Your business is worth more than 6X yearly earnings

James Hultquist-Todd

I think this acquisition push has more to do with the early designers of digital type retiring (and the ensuing rush to get their IP) than AI fears.

k.l.

Thanks for getting this back on track.

John Hudson

Aside from all the potential risks of AI, a primary issue in any use of the technology is the problem of constrainability. The notion of a ‘robotic intern’ implies something self-contained and working within constraints specifically dictated by human instruction. It is possible to create an air-gapped machine learning tool that operates only on specific training materials provided and only performs tasks specified by human controllers, but that is not the general model of machine learning being applied in today’s most popular AI. To me, such a model seems exactly what I would want from a robotic intern in font making because, as explained in other threads, I would want to train the AI tool to design type and make fonts that way I do so, not the way other people do, but such a model will be viewed by many as unattractive due to the limits it places on the potential of the technology. An AI that has all the Internet as its training material is much more powerful, but also much riskier, since it is not only learning what you want it to learn, but learning things that you may not realise it is learning, including communication protocols.

So when talking about the usefulness and risks of AI, and when likening it to existing non-AI tools such as automation scripts and algorithms, it is important to consider how constrained or unconstrained is the operating environment of the AI.

PabloImpallari

Haha.. what you want is to indoctrinate your own AI to your own taste... which is totally ok and valid. I have been doing the same.

You do so by "captioning" your training data. Its a long and tedious process full of thorns, but the results is the sweet nectar in the middle of the rose.

Once the AI has learned the meaning of the words you have used in your training data captioning, and start to react to the presence or absence of those words in your prompts, you can start to control it as your servant.

First the AI will have very little to none reaction, but as you keep increasing the training time you will see slow progress... repeat and repeat until results are satisfactory.

Good idea to save model checkpoints from time to time... so in case you ruin it, you dont have to start all over again.

One strategy I have been using is to train small models, one each specific for each specific time.... as opposed to train a super huge do-it-all genius monster model. For me is easier, also I don't know enough about AI internals to even aim at the task... for example I still don't know how to "correct" the AI when she learns something incorrect. On those escenarios I need to reset and start over.. but I know that are other better options, including golas and rewards, model merging and many more advanced techniques that may be out of my league.

In the process of teaching the AI you will learn a lot about you very own tastes too... since many things that one does instinctively without thinking too much about it... will be subject to deep thinking analysis, and you may end up changing your own mind on many regards.

MrEchs

As a business coach and consultant to type people, I've been hired as an advisor to several of these acquisitions. I'm not speaking here for any of those folks but I wanted to share some thoughts.

There are now several companies actively looking to acquire font library IP. Overall it's hard for me to see this as anything but good news for independent type designers. Even if you plan to never sell, it signals that investors believe that fonts are valuable. They have a good reason for believing this.

Regarding valuation and earnings multiple, upthread a commenter pointed out that an acquirer might spend 6X earnings up front, then sit back and collect 1X earnings every year.

I think that misses the point. Few investors would be satisfied with that return in any industry.

People buy businesses because they believe they can increase the revenue. If they see revenue growing prior to an acquisition, they are probably willing to pay a higher multiple of earnings. If they think that they can do something that will cause that revenue to grow faster, they're probably willing to pay even more. If they think revenue will go up without them doing anything at all, that's even better!

Acquisition activity signals that investors believe revenue will increase. I see signs that there's some consensus that there's an opportunity for font revenue to grow industry-wide. That's supported by what I'm seeing in my own work.

I also wanted to share a couple of things to think about when considering buyout offers. An earlier commenter suggested that these deals are driven by designers looking to retire. I have not yet met a type designers who wanted to retire! I have met several who want to retire from sales, marketing, Twitter, and Instagram, though.

Speaking in general and not specifically about any company or transaction -- when there are multiple companies competing to acquire other companies, price is only one way they compete. 

Another is the opportunities they offer the principals of the company they're buying. Some may expect the former owner to disappear into the sunset. Others may invite them to become an employees, or even a partner.

One might pay the entire price up front. Another might over a long-term earnout that provides income tied to the revenue generated. Some form of equity in the buyer's company might also on the table.

The earnings multiple is rarely the most important thing for my clients. The question of what you'll be doing for the balance of your career is likely the essential factor.

I hope that's helpful. If you'd like to discuss any of this stuff you can reach me at mjr@bizlet.org.

--Matthew 

Business Letters LLC
Coaching for Creative People
http://bizlet.org

John Hudson

@MrEchs

There are now several companies actively looking to acquire font library IP. Overall it's hard for me to see this as anything but good news for independent type designers.

It is only good news for independent type designers—and independent foundries—if there remain ways for them to leverage the value of fonts and earn a living independently of the channels owned and controlled by those companies that are seeking to acquire everyone else’s assets. I am concerned that recent distributor contract changes and library subscription based distribution models aim to diminish the ways in which independent designers and foundries can reap a return on the value of what they make, leading to a situation in which selling IP rights to Monotype—and let’s be clear that Monotype’s new contract seems designed to make it difficult for foundries to sell to anyone else—becomes the only viable income source while, at the same time, so reducing income from other forms of licensing and distribution as to lower the perceived value of the fonts and the foundries, at which point the monopsonistic purchaser can pick up the assets cheaply.

I have spent all day pondering whether to write this, because one reasonable response is to think ‘Well, if he’s right, I should sell sooner rather than later’. So consider also that I may be wrong, and perhaps Matthew is right that ‘there's an opportunity for font revenue to grow industry-wide’—wherein ‘industry-wide’ continues to include small, independent foundries able to operate and participate in that growth outside of the channels owned and controlled by the circling sharks. Alternatively, consider that maybe you want to organise against one possible future.

People buy businesses because they believe they can increase the revenue.

Indeed, and large, well-capitalised companies are always going to be able to more effectively leverage value than small, under- or, often, un-capitalised companies that people have built from nothing through their creative labour. They can do so not because they are cleverer or more efficient—or even more than minimally competent—but simply because they have capital, which means they can invest in things like sales staff and lawyers and technical innovations that most independent designers and foundries cannot.

If we reach a point at which the only way for type designers and font makers to make a living by selling the IP rights to the products of their labour to the owners of capital, we become a kind of creative precariat: wageless and unprotected workers making things whose value is leveraged to enrich others, unable to organise in our collective interest—because technically not employees, yet retaining none of the benefits of not being employees.

MrEchs

Thanks John for the cogent and balanced reply. I appreciate it.

I certainly didn't intend to say that anyone ought to sell sooner rather than later! So far, the primary factors for most have been lifestyle and financial needs. Different kinds of transactions come with different opportunities for how you'll continue your career. I think it's wise to consider these first. 

Overall, more parties acquiring type IP portends more parties marketing it. It's hard to see how that does not lead to more revenue opportunities industry-wide, even for those who do not sell. 

I would expect competitive forces to influence buyers as well as sellers. Buyers will compete with each other to acquire IP. In time this could address some of the issues you mentioned. 

I know it's a tough business and I have infinite respect for everyone making a go of it. To me it seems there are more ways for designers to earn a living than there were 15 years ago. Some of them are terrible! I hope more choices are better than fewer, and I am hoping that they'll influence each other along the way.

--Matthew
Business Letters LLC
Coaching for Creative People
http://bizlet.org

Nadine Chahine

As I mentioned in my ATypI talk, there are now at least 2 entities now active in acquiring foundries: Monotype and The Type Founders. This creates a very interesting dynamic and could potentially explain why Monotype is asking for a 3 months notice period in case a foundry plans to sell to someone else (as mentioned here). How they can ask a foundry to breaks its NDA and disclose business negotiations before they are concluded is beyond my comprehension...

When it comes to selling and calculating the worth of a foundry, one has to look at its revenue streams and expenses. If its profit is coming from custom work, then its valuation will likely be less attractive because that type of income requires that personnel are kept on board and existing customer relations are maintained. If the buyer keeps the foundry employees, not a problem. If the buyer prefers to keep only the font IP, then that foundry is less attractive.

If on the other hand, the profit is coming from predictable font licensing, then that is more attractive to a company interested in growing its portfolio.

Someone earlier asked about the royalties that Monotype takes on fonts. Those are kept by Monotype (as is normal) and do not appear on the balance sheet of the foundry. They were never income for that foundry, and that money was never in the bank account of the foundry. So, not part of the equation.

One last note, as part of the ILT Academy, we will be offering a seminar on mergers and acquisitions as there's been a lot of questions around that topic. I'll post details later.

John Hudson

When it comes to selling and calculating the worth of a foundry, one has to look at its revenue streams and expenses.

But not only. Some foundries may have IP that they have under-leveraged or, indeed, not leveraged at all. So, for example, a company whose income is primarily derived from custom work may also have IP that they have not bothered to monetise via retail licensing channels. Despite showing up as non-earning, that IP may still have significant value to a purchaser, even if simply in terms of adding assets to the books, thereby increasing their own purchase value.