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

The first (and foundation model) is the prospecting Contribution to Fixed Expense P&L (see 2007 Catalog Prospecting Breakeven Model Example below).

Note the $1.147 gross demand per catalog mailed is the break-even point. At this $1.147 level, the mailing has covered variable expenses and will start contributing to fixed expenses. In this example, the $1 sales per book achieved was below breakeven. So the 20 orders/customers secured (at a total cost of $65) means the cost per new customer was $3.25 each.

Next, run this result through a 12- to 36-month lifetime value cash flow model and see if it makes economic sense to invest this much to secure a new customer. Then run the same analysis on each primary channel you use for prospecting.

These models (which your marketing people should run every year, by primary season) will help you:
3 set your annual sales and profit forecast;
3 set circulation levels for prospects and customers in each seasonal mail plan;
3 maximize profits in your yearly circ plan; and
3 when the timing is right, be positioned to raise capital, sell equity or exit.

Also, calculate the size of your “proven” prospect universe and the future sales growth forecast range it might have the potential to generate. This is at least a two-part model: one for catalog mailings and one for Web marketing. And, of course, if you want to find growth from alternative media, add one for that program also.

One other financial model used in the deal world for catalogers is especially useful in helping outside financing sources (i.e., non-catalog investors) understand the overall profit metrics of mailings to house customers vs. mailings to prospects. One easy-to-understand table can be prepared by your marketing and finance departments to show annual (or even primary season) P&L.