Cashing In Your Chips

MERGERS AND ACQUISITIONS are dominating many sectors of the U.S. economy, and the direct marketing industry, in particular. Everywhere you turn, somebody is buying someone else’s business-and they’re paying a pretty penny to do so.

What’s driving this activity?

Direct marketing has gone mainstream as more and more manufacturers and retailers are looking to expand their distribution and marketing channels through DM-without having to build the infrastructure from the ground up.

The bull market hasn’t hurt either, prompting the professional investment community to cast an approving eye on previously overlooked arenas such as direct marketing. All these eager buyers have driven the sales prices of direct marketing companies way up.

On average, direct marketing businesses on the block are getting five to eight times their EBITDA (earnings before interest, taxes, depreciation and amortization).

And the most desirable companies-those with outstanding profit margins in high-growth markets, such as business-to-business catalogs -are even getting double-digit multiples of their EBITDA.

Office Depot, for example, paid 21 times Viking Office Products’ EBITDA in their

$3 billion transaction. Quill got 16 times its $43.2 million EBITDA when Staples bought it for $690 million.

As a result, many companies that previously wouldn’t have thought about selling are considering the prospect quite seriously. If you’re one of them, here are some key initial steps to put you on the yellow brick road to achieving maximum value for your hard work.

The Right Reason to Sell Your first step after you decide to sell is to be able to explain why you want to sell your business. No potential new owner or investor wants a dud, but they will want an underachiever that can overcome its obstacles with deeper management, more capital or a new distribution vehicle.

If it is a family-run business, maybe you’ve simply decided that it’s time to retire and put your affairs in order to ensure the smooth transition into capable hands.

Either way, you need to paint the picture of your company’s potential, which may be brought to fruition by one or more of the following factors.

* Better capitalization:

Are the company’s database marketing capabilities suffering because you can’t afford the latest modeling software or expand access to the desktop? Perhaps the company needs to double its warehouse capacity to fulfill orders in a more timely manner. An infusion from a cash-rich new owner could send the business on its way to improved profitability.

* Change in type of owner:

In today’s dynamic DM market, companies are constantly repositioning their businesses and often shed units that don’t match their chosen growth paths. With the right strategic owner, a direct marketing company can dramatically bolster its marketing expertise or add a new distribution channel (catalog or direct response television, for example) to maximize its performance.

Or perhaps your company has the right direct marketing initiatives in place, but requires more capital or financial management to put the right numbers on the board. A financial owner, such as a venture capital or private equity firm, can provide capital support and financial management expertise for underperforming or undercapitalized businesses.

The Long-Term View The next step is to begin painting a picture of your business to show any new owner that all the talk about what “could be” is backed up by an actionable strategy. Don’t just look at the here and now, but where the company is going, and how it will get there. Provide answers to the following questions:

* What are the company’s strengths? Weaknesses? Think in terms of your management, operations, merchandising and marketing.

* If given different resources, what is the company’s strategy to achieve future growth? Is international expansion the way to go? Or will you cross-market a broader product mix to your existing house file ?

* Who is going to drive that strategy? Will you need to bring in new management? Are the right people in place to lead the company to the next level?

DM Assets In fact, while having focused leadership is critical to any business, it’s perhaps even more crucial in the direct marketing industry where managing back-end systems and intangible assets such as house files can make or break the bottom line.

Just as “location, location, location” means success in reaping maximum value in real estate, “management, management, management” are the three keys to a successful direct marketing transaction.

Quality leadership can turn a mediocre company into an overachiever and make a solid company better. Think of Lillian Vernon’s catalog success and you can’t help but think of its founder Lillian Vernon, or the positive association between Pleasant Rowland and The Pleasant Company.

The marketing database is also one of a direct marketing company’s greatest value drivers, and you’ll be able to put a higher price tag on that asset if you can turn your raw data into marketing intelligence.

For example, do you know what your customer acquisition costs are? Or the recency, frequency and monetary (RFM) values per customer? How long do your customers stay with you? The ability to measure a term like “customer loyalty” with dollars will enhance the value of your database-and your business as a whole.

Lastly, start thinking of your financial records as assets and be meticulous about their accuracy. Remember, when it comes time to start negotiating the sale of your business, you’ll be working off your budgeted numbers, whether historical or projected.

Underbudgeting will prevent you from getting a fair market value for your business because you could ultimately have gotten a higher price based on your actual sales and profits.

On the other hand, if you fall short of your budgeted goals, you will lose credibility with any potential acquirer, and could even be forced to renegotiate downward any deal that has already been agreed upon.