Creating, Selling and Buying Media Companies

Charles Carreon
Wouldn't it be nice if someone wanted to buy your business for a lot of money? We constantly hear rumors about buyouts of adult companies, but they are hard to verify. Deals that get done are usually done quietly, and for good reason — when a buyout is actually in process the last thing the parties involved in the deal need is a lot of publicity. News that millions or even hundreds of thousands are about to change hands could provoke what game theorists call "strategic behavior" among business associates who see an opportunity to get their own piece of the pie, and perhaps are willing to make a little trouble to get it. So the kind of information I'm about to share here is not exactly secret — it's just not often shared outside the profession.

First I will confirm the rumor. Deals do get done. Now I will break the hard news: Doing them is not easy. Now the harder news: Many people who claim to be in the market to buy companies are blowing smoke. To save you some time, I will identify the known characteristics of bogus takeover artists. They have no background in the industry, and no real business of their own. They claim to have bags of money and a passion for the business. They love your content, covet your traffic and buy endless rounds of drinks. They use a form contract that is an exploitive nightmare written by a lawyer who thinks traffic is something to get stuck in at rush hour, conversions lead to religious lifestyles, and domains are ruled over by nobles. Since bogus dealmakers have no understanding of what makes a company successful, they are drawn to the showiest players, and fail to hook up with the quiet types who are minting money without making a splash. Thus, bogus dealmakers surround themselves with a circle of people who don't have much going on, and are hoping some undiscerning individual will make them rich by sinking a lot of money into their so-so program. Frankly, these people deserve each other, and while they engage in cluster-flagellation, the rest of the industry carries on doing real business.

Who Would Want To Acquire You?
You can interpret that question in a lot of ways. First let's put the emphasis on the word "you" — because if you really want to be acquired, you have to shift perspective and look at your entire company as the product. If you run an affiliate program, you spend all day trying to sell your program to webmasters. If you create content, you focus on selling your product through wholesale and retail channels. If you are a webmaster, you spend your day pitching other people's content to surfers. To sell a business, you must consider your entire business to be the product, and the prospective acquirer as the customer. Your acquirer is going to look at your company as a bundle of media assets, and will look at more than cash flow. There are many businesses that operate profitably, but on such shaky legal foundations that they are not attractive takeover candidates.

Follow The Hollywood Model
What does it take to make your company attractive? I hope you will not be offended by the suggestion, but the intellectual property strategies that have worked so well for Hollywood should work for you. One example will suffice. Thirty years ago, Disney had been written off by Hollywood. The last straw was "Tron," a movie where virtual people were imprisoned in a cruel computer that tortured them with bad graphics — a crisis which lead CEO Mike Eisner to dig into the vaults and re-release Disney's lush cartoon epics on videotape. Thus, the video cassette player, which was supposedly going to destroy the movie industry, opened up a vast, untapped market. The rest is history. Disney programmed a new generation of children to love Snow White, Pinocchio and Mickey, revitalizing the Magic Kingdom, and boosting everything from theme park attendance to lunchbox sales and Halloween-costume licensing. Just as Disney exploited the magic of intellectual property, you too can harness its power to build an enduring media empire.

You can sell your videos and photographs without registering the copyrights, and you can use a trade name without registering the trademark, but registration will give you more clout to prevent infringement and enhance the value of your assets to an acquirer. You can't even file a copyright lawsuit until the copyright is registered, and if you register after the infringement starts, you can't recover attorney's fees or per-incident damages. Protecting domains by registering a trademark is another good strategy that can turn a cybersquatting case from a protracted legal wangle into a slam-dunk that can be settled with an email. Since an acquirer will inherit all of the legal benefit you have packed into your content, trade names and domains, a portfolio of registrations will definitely enhance the value of the business. Indeed, some acquirers may have the war chest to go out and sue infringers, turning that portfolio into a profit center even when the underlying works are not selling.

People Who Need People Are The Luckiest People
In the media business, people do everything. People shoot the content, people are the content, and people design sites, write codes, manage programs and make sales. And when an acquisition is in the works, people can mess everything up because sometimes, nothing goes wrong until something goes right. When something goes right, greed rears its ugly head. Memories get distorted. Claims can be made. Employment contracts and confidentiality agreements help us keep the good times forever. A work-for-hire agreement will prevent a coder from saying he or she owns the code. A confidentiality agreement will keep a disgruntled salesperson from posting a compromising screencap on the boards. Other examples come to mind. So remember how much you need people to be nice, and use contracts to help them remember how nice you were, and you will all be lucky people.

Sometimes You Just Have To Say No
So your business is humming along and making money, and all of a sudden you get a takeover offer. Assuming it's for real, it will be flattering and exciting, but most often you will still want to say "No, thank you." The reason is simple — most acquirers want the business they acquire to pay for itself. What? Pay for itself?

Yes, it's true. An acquirer will give you a nice chunk of change, like six months of revenue, in exchange for control of the business. The acquirer will offer to pay you off as revenues come in, and may want to pledge your property as collateral for new debt. The acquirer may offer you a job as a consultant. Good lawyers and accountants can negotiate this process to give you some protection, but let's face it — you are losing control of the business that you know best, and that is going to be the source of the money to pay you off. You would only do that if you thought you were selling to someone who could actually run the business better than you can.

Garry and Oystein of Mansion Productions have turned down several acquisition inquiries, so what they have to say about it is worth listening to. When asked about how Mansion dealt with feelers from potential acquirers, Oystein said, "We regularly receive inquiries from companies interested in acquiring Mansion, but so far, nothing has looked appealing. We have established relationships with fantastic companies, and remaining true to those relationships is where we see our future."

Garry, whose devotion to customer service is well known, said, "I don't want to close all the doors to an acquisition, but we are conscious of our obligation to the community, and in choosing a partner to expand our position, we will look most closely at how they can strengthen the service that we provide."

And Sometimes You Find A Good Fit
You might think it was going to kill me to say something positive, but I was just waiting to close on a high note. I have had the pleasure of representing Brian Randall of GunzBlazing both when he was acquiring media companies and assets, and recently, when his own company was acquired by one of the biggest players in the industry. When asked whether GunBlazing had grown more by acquisition or by internal development, he answered, "Because we know our market well, we've invested strategically in projects that show good prospects for a solid return. We've grown mainly from in-house efforts with some careful acquisitions, and by providing seed money to developing enterprises." In answer to a question about how he reached the decision that it was time to become part of a bigger company, he said, "We joined a much larger company with a well-established network and strong revenues. We are good at producing and delivering great content to a focused market, so combining with a powerful partner allows us to boost our creative output while maintaining strong revenue." In acquisition-speak, we call that "synergy." In ordinary terms, it's a good fit.

Charles Carreon is a graduate of UCLA Law School and has been a California attorney since 1987. He has been involved in the industry since his victory as Gary Kremen's lawyer in the Sex.Com case in 2000, about which he has written a recently published book, The Sex.Com Chronicles, A White-Hat Lawyer's Journey to the Dark Side of the Internet.


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