that each side understand the other party's position. Depending upon the size of the transaction, this frequently can be best achieved by hiring a third-party advisor who will function much like an attorney representing a party in litigation.
An independent mergers and acquisitions (M&A) expert can be an invaluable resource in representing an association in the sale of its event. During the negotiation process, the advisor can provide a strong foundation for valuation, take the lead on negotiating, and help the association board to maintain its objectivity in the process. An experienced M&A advisory firm with deep domain expertise and a strong grasp of the event business will expedite the transaction process and minimize the anxiety level of the client. To create a level playing field, association sellers should make sure they are represented as strongly as any of the potential strategic and financial buyers.
Selection of the right M&A firm is a combination of experience in the event business, terms and conditions proposed, and chemistry with the seller. Securing proposals and interviewing prospective firms is not a lengthy process, but it is a very important step.
Some advantages of hiring an experienced M&A advisor are that he or she will
- conduct a discreet process that minimizes disruption to the association's staff
- allow association boards and management to stay focused on running their businesses
- provide in-depth M&A market knowledge and analysis
- know how to position the business to maximize value
- bring objectivity and reality to the process
- have access to a vast database of prospective buyers and well-established relationships with key decision makers
- know the "hot buttons" of potential buyers
- have experience in overcoming hurdles that can arise during a transaction process and negotiation
- be compensated based on a successful outcome for the association
- manage the critical, time-consuming due diligence phase
- run an orderly process with tight timetables.
Finally, it is important to remember that an orderly M&A transaction process with a tight timetable is an association seller's best ally for maximizing the value of their event business.
Douglas L. Ducate, CEM, CMP, is president and CEO of the Center for Exhibition Industry Research. Email: [email protected]
Ducate would also like to thank Richard Mead, managing director of The Jordan, Edmiston Group, Inc., for his contributions to this article. Email: [email protected]