Lots of Radio Stations for sale - Time to buy?

[Goat Rodeo Cowboy]

"cash flow" pays the bills, and, one hopes, the shareholders.

In the buying/selling process cash flow is what remains after paying bills. . . debt, interest, stockholders, etc., are all below the line and do not impact cash flow.

Actually, the simplest, crudest explanation of Cash Flow was given to me by a young accountant some 50 years ago. It is flawed, too simple but this is what he told me: "Cash Flow is net profit with debt payments, interest payment, dividend payments and depreciation added back in." So we're back to David Eduardo's EBITDA.

 

[davideduardo]

Also consider in a closely held corporation there are a number of other ways to pay the shareholders that meet IRS approval but distort the "bottom line" when you are looking at a property.

Subchapter S corporations are the best example... profits are disstributed to the shareholders and not taxed at the corporate level. A tightly held non-Subchapter S company can acheive the same thing by paying the owner / owners salaries equivalent to the profits so as to avoid taxes on the business itself.

Master Limited Partnership shares, exchange traded, essentially do the same thing as a Subchapter S but divided into tiny pieces.

 

[Goat Rodeo Cowboy]

Back in the days when tax rates were a whole bunch higher than today, I knew of a broadcaster who purchased a station from one party, and then had his children's trust fund buy the transmitter site real estate from another party. Since two unrelated people (arms length transaction) had agreed on the rent price, he was free (for tax purposes) to continue paying rent to the property owner (his children) who now had some taxable income, but they were at a much much lower tax rate.

You may remember a few years back when some stockholders filed a lawsuit against Walmart, claiming they were leasing store building from companies owned by members of the Walton family.

When you get into these kinds of transaction, trying to calculate a "cash flow" suitable for including in the multiplier formula gets a little ragged around the edges.

 

[KirkSherwood]

EBITDA often comes up in articles about radio and cash flow and selling prices.

True. EBITDA is standard with the bigger broadcast companies. However, the methodology used by most smaller companies is nearly identical ‒ add revenues, subtract operating expenses = cash flow. Below the line is depreciation, debt, interest, etc.

No matter the size of the company, the general “speak” is, “what are your YTD revenues, what is the cash flow and what is your asking price?” Most times these questions will not be answered until there is proof of financial ability and an NDA is signed. While times greatly vary, ten-days for due diligence, 30-days to agree on the APA, and 10-days to file, pay escrow, etc. The sale is usually consummated on final order (75 days), although sometimes this occurs on the Initial Grant (45 days).

 

[Goat Rodeo Cowboy]

True. EBITDA is standard with the bigger broadcast companies. However, the methodology used by most smaller companies is nearly identical ‒ add revenues, subtract operating expenses = cash flow. Below the line is depreciation, debt, interest, etc.

I guess what is keeping us from being in agreement on this topic is the terminology: "Below the line." That is not language that is meaningful to me. I guess there must be an accepted format for cash flow statements and if so, that is a form that I am not familiar with.

The other issue to deal with in valuating a small station is what to do with money paid to the owner as salary. In the bigger broadcast companies where EBITDA is a common terminology, the cost of supervising and managing the station is part of the operating expense. The local general manager, the sales manager, etc and maybe a potion of the corporate engineering manager may be included in operating expense.

If you include the owners salary in operating expense (in a mom and pop) you are including some of what should be considered profit. If you totally exclude the owners salary then the true operating cost is being understated. And thats o.k. If someone is skilled enough to be able to buy the station, he/she is probably skilled enough to make an evaluation of that.

My whole hangup here is the small shirt-pocket operator who excludes all payments to himself, both salary and maybe to reimbursed expenses so that the profit seems large, thus the cash flow seems large, and yet he wants to multiply this exaggerated cash flow number by 16 or something.

For these folks selling your station is sometimes like selling one of your children.... and if you start hacking away at what the owner has convinced himself is legitimate CASH FLOW it gets to be like you are trying to degrade one of his children.

 

[KirkSherwood]

I guess what is keeping us from being in agreement on this topic is the terminology: "Below the line."

Here are three methods I am familiar with: EBITDA, OIBDAN and Locally produced financial statements. They all breakout revenues, then expenses. Depending on the method, the result is EBITDA, OIBDAN or net profit. Next come the “below the line items.” This varies depending on the method. Often listed are interest, depreciation, professional fees, officer comp, etc. In some locally produced financials, the amount of the debt service is also shown.

$1M in rev, $700K in expenses = $300K (this is the figure stated by the Seller as cash flow). Expenses listed below the line do not impact the $300K. In truth the owner may have $400K in interest payments, but because these costs are below the line, the cash flow is stated as $300K.

The Seller may try to negotiate other expense items as below the line. Example, I fly my corporate guy into the market every month, in a year it costs me $20K, but since you live in the market, you will not have that expense, so we need to move that expense below the line, thus the adjusted flow is $320K. Did I mention I take my wife out to dinner every week on the station tab, over a year this totals $12K, we need to move this expense below the line. . . and so it goes. This is just one of the reasons why it often takes more than 30 days to knock out the APA.

Believe this, is the buy/sell process was streamlined to a simple template, the Mercedes Benz dealer would never see an FCC attorney in their showroom. . .this is not the case!

 

[TomT]

Having just bought a station, it helps to know the market, be very familiar with the operation, and explore thoroughly for hidden costs such as contracts for software or consultants.

 

[bossbill]

If you include the owners salary in operating expense (in a mom and pop) you are including some of what should be considered profit. If you totally exclude the owners salary then the true operating cost is being understated. And thats o.k. If someone is skilled enough to be able to buy the station, he/she is probably skilled enough to make an evaluation of that.

[/quote]

I'll take issue with that statement. In order to determine the true cost of operation, the small business owner's reasonable salary MUST be included, as well as reasonable cost of the premises occupied if owned by the company. In small businesses, the owner may actually work far more than one employee. Failure to include that fair salary then creates a fictitious cash flow.

And remember, there are other factors, including the way the business is being operated, and future potential, which will affect what a buyer is willing to pay based on the very simplistic "cash flow" multiple.

 

[TVradioguru]

I agree with Bill, if a station isn't including ALL expenses including but not limited to the owners salary, I'd be very suspicious. To Bill's point and depending on the market size (or lack thereof), the owner may even hold the largest list of client accounts, which may include commissions. On a smaller station, that amount could skew your cashflow numbers considerably.

I've seen in many instances, where trade accounts of 10X were rolled into the owner's compensation which weren't disclosed in the financial reports from the broker. The problem is your cashflow takes a healthy hit after the sale because now you're stuck with all these bad trade deals because of contracts tied directly into the owner or GM compensation package.

If I don't see the owner's or GM compensation all-in, apparent in the financial statements, I'd be willing to walk away.

 

[Goat Rodeo Cowboy]

I think we are all in agreement that when contemplating the purchase of a station that is small, that is closely held, that is owner-deeply-involved, we want to see all the details of what flows into the owners pocket, and how is that reported in the financial statements you are reviewing.

My only point this: Even if the big corporate buyers of big, substantial stations are pay 10x, 12x or even 16x cash flow in a nearby market, you have a sticky-wicket when the small-time operator wants to throw all his personal income (and maybe the income paid to a spouse) into cash flow, then digs in his heels and says: I am accepting nothing less than 16x.

My point is that he may not be comparing apples to apples. He may be asking 16x an inflated number. Yes, I have the choice of walking away. I have the choice of finding out if I am a tough negotiator. The reason I have stuck with this bogged down conversation is this: Maybe a potential seller is reading these threads. Maybe a potential seller needs to read that some people have a different concept of how you calculate cash flow. Maybe a potential seller would come out better in the end by being realistic in proposing why his/her asking point is what it is.

The one that amused me was the seller sitting on some back-street land wanted the same price per acre as the big-box store paid for prime land two miles away on the most desirable intersection in the entire market.

From that experience I learned that how you explain why you think the price should be lower can really frost-bite your negotiating session. ;D

 

[12 In a Row]

Or the single owner who is living VERY well, beautiful home, high end everything, 2 very expensive cars, lavish trips who claims he is talking out 35K a year. Turns out his lifestyle is all on trade. Thank god we walked! I wonder if the IRS ever caught up with him?

 

[davideduardo]

Or the single owner who is living VERY well, beautiful home, high end everything, 2 very expensive cars, lavish trips who claims he is talking out 35K a year. Turns out his lifestyle is all on trade. Thank god we walked! I wonder if the IRS ever caught up with him?

That reminds me of the old radio joke...

Jock 1: did you hear about Bill, the sales manager?

Jock 2: no, what happened?

Jock 1: he was robbed!

Jock 2: really?

Jock 1. yes. the thief took $100 in cash and $500 in trade.

 

[Prais]

Trade is not bad, it's doing the correct boookkeeping thats the problem. The guy we bought a station from would have gone to jail had he not died of a heart attack, because ascrap would NOT leave him alone.

In LOTS of small markets trade is an excellen opportunity to get a merchant with lots of inventory to use radio. It worked in the small
market where we owned an am/fm). We did very well.

After a few years of only cash , we wanted to get EVERYONE who
wanted to be on the air, on, so we traded alot. If not for our persnal use, than for our "prize closet." My wife and I bought out 3 parners and were eventually the sole owners.

We traded, a livng room suite, bedroom suite, many GE appliances,
$100 worth of groceries a week, a used car with about 40k miles, a new Ford Granada, $100 weekly in records, 10 tickets weekly to a movie theatre, $100 tickets monthly to see big name acts, $100 weekly at Dairy Queen, a deluxe fireplace for our home, lawn care for the station (and eventually our home as well) Las Vegas, Florida and Chicago hotels, $100 a week in gas for our sales ladies, and I'm sure I'm forgetting a few things, as this was more than 25 years ago.

....and those 2 stations still did around 70k total monthly in cash business, and naional farm accounts. If that was not true, I would have NEVER gone so hog wild with the trades.

The trades enabled LOTS of businesses to use local radio (and stay
out of the newspaper..another goal of mine), The trades showed merchants the VALUE of running radio ads. Many became cash cunstomers, later.

More importantly, it helped my family live VERY well.

 

[Nostalgia]

Re: Lots of Radio Stations for sale - Time to buy?

More importantly, it helped my family live VERY well.

Prais, you are a god, my hero and role model! I wanna live VERY well too ;D So far I am trading out hotel rooms and mowing the tower field, we clearly need to expand our horizons.

 

[CaptBob92]

Hell, I got a new 25 foot boat and an electric car out of my trades one year. LOL

 

[radioray]

I guess it's just your approach but I don't know it can be pulled off.

A good friend of mine was GM of about a mom-pop triplet combo in a town of 38,000. He took over from a previous GM who had been given carte-blanche to trade as long as it had some benefit (and the benefit could just be a new car for the GM). My friend said it was a MESS.

First off, "traders" who were using cash in the newspaper or on one of the other four stations in town would refuse to use cash with him because they knew they were "barter takers".

Then he said he had a problem with those paying cash finding out barter was possible and immediately demanding it too. "If you are giving barter to Bobs Pizzas Place, why not Toms Hamburger place" was the argument (used in this case by "Tom").

You also had a problem with accounting for this stuff, their tax attorney told them it was pretty risky.

I mean, just a mess. He finally drew a line in the and said as of March 1 on year 200X no more barters of any kind, for anything period. If we want or need something, we will buy in cash. If you want airtime, hand over some cash. No mess, no fuss.

Said it took about 2 months of truly doing this, taking absolutely no trade, zilch, for 70% of the clients who were traders to start paying cash.

But I guess if you can somehow pull if off, I guess do it. I never would.

 

[TVradioguru]

If I caught one of my GMs doing trade deals for themselves as part of their 'compensation', or doing deals at anything but equal value, they would be out on their a$$ in a heartbeat.

To me, one-to-one trade is okay for promotional use, but shouldn't be used for personal gain of anyone in the operation.

Trade is a slippery slope, one that is frequently abused and messy when brokering a sale or purchase.

 

[Porky Hooton]

TV. I would also let the station managers give sales managers and sales people permission to make trades for gas and cell phones. But you are right, it is slippery slope, and if the authorties ever went to the "trade files" and "political files" of most radio stations, they would have a field day. The business office would then indicate all trade on the payroll checks. Say a sales person had a $100 a month gas trade. It would then appear on their payroll check, and they would be taxed accordingly. I am sure that in many small and medium market radio stations you have lots of double dipping, with sales people trading out commercials for free gas, and then turning around at tax time only to claim it as a business expense. Not very kosher in IRS circles. The other thing that would happen in the smaller markets, is that talent fees would be paid directly to the dj's at station appearances. What dj do you know that is going to claim that income? To that end, like with gas trades, you should always build in the talent fee in the cost of a remote, and have it paid out of the payroll department, so that it can be taxed accordingly in their payroll deductions. Do good, be well and happy.

 

[Goat Rodeo Cowboy]

I am sure that in many small and medium market radio stations you have lots of double dipping, with sales people trading out commercials for free gas, and then turning around at tax time only to claim it as a business expense. Not very kosher in IRS circles.

The handling of "imputed income" has become a nightmare for the Payroll Department and the Accounts Payable people in companies of all sizes. I was the I.T. Director for an automobile dealership group. They told me I was entitled to a "company car" if I wanted it. After I looked at all the paperwork, the tax issues, and in insurance issues, I told them to forget the car and give me the small but generous cash increase in my pay instead.

 

[Mike Sheridan]

Re: Re: Lots of Radio Stations for sale - Time to buy?

More importantly, it helped my family live VERY well.

Prais, you are a god, my hero and role model! I wanna live VERY well too ;D So far I am trading out hotel rooms and mowing the tower field, we clearly need to expand our horizons.

If the bookkeeping is done correctly I don't see a problem. Just make sure you have enough inventory for the cash customers. I assume the cash customers get the best times? Are the trade account spots preempt-able? Being creative this way has probably helped lots of stations and the people who work there survive.