Risking a valuable business on a “key man” issue

Love him or hate him, Perez Hilton (nee’ Mario Lavandeira) is living up to his self-proclaimed “Queen of All Media” moniker. If you aren’t a pop culture fanatic like moi, then you may not know that his website PerezHilton.com is, according to recent rankings on Alexa.com, the 146th most popular site in the US and the 437th most popular website in the whole world.

While he has picked on some of my personal friends and clients, I still do enjoy taking breaks and browsing his site. I also applaud him for being proactive on the business front. He has leveraged his valuable audience into brand extensions including a record label, music tour, books and more. Most recently, he announced a new “sister” platform site, CocoPerez.com, focusing more narrowly on fashion and celebrity.

So what’s the problem? The problem is his brand. The same brand that has allowed him to become successful also creates a ton of risk for his business.

This may sound very pot-calling-the-kettle black coming from a site called CarolRoth.com, but trust me, I have a strategy. However, all of the Perez Hilton endeavors are branded and associated with Mr. Lavandeira’s alter-ego, Perez. While having a person behind the brand has created a connection with his audience (and made him a celebrity in his own right) it creates a lot of business strategy issues. This issue is known as a “key man issue” and is exacerbated because he IS the brand.

If Perez gets hit by a bus, the brand loses a lot of weight (and by weight, I mean value). If he personally falls out of favor with his core audience (which is a possibility; he has suffered some backlash from celebrities including his high-profile fight with will.i.am from the Black-eyed Peas), he can risk his company. And possibly most importantly, because he is the brand, he jeopardizes the ability to monetize his “media empire” through an acquisition.

The Daily Candy, a competitor in the blogging space with a similar demographic, was sold for $125 million to Comcast last year. The Daily Candy brand is personality agnostic; not being tied to any one person made it an easy property to integrate. Potential acquirors would have a very difficult time integrating a brand that is person-centric.

To further demonstrate the key man risk, you need look no further than Martha Stewart for a perfect example. When I worked at Banc of America Securities, we were one of the investment banks that participated in the Martha Stewart Living Omnimedia IPO. I was on the team that helped secure that transaction for B of A. All of the investment bankers involved in the IPO realized that Martha Stewart was key to the success of her business. Even though it was a large company, her name was attached to it and she was important to the brand.

If you look up the IPO registration statement, you will see a disclaimer about this very issue. This risk was proven to be significant a few years later. Martha Stewart Living Omnimedia’s stock was close to $20 per share in early 2002 when the news broke about Martha Stewart’s alleged securities fraud (for those of you asleep during the early 2000s, she was accused of selling an unrelated stock based upon illegal “inside information”). The issue of Martha- the founder and key person at her company- potentially going to jail, sent the stock to a low of approximately $6 per share and it didn’t recover for several years, well after she was convicted and served time in jail.

The value of the business significantly declined and was seriously impacted by this unforeseen issue affecting Martha Stewart.

The same risk is present for Perez Hilton. When he launched his new CocoPerez effort, he could have used it as an opportunity to extend the brand away from himself (i.e. Perez Hilton presents “XXXX”). Heck, he could even start transitioning his beloved dog Teddy Hilton to be the key anchor of the brand. There is much less risk in that (think of how many “Morris the Cats” have pimped out 9Lives cat food?). Instead of taking the opportunity to diversify his risk, he created more risk.

What Perez Hilton needs to do now is focus on high-level business strategy. His celebrity is solid, but a business’ value is fleeting. If he wants to make sure that he captures the value he has created before that value changes, he needs to hire someone well-versed in business strategy who has an eye towards an end-game like an acquisition (like me or one of my colleageus) to make sure he is maximizing his chances to get paid for what he has created and all of the work he has done to date.