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How's this for ironic: Many of us in the high-tech sector work tirelessly to raise our company valuations. But sometimes lofty valuations and unreasonable expectations can destroy the very businesses we've worked so hard to build. Skeptical?
February 7, 2012
valuationHow’s this for ironic: Many of us in the high-tech sector work tirelessly to raise our company valuations. But sometimes lofty valuations and unreasonable expectations can destroy the very businesses we’ve worked so hard to build. Skeptical? Consider this cautionary tale involving Ziff Davis Enterprise, which spent a decade trying to overcome two unrealistic valuations (set in 1999 and 2007) that triggered lofty, insurmountable debt levels.
As the old saying goes, we all want to buy low and sell high. But setting company valuations is an inexact science. Should we focus on current EBITDA? Future earnings projections? Past quarterly results?
Insight Venture Partners, for one, acquired Ziff Davis Enterprise for about $150 million to $160 million in 2007. That was roughly 1.5 to two times revenues at the time, friends have told me. GE Capital Corp. quietly provided financing for that transaction. Clearly, Insight Venture Partners was looking to ride the web content and IT marketing waves, snapping up well-known Ziff Davis Enterprise brands like eWeek and Channel Insider — plus an established events business. (Side note: I worked for Ziff Davis Enterprise’s predecessor from 2004 to 2006.)
No doubt, Insight Venture Partners’ business plan going forward was to grow Ziff Davis Enterprise’s revenues. But ultimately, Insight Venture Partner’s financial models never really panned out. Print advertising continued to dry up. The 2008 credit crunch put the squeeze on IT spending. At some point around 2009 or 2010, I suspect, Insight Venture Partners essentially walked away from Ziff Davis Enterprise — leaving the debt holders (GE Capital?) to call the shots.
While the Ziff Davis Enterprise team worked overtime to reposition the company for digital media growth, ever extra cent Ziff Davis Enterprise made was earmarked for debt payments, I believe. The result: It was difficult for the remaining ZDE team to innovate on limited budgets.
Last week, the bankers called the final shot — selling Ziff Davis Enterprise’s assets to Quinstreet, a lead generation company — for an undisclosed sum. Quinstreet allegedly plans to cut 80 percent or more of the Ziff Davis Enterprise staff.
So what’s the lesson here for MSPs, IT service providers and small business owners?
For those who are planning exit strategies: Be careful what you ask for. During the selling process, you may strive to make every dollar possible. But if the buyer opens his or her wallet too widely — perhaps pursuing unrealistic debt levels to complete the deal — you could risk harming your chances for a long-term earnout. And you could even hurt your industry legacy.
Sure, get every cent you deserve. But make sure the buyer can carry your legacy forward — perhaps even building your company into something bigger and better than you could have imagined.
Some Ziff Davis Enterprise veterans are upset about Quinstreet’s alleged plans to cut ZDE headcount and shutter some media brands. But here’s the reality: This news was a decade in the making. Ziff Davis Enterprise and its predecessor companies have spent more than a decade trying to overcome big debt from multiple M&A transactions.
The debt — amassed because of overly optimistic valuations in 1999 and 2007 — finally caught up with Ziff Davis Enterprise last week. Don’t let debt catch up to your company. Stick with your tried-and-true focus on cash flow and reliable recurring revenues.
Side note: Best wishes to the Ziff Davis Enterprise staff members — current and past — as they march forward with various career pursuits. Thank you for all of the education and guidance you’ve offered me for more than two decades.
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