Valuations & Acquisitions: What Acquisition Due Diligence Reviews Can Teach You

As competition among acquirers of catalog companies has increased and multiples have grown, these buyers have become more sophisticated in their acquisition due diligence reviews (DDRs).

“Multiple” refers to the multiplying amount applied to the latest 12 months of EBITDA (earnings before interest, taxes, depreciation and amortization), to equal the final valuation. And this especially is true for equity house investors, all of whom have extensive fiduciary responsibilities to their sources of capital, which often are insurance companies, pension plans, banks and other institutions. In fact, even most large direct marketers don’t acquire catalogers without similar intensive DDRs.

DDRs help as you do your circ plan, determine paid and natural search budgets, establish an annual P&L forecast and attempt a three-year strategic plan.

A DDR occurs between the signing of the joint letter of intent and the acquisition’s closing. Typically a 90- to 120-day period, DDRs for deals of any significant size include at least two primary reviews: from the buyer providing equity and from the financing source.

Since there can be more than one type of debt (e.g., short, mezzanine, long-term), there may be a third DDR. A fourth can occur if the working capital line is provided by an additional outside bank.

DDR Methodology and Intensity

The extent of each DDR varies with the investor. The intensity of the review in descending order usually is the equity investor, followed by the short- and long-term debt sources, followed by the working capital line source. Each has certain metrics it tends to focus on, so each analysis and DDR normally is custom made.

If you’re an old-line cataloger, you may wonder why you should study this and how you can learn anything from a bunch of “Johnnies-come-lately” professional investors. It’s simple: Most DDRs are conducted by long-time experts drawn directly from some of the best career catalog and Web site people in our industry.