When Penthouse bought AdultFriendFinder and its sister sites for a reported $500 million in December 2007, it wasn't just a big deal. It may have been the biggest deal in the history of the adult industry.
You're not likely to ever have to worry much about nine-figure payouts. But it's quite possible that Penthouse - or Hustler or XXXHotSoccerMoms.com - may come calling with a partnership or acquisition proposal. Will you be prepared?
The chances are good you'll feel the urge to merge some time soon, if you haven't already. Mid-level webmasters, in particular, are facing challenges from below (free sites with loyal niche audiences) and above (pay sites with plenty of variety). "Partnerships are becoming more common out of necessity," said attorney Ira P. Rothken, who worked on the Penthouse deal. "If it's done well, consolidation in the industry leads to greater efficiency and greater profitability."
The first question to ask yourself is a simple one: Where do you want to go from here? Do you want to take a cash payout and get out of the business? Stay in the game but reduce your role? Become an even bigger player and create your own empire?
If you're looking to be bought out, be especially careful. "More times than not, the person that's being acquired will probably be getting the short end of the stick," said Jack Avalanche, CEO of the CherryPimps.com adult affiliate program.
The key is to know what you're getting into. Just look at how the big boys do it: A deal as large as the Penthouse acquisition typically involves an army of attorneys, accountants and even private investigators, all examining whether the deal makes sense.
The typical mom-and-pop shop - or, in our industry, a mom-on-pop shop - doesn't have this kind of support system. But "due diligence" is still crucial.
This means poring over revenue numbers and considering some worst-case scenarios. If you're acquiring a site and the traffic drops, what will you have left? "Do you have value in the property, the content, the affiliate base?" Avalanche said. "If some of the variables change, am I up a creek?"
And while you're checking things out, pay very close attention to 2257 compliance. "That is the big lurking elephant out there," said attorney and author Frederick Lane. "You really want to know what has been done in that respect and what kind of records are kept."
Lane, who estimates that as few as 1 in 4 sites are in full compliance with 2257, said larger companies like Playboy, Penthouse, Vivid and Wicked have the most money to lose and probably pay the most attention to 2257 compliance. Smaller companies might be more careless, he said.
If you consider a merger or acquisition, start by checking the resources that are available on sites like XBIZ and YNOT. And think about hiring an attorney with experience in the adult industry.
Remember: The business you save may be your own.
-Richard Dangle
This article originally appeared in the May 2008 edition of AVN Online. To subscribe, visit AVNMediaNetwork.com/subscriptions .
