ACQUISITIONS BY PUBLISHERS
As the publishing industry continues to consolidate, many publishers have decided to get bigger. Often the quickest road to expansion is to acquire a line of existing titles, or, in some cases, the entire business, of another publisher. Before proceeding with an acquisition, an acquiring publisher should ask the following questions:
Will the publisher be buying assets or stock?
If a publisher is only acquiring an existing line of titles, this is not an issue, as the publisher will only be purchasing certain assets. However, if the publisher is acquiring all or substantially all of another publisher’s business, the acquiring publisher will have to decide whether to purchase the assets or the stock of that publisher. There are three reasons for favoring an asset purchase over a stock purchase. First, an asset purchase will usually provide a more favorable tax result for the purchaser, since the purchaser will be able to establish a new tax basis and depreciation schedule for all depreciable assets acquired. Second, an asset purchaser can pick and choose the assets to be acquired, whereas a stock purchaser must take both wanted and unwanted assets. Third, a purchaser of assets will usually not be responsible for the liabilities of the seller.
Are the assets all that they appear to be?
An acquiring publisher should investigate the status of the assets being purchased. The primary assets of a publishing business will normally be contracts for books currently in print, the inventory of copies of those books, contracts for books to be published, the trade name or trademarks of the business, and all of the goodwill associated with the business, including relationships with authors, distributors and retailers and brand recognition by consumers. Before closing the deal, the buyer should investigate the status of these assets. For example:
- What are the terms of the publishing agreements with the selling publisher’s authors? Do the agreements grant all of the rights that the acquiring publisher expects to receive? For example, do the agreements include electronic rights, foreign translation rights and audio book rights? Are the royalty and payment provisions acceptable to the acquiring publisher, and are those provisions complete so as to avoid any ambiguity as to what royalty will be due from various uses of the works by the acquiring publisher?
- Are all of the publishing agreements freely assignable, or will it be necessary to obtain the consent of the authors?
- Does the seller have adequate permissions for all third party materials used in its books? If the publishing agreements cover both publishing rights and subsidiary rights, the acquiring publisher should make sure that all permissions extend to the exercise of all of the subsidiary rights. For example, if the selling publisher only has permission to use third party photos in English language print editions of a book, the acquiring publisher may be prevented from issuing an e book edition of that book or from licensing foreign rights in the book.
- Has the selling publisher had disputes with any of its authors? If so, what was the nature of those disputes, and how were they resolved? Are there any disputes that remain unresolved?
- What is the condition of the copies in the seller’s inventory, and does the quantity of copies in inventory exceed the number of units likely to be sold in a reasonable time, given recent sales history?
- What is the seller’s recent returns experience? If the seller has been experiencing unusually high returns, it may be a sign that the seller’s titles have lost their appeal in the marketplace.
- If the acquiring publisher plans to continue using the seller’s distributor, what are the terms of the contract with that distributor, and what has been the seller’s payment experience with the distributor? Also, is the contract with the distributor assignable, and will the sale give the distributor an option to terminate the contract, or change the terms of the contract? If the acquiring publisher does not plan to continue using the seller’s current distributor, can the contract with that distributor be terminated, and what procedures apply upon termination?
- Are any of the seller’s assets subject to security interests, liens or other claims? If the seller has borrowed money from a bank or other lender, that lender has most likely obtained and perfected a security interest in all of the selling publisher’s assets, including all of the seller’s inventory and the seller’s contract rights under all publishing and subsidiary rights license agreements. If any such security interest is in place, it should be released before the acquisition is completed.
- Do the seller’s trademarks or trade names infringe on the marks or names of others, or, conversely, are others infringing on those marks or names? Does the seller have U.S. trademark registrations for any of its marks?
What are the seller’s liabilities?
An acquiring publisher that fails to obtain a non-compete agreement may find that the purchase price has been invested in a competing business.As noted above, a buyer who buys the assets (as opposed to the stock) of the selling publisher is generally not responsible for any of the seller’s liabilities. However, there are some exceptions to this rule. In Minnesota and several other states, the buyer may be liable for sales and withholding taxes not paid by the seller. The buyer may also be liable for the seller’s failure to comply with certain federal and state employment and labor laws. Accordingly, an acquiring publisher should obtain representations from the selling publisher that no such liabilities exist, and should also conduct its own independent investigation to verify those representations prior to completing the acquisition.
How will returns be handled?
Returns are a fact of life in the publishing business. In most acquisition situations, the selling publisher will retain the accounts receivable for all sales made prior to the closing, and will be responsible for covering the credits on any returns from those sales. This can be handled either by the seller taking back the books and covering the credits directly, or by the seller reimbursing the acquiring publisher for credits covered by the acquiring publisher. In either case, the selling publisher will usually demand a cut-off date after which it will no longer be responsible for returns. If the selling publisher covers the credits directly, the acquiring publisher may have an option to purchase all copies returned. If the acquiring publisher covers the credits, it will take possession of the returned copies, and it should hold back a portion of the purchase price and make a final reconciliation after the cut-off date for returns.
What will the seller do after the sale?
The owner or owners of the selling publisher will typically have extensive contacts in the industry. Unless the acquiring publisher obtains a non-compete agreement, it may find that its purchase price has been invested in a competing business that continues to use the contacts and goodwill that it paid to purchase. In addition, the acquiring publisher may want one or more of the owners or other employees of the selling publisher to continue to work with the business for a period of time. If this is the case, the acquiring publisher should include appropriate employment or consulting agreements as a part of the deal.