"In a small business, the balance sheet is an interesting piece of fiction," Hesters, who ordinarily prefers his tales truer to life, explains. "Cash is what counts." A balance sheet is a stylized rendering of a company's value at a given time. That's why the founders chose to report certain outlays as capital investments rather than as expenses. In the surmise of bankers and investors, the company appears more profitable. Keeping a watchful eye on their ratios, especially current assets to current liabilities, the partners improved their creditworthiness, a quality they had ignored at Newman. They reapportioned debt to strengthen the catalog company. Outstanding debt to lenders remains at just over $130,000. Equity remains at $400,000. "By the time Dun & Bradstreet gets a look at our next balance sheet, it will be a pretty sight." Is appearance on a credit report so important? "You bet. That's part of the image. We've learned to present financial information in the way that investors and lenders are accustomed to seeing it -- and within the ranges that put them at ease," says Hesters.
One plus one doesn't always equal two. Or, as Hesters discovered, occasionally, twin businesses are better off -- and worth more -- apart. One set of financial standards for a direct-mail catalog company and an entirely different set for a publishing company made their union a handicap. To meet expectations in one industry, the company would have to fall short in the other. Consider profitability: 10% to 20% is the range considered healthy for a publisher; 5% to 10% for a direct-mail marketer. The company's value was obscured.
The synergies -- the catalog is both a distribution channel and a marketing tool for the publishing company, while the publishing company is a reliable and low-cost supplier for the catalog business -- still make the two businesses a pretty pair, Hesters maintains. But he decided to uncouple them and focus on building value in the direct-mail enterprise.
The tangible assets embedded in that business include a list of some 200,000 names, which might fetch $350,000; another $350,000 in inventory; and capital equipment that includes a computerized order-fulfillment system, 12 personal computers, a dozen or so phones atop the same number of beat-up desks, five years' worth of surplus catalogs, and an old fridge. Hesters and Olsen would be lucky to get $25,000 for the lot. But the intangible assets, Hesters argues, account for half the company's value. First, the company's knowledge of the market: six years of sales and customer data could be worth plenty, he contends, to industry newcomers such as Columbia House or Doubleday. Then there are the relationships the company has forged: two-thirds of libraries that buy audio books buy from Audio Partners. The founders have fostered strong ties with nearly 100 audio publishers. "No one in the industry does not like to deal with them," says Jim Brannigan, vice-president of Highbridge Co. "You get as honest a deal as you can have in business."
The Value Mason
There is little about the value of their company that Audio Partners' owners leave to the vagaries of growth or profit. Olsen and Hesters don't presume that a booming market or even bolstered earnings will beget a valuable company in the end. No invisible hand sprinkles gold dust on the company, even in the best of times. So they conscientiously weave value into every aspect of their operations.
"The direct-mail business is our effort to draft behind the energies of major publishers," says Hesters, who strategically leverages what he calls OPT -- other people's titles. Lavish promotional efforts of large suppliers attract new customers for audio books. By Hesters's estimation, each audio convert is on the road to becoming the volume consumer his company targets.
On the publishing side, Olsen focuses on titles that don't risk hefty advances. That acquisition strategy allows Audio Partners to take shelter from bigger players such as Bantam or Nightingale-Conant, which for obvious reasons avoid stuff that John Grisham didn't write. With a few serendipitous exceptions , they have eschewed mass-market titles in favor of specialized books that hold marginal mass-market potential. They have acquired rights to a collection of Isak Dinesen's work and to The Diary of Anne Frank, among a handful of classics. "We want a backlist with legs," pronounces Olsen. Evergreen titles that promise a long life cycle are "like residuals. They keep selling and selling," adds Hesters.
Direct-mail customers who have bought from Hesters and Olsen in the most recent two-year period number 50,000. And the company carefully slices that roster into fine segments -- those who have bought in the last 6 months, 12 months, and 24 months -- and determines what they ordered and how much. The high return on each mailing reflects the company's attending to only those buyers likely to perform. The demographics of its own customer base provide a template for renting the right names from the right lists. The direct-mail division usually prospects for new customers in the few months before the holidays, when people are predisposed to spend. The company doesn't mail more than three consecutive catalogs to a prospect who has never ordered.
Back in 1992, when the direct-mail company topped $1.5 million in revenues and the founders detached it from the publishing business, they embarked on a hunt for an equity partner -- someone with a background in direct-mail operations as well as finance who would join the company as a hands-on manager; someone who would add value to the business, not simply pay them for the value that already resided there. They sought an equity investment, earmarked for working capital, equal to the cost of the new partner's salary. "Just in case," says Hesters.
