Asman Damodaran of the New York University Business School had a go at valuing the Star Wars franchise. Disney paid $4Bn for it – so did that turn out to be a good deal?
Damodaran reviews the franchise to see where the revenues have come from. Interestingly the original film is still the biggest grosser to date at nearly $4Bn. But the other revenue streams are even more important; VHS/DVD/Rentals, Toys, Gaming, Books, and TV series. These other revenues dilute Movie income to 20% of the whole alongside 23% for rentals, 15% for gaming and books, and a whopping 36% for toys and merchandise.
So how do you value it? Like any other business, one needs to take a stab at future earnings potential. In the absence of Disney’s, no doubt closely guarded, forecasts Damodaran makes educated guesses. Starting with Disney’s intent to make another two films he then assumes they’ll each gross something similar to “the Force Awakens”. I’d have assumed some slight decline each time around (as the history suggests) but you have to start somewhere. He judges that add-on revenues will continue be more important - streaming replaces rentals and he assumes $1.20/dollar v $1.14/dollar thus far, Toys continue to generate $1.80 for every dollar of movie income, Books drop 25% to $0.20/dollar, Gaming stays at $0.5/dollar, and he assumes that with the distribution power of Disney and Netflix (rumoured to be planning 3 live action series) TV rights will increase to $0.5/dollar.
One needs to keep making assumptions, when the films will be released, inflation, and of course the margin levels on the income streams – he uses sector averages here, for example toys/merchandise at 15%. Put it all together and you get an overall net income projection which he discounts at 7.61% being the average cost of capital for the entertainment sector. Net result a valuation of $10M. So Disney did a good deal. If you want the full calculation Google “Galactic Finance: Valuing the Star Wars Franchise” which will take you to his blog.
It shows you can build up a cogent case to value almost anything, although I’d have factored in some kind of discount just because of the existence of Jar Jar Binks.
Planning for exit and succession can be difficult in any business, but in family businesses there are additional factors to consider. One of the problems with family succession planning is that the two key objectives – liquidity and preservation of the business legacy appear to be in conflict – how can you get cash without selling up? A sale to a trade buyer may be unattractive if the plan is to keep things in the family, and this is where the idea of a sale to family comes in.
This is a form of management buyout – the family members buying the business are very often the team running the company. Often it goes beyond that to key managers – hence the occasionally used abbreviation the FAMBO. This is meant to mean Family and Management Buyout, or Family Buyout, although just to confuse things I’ve recently seen it used in East Anglia to refer to a Franchisee and Management Buyout. It can also be called a VIMBO or Vendor Initiated Management Buyout – because the its usually (though not always) the older generation which initiates the sale to the younger family members. At PEM we prefer to refer to such deals as Succession Buyouts – because that neatly encapsulates the overarching strategic intent of the deal.
Because family relationships are involved things can go wrong so as to delay the transaction or even kill it completely. So here are some key thoughts on how to preserve family harmony whilst successfully completing a buyout.
Plan ahead and don’t rush each other. It is really important that harmony and trust is maintained. Nothing breeds suspicion more than the idea that one family member wants to take advantage of another, either by being pushy or appearing to scheme behind the scenes. This is true whether a family member is a buying or selling. An aggressive buyer almost ensures that the seller will react negatively; an aggressive seller communicates desperation and may undermine his or her own negotiating position. Actually this is also true of Succession Buyouts amongst long standing colleagues who are not related.
Take account of peoples personalities Families ought to know one another pretty well. They know about personality traits or past circumstances giving rise to unusual levels of loyalty, or even resentment, or jealousy. This might all come out in the run up to a transaction, sometimes they are deep-seated psychological feelings, and can be almost childlike—“Dad always preferred you.” Being alert to such attitudes and steering the transaction in a sensitive way that respects feelings will help ensure success. Often the most important thing is to make sure everyone is listened to.
Get the business professionally valued If your shareholder agreement doesn’t prescribe a valuation methodology, it will be helpful to everyone involved in negotiating a transaction that there should be an independent assessment of valuation. Fairness is the key to completing the transaction and maintaining positive family relationships, and possibly sanity. Neither buyer nor seller wants to looking back on the transaction with regret or suspicion.
Find some trusted advisors. Truly independent advisors who have the best interests of the family in mind can be hugely helpful in communications and facilitating agreement amongst the family. Each family member can get some independent advice, but its much better to select an adviser with a track record of brokering/facilitating such deals amongst close knit family or business groups to work for the company/family as a whole with the objective of reaching an agreement that works for all. A skilled adviser will listen to all the agenda’s and try to manage any emotional pressures that arise during negotiations.
Tax and estate planning My tax colleagues would point out that it’s really important to consider the tax and financial affairs of the whole family, up and down the generations. And a deal like this is an opportunity to consider these things holistically. Has the family provided for everyone as they intend and have they done inheritance tax planning? Again these are things that need to be done early. One of the consequences of some buyout structures is that IHT planning becomes more important – don’t leave it to the last.
Family businesses are important to us all – according to INSEAD they account for 57% of US GDP. There’s a general perception that many don’t make it beyond one or two generations. I’m not sure that’s true, INSEAD reckon there are 5,500 bicentenary family businesses around the world, and we’ve certainly worked with some family businesses which are now at fourth or fifth generation stage. Visit our website to read about some of the family buyouts we've worked on.