Tuesday, July 7, 2009

Buying Your First Station

Over 22 years as a media broker, I have received hundreds of calls for advice on, “How do I buy my first radio station?” Perhaps not surprisingly, the volume of those calls dropped off as prices escalated in the late 1990’s. Now that stations have become much more affordable (read “cheap”), the inquiries are returning. It is once again possible for an entrepreneur to get into station ownership.

I will touch on some FAQ’s in this post which have come up consistently from first-time-buyers. The success rate for would-be buyers is no doubt pretty low. However, all owners were, at some point, first-time-buyers. The most vexing question in the process:

“How do I raise the money without having a deal, and how can I get a deal without having the money?”

This is the proverbial “chicken and egg” question. I maintain that you have to raise the money (equity) first. Without an equity commitment, brokers, sellers and lenders simply will not take you seriously. If you see any deals at all, they will be those left after every other real buyer has already passed.

“How do I raise the equity?”

Unless you have a gold-plated resume with a solid management track record, you are probably not going to get the attention of institutional private equity investors. In fact, in the current environment, you might not even get a returned phone call.

Your best bet is “angel” investors. Work your network of connections. Hit the “Doctor, Lawyer, Dentist” circuit in your area. Use LinkedIn ( http://www.linkedin.com ) or other networking tools to connect with people looking to invest their money. This is a real “shoe leather” process, but likely determines whether or not you will own a radio station.

“What is the difference between debt and equity and why does it matter?”

Debt is a loan, usually secured by assets and personal guarantees. The money is less expensive than equity. Pricing is generally based on a negotiated number of basis points over LIBOR or the Prime Rate. Terms are usually five to seven years.

Equity is ownership. Equity is riskier than debt, so equity investors expect a higher return on their money. In the event of a liquidation, the debt holders generally get their money first; anything left over (usually nothing) goes to the equity holders. Pricing reflects this inherent risk. In the go-go days, equity investors were looking for internal rates of return (IRR) in excess of 30%; more recently, returns were in the mid to high teens. Most equity wants to “cash in” within five years.

Before the current economic chaos, banks would typically loan 5x – 6x cash flow on a deal. The balance of the purchase price (together with working capital) was funded with equity.

“What is Broadcast Cash Flow?”

Operating Revenue minus Operating Expenses (excludes interest, income taxes, depreciation and amortization).

“How does seller financing work?”

Typically seen most often in smaller market deals, the seller functions as the bank. The buyer puts up a down payment (which must be enough for the seller to pay off his lender if there is one) and gives the seller a note for the balance. Terms are negotiable.

“Will the banks make small loans? Define ‘small.’”

Banks generally preferred making loans greater than $10 million. Today you would be hard pressed to find a bank willing to make a loan to a broadcast company (let along a first-time-buyer).

The SBA guaranteed loans often come up. Yes, technically they are an option. But in the real world, the documentation and red tape involved usually stops the process dead in its tracks.

“I know broadcasting, but I don’t know anything about finance. Can I still get a deal done?”

Probably not. Either learn basic finance (that’s what night school is for) or pair up with a partner who has a financial background. If any of the terms I have used in this post are foreign to you, you have a long way to go.

I owned my first station two years after finishing my MBA.

“How are stations priced?”

Stations are usually priced as a multiple of annual Broadcast Cash Flow. Before deregulation, the multiples tended to range between 7x and 10x. Deregulation saw them spike at times into the 20’s (and sometimes based on projected cash flow as opposed to actual, historic cash flow). At this writing, they are probably in the 5x – 7x area, though with so few deals being completed, it is difficult to say for sure.

I intend to discuss pricing for “stick” deals in a future post. But a first-time-buyer can forget doing a stick deal.

“Is institutional private equity an option?”

In good times, maybe (see above). In tough times, no.

“How do I get a broker to work for me?”

Brokers only get paid when deals close. And, like real estate, they typically work for the sellers. For a broker to “carry your flag,” he/she has to be convinced that you are a “real” buyer (that you will show up at closing with a check in full). Commercial break: http://www.MediaServicesGroup.com

“I am a good programmer, but do not have any sales or management experience. Can I get a deal done?”

Probably not. Bring a solid manager onto your team.

“When do I get a lawyer involved?”

Early in the process, ideally before you present a letter of intent to a seller. Interview several, and hire the best you can afford. I recommend that you use FCC attorneys with transaction experience.

“What is the actual buy/sell process?”

After identifying a deal and raising the necessary capital, you typically submit a letter of intent to the seller. It defines the broad business terms of the deal, and is usually considered non-binding (use counsel!). Once the letter of intent has been signed by both parties, you 1) begin negotiating the formal purchase agreement (with counsel) and 2) conduct your due diligence (financial, technical, and legal). There is usually a 30 to 60 day window to complete these steps.

Money usually goes into an escrow account (and is at risk) upon the signing of the purchase agreement. 5% of the purchase price is a typical escrow deposit, though this varies. The assignment application (which includes the purchase agreement) is filed with the FCC. Barring objections, the FCC staff will typically approve the transaction within 60 to 90 days. You can close at that time; however the FCC grant does not become “final” for another forty days. Lenders often require buyers to wait for finality before closing.

“I don’t have any radio experience, but it looks like a great business. Can I finance a deal to buy a station?”

No. Unless you won the Lotto.