Valuations & Acquisitions: What Acquisition Due Diligence Reviews Can Teach You
Yet in each case, virtually all are concerned with sustained and growing cash flow. Many simply reference EBITDA. That said, growth is the most important characteristic assuring the equity investors receive their required ROI, and the debt sources receive their payback with interest. Both often are shareholders; without receiving their due, failure is in the cards.
Future growth is the same primary objective that catalogers have to focus on. When catalogers exercise the DDR approach, its disciplines and interpretations, they not only help their own EBITDA generation, but they also best position themselves to do their own deals — whether it’s to buy, sell or raise growth financing.
The first industry “expert” within a DDR analysis program is the so-called executive-in-residence. Equity investors normally are aligned today with career direct marketers, who invest alongside them, and who eventually hold senior management, operating positions.
Some examples: Jon Medved at Chef’s Catalog, Rich Hebert at BlueSky Brands, Jack Rosenfeld at Potpourri Group and Gary Giesler at AmeriMark. These all are heavy-duty career catalogers, who know what metrics and performance standards lead to future growth, how to measure historic rates, how to improve performance and which investments to avoid.
When they acquire an initial platform business, or complete a later add-on acquisition (of size), they assemble a team of catalog industry experts, by operating area, to conduct the DDR analysis. It’s not unusual to see a consultant (or consulting firm) investigating and analyzing, through meetings and performance data requests with company management, each discipline in the company to be acquired. These include merchandising, inventory control/forecasting, marketing, Web and search, operations, accounting/financial statements, and legal.
Such investigations typically take 75 to 100 days, and can cost more than $100,000. If there are multiple brand/catalog titles, this figure can increase greatly. Additional costs for the legal due diligence and closing documents can represent an incremental $100,000 to $250,000 or more. Finally, add expenses for intermediaries, such as myself, as we often can work on a deal for up to a year on the sell side, and six to nine months on buy-side representation.