Hesters reckons that today's world of publishing will leave few "freestanding elements" like Audio Partners. So he primps the business for a yet-to-be-arranged marriage. "We have to structure ourselves so we can be attached to somebody else in case this company is no longer viable on its own." In 1992 he and Olsen split the company in two -- publishing and direct mail -- because direct mail's promise of greater growth would make it more appealing to an investor or buyer. The company thereby bettered its chances of attracting capital and added another exit scenario.
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Value: Let Me Count the Ways
The five-year plan entertains several versions of a closing scene: Hesters and Olsen might sell out -- completely or partially -- to a larger company for cash or stock or a combination of both. They might woo an independent buyer, whose acquisition they could finance. They might sell all or part of their stock to their current operating partner or to their employees. Or bring in managers to run the business while they draw dividends from its earnings. An initial public offering, one option they reject, is "an expensive, time-consuming, and complicated way for a company our size to realize its value," says Hesters. "We'd have to reinvent the company and devote too many resources to selling this new product called stock." Hesters's ideal exit: to reduce his active role, perhaps to chairman of the board. Olsen's dream: to devote more time to travel, tennis, and pet publishing projects. Both aim to decrease the percentage of their net worth tied up in the company. "No more than a third," Hesters says.
As he and Olsen see it, they must continue to grow just enough to catch the fancy of a strategic partner -- a larger company in the direct-mail or audio-publishing business -- looking for market share in an acquisition. Profits cannot be sacrificed for growth, however, since a corporate buyer with higher cost structures would expect to see margins that could support its heft. The partners also consider courting an independent buyer who, they figure, would pay more for earnings than for growth. The possibility of a buyout by Goff or their employees demands profits sufficient to finance it. And the scenario in which the owners hire a chief executive and assume an investor's role is impossible without bolstering profits to support the dividends they'd take in return.
Growth without earnings gets you nothing but bragging rights. "The value of this company exists only to the extent we make it worth something to somebody else. Unless it produces income and doesn't require risk to sustain it, it isn't fully real," says Hesters.
That's a coolly rational assessment from a man who loves his company. But the company is not a monument to growth or profit or even the entrepreneurial Élan of Grady Hesters and Linda Olsen. It is a piece of masonry, built brick by brick, according to the founders' blueprint for value. And while it has been constructed to enrich the owners, it has been crafted as well to please other beholders: employees, customers, vendors, investors. The owners concede that if others can't see the company's value, it's a myth.
After witnessing firsthand what can happen when lenders or investors lose faith, the founders know not to risk their displeasure. "I want to create value that bankers and other investors respect," says Hesters, "so we have to produce results that are easily understood by bankers or potential investors." It's a game of managing perceptions.
"Grady is a meticulous thinker," says former partner Hal Newman. "His thinking moves like a flow chart." His postulates on value reflect that mental orderliness. First there's the market value -- what someone else will pay an owner for his or her equity. The most popular interpretation of value, it is also the most variable, dependent upon who sits across the table, how fast a seller must dispose of an asset, and when and how he or she will be paid.
That's why Hesters considers alternative reckonings of worth. For example, the company as cash flow. How much income can the founders collect -- through salaries, interest payments on loans they've made to the company, and dividends? If they bettered their profit margins to 5% of, say, $5 million in revenues, that would put $250,000 in the pretax kitty. At least half of that would go to taxes and a CEO's salary if Hesters were to step aside. The couple currently take just over $100,000 in combined salaries. Interest payments account for $14,000 to $15,000 more each year, but that income would balloon if they chose to finance a sale. If the business could sustain an annuity of $200,000 or so, the two might live golden years without really selling.
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The Death of a Business
In the sun-washed attic office where Hesters's desk overflows with business cards and trade magazines and, of course, cassettes, a hush falls. "It's worse than the death of someone close," says Hesters, "because when you own it, a company is really a living, breathing thing. It has a life of its own but at the same time you see yourself in it. Then one day it's just gone, and you can't believe it." So begins his memorial of Newman Communications, his firstborn, the company that made him rich (if only for a moment), died too young, and left him broke.
Founded in 1981, Newman Communications set out to pioneer the distribution of audio books in a then-nascent market. Distribution operations were headquartered in Albuquerque, where Hal Newman lived; sales and marketing as well as direct-mail operations were run out of San Mateo, Calif., where Hesters and Olsen lived. The couple, new to audio publishing, sank personal savings of $30,000 into the start-up and later took out a second mortgage to provide more capital. They jointly held 40% of the business. Newman, the company's cofounder and president, held 60%.
A private placement of $250,000 financed a public stock offering on the penny-stock exchange in 1984 that raised $1.5 million more. The stock won its listing on NASDAQ before the year was out.
