Valuations & Acquisitions: Why Deal Due Diligence Is Worth a Try

In my last Catalog Success column, “What Acquisition Due Diligence Reviews Can Teach You” (February 2007, pg. 37), I explained why catalogers can benefit from embracing and using the analytical models employed by acquirers and financing sources in this industry as they decide which catalog/Web marketing businesses to pursue. Now, onto the use of due diligence methodologies in catalog deal-making.

These are some of the key analyses you should use in most of your seasonal circ plans and your annual strategic plan. Furthermore, and of no small importance, these are the same metrics and analyses your local banker should be using when deciding on whether to expand your working capital line or loan you money for an acquisition.

To operate a catalog/Web multichannel marketing business with what is considered “good” profitability — 8 percent to 10 percent EBITDA (earnings before interest, taxes, depreciation and amortization) — you have to understand the economics of your prospecting and how those economics compare for new customers sourced by a catalog mailing vs. those labeled as “pure” Web-sourced.

I’ll also look at one of the easy-to-understand models used in due diligence. Later installments of this column will go into more detailed approaches used by direct marketing consultants who often are retained by investors to assist with the investigation.

These models help you plan growth, improve profits, prospect breakeven, and analyze lifetime value.

If you’re determined to improve your catalog and Web business, invest some time and make sure your head of marketing analyzes and models your prospecting databases. This will allow you to more accurately set and achieve your growth goals — especially pretax profits — through the preparation of key marketing profitability metric models. These models can calculate for each season and primary type of prospecting the following:
3 a sales per catalog break-even P&L for new customers;
3 the cost to get a new customer;
3 new customer 12-, 24- and 36-month P&L value;
3 old customer reactivation profitability, breakeven and contribution; and
3 individual P&Ls for total revenue from customers and prospects.