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Mergers and Acquisitions, Mirus Capital Advisors

Direct Marketing Deal Elements

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By Stuart Rose, Mirus Capital Advisors and Geoff Wolf, Wolf Direct

There are important numbers and concepts used to evaluate the acquisition of companies. Sales, growth, profitability, Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), and discounted cash flow (DCF).  All of these are important when presenting a company for sale in a Confidential Information Memorandum (CIM), a document sent to potential acquirers.

There are concepts and numbers specific to ecommerce and direct marketing companies that look to evaluate the health and potential. Foremost among them is the Cost of Acquisition and Lifetime Value of customers. Can the company acquire customers at a cost less than they are worth? A central question.

Presented below are standard concepts used to evaluate direct marketing companies. These concepts are then segmented by group in order to understand or manage the dynamics of a business. Every company, whether it’s for sale or just trying to turn a profit should understand how these concepts relate to its business AND the levers that influence the results.

Individual Elements

  1. Customers
    • Lifetime Value (LTV)
      • The long-term value of individual customers, generally grouped in descriptive bundles
        • 2-5 years of gross profit dollars net of the cost of marketing to them and fulfilling order
    • Size of Buyer File, especially 12m segment
  2. Recency, Frequency and Monetary Value (RFM)
    • When was the customer’s last purchase?
    • How many times has the customer bought from us?
    • How much has the customer bought from us (sometimes on average)?
  3. Prospects
    • Cost of Acquisition
      • How much spending is required to acquire a new customer?
    • Source of Acquisition
      • What source led a customer to buy the first time?

Ecommerce and Print Elements

  1. Email (per thousand emails deployed)
    • Open Rates
      • Unique Users opening emails
    • Click Thru Rates
      • Once emails are opened, how many click through to landing pages and get to the web site
    • Conversion Rates
      • Of the users who spend time on the web site, what is the conversion (sales) rate?
  2. Organic Search Within Competitive Marketplace
    • Does the brand consistently rank in the top three locations of Organic Search?
    • What is the conversion rate of organic keyword searches?
  3. Paid Search Within Competitive Marketplace
    • Does the brand consistently rank in the top three locations of Paid Search?
    • What is the acquisition cost of these orders and customer?
    • Brand versus Non-Brand visibility of keyword results
  4. Ecommerce Marketplaces
    • Amazon
      • What is the Amazon strategy?
      • What percentage of sales does Amazon represent and at what margin?
    • Other Marketplaces
      • Do any other significant digital marketplaces exist?
      • If so, what percentage of sales do they represent and at what margin?

Print Elements

  1. Circulation
    • How many print pieces were sent out to prospects and customers?
  2. Response Rate
    • How many orders were generated from the print pieces that were sent out?
  3. Cost per Book
    • How much an average piece costs to print and mail
  4. Dollars per Book
    • Total sales divided by mail file quantity
    • The average print piece generated how many sales per circulated piece

Order Elements

  1. Average Order Value (AOV)
    • How much is the typical order?
  2. Items per order
    • How individual items were bought in an individual order?
  3. Fulfillment Expense
    • How much does it cost to take, pick, pack and ship an order?
  4. Return Percentage
    • How many sales are retained for refund or exchange?

Merchandise Elements

  1. Proprietary Merchandise
    • What percentage of the merchandise is unique to the company?
  2. Newness
    • What percentage of the merchandise is new each time period?
  3. Markup and Gross Margin or Cost of Goods
    • What are the initial and maintained differences between cost and sales?

Market Elements

  1. Total Addressable market
    • What is the size of the total market?
  2. Category Growth
    • How fast is the category growing or shrinking?
  3. Market Share
    • What portion of the market does the company control?

Additional Deal Elements:

  1. Management Team
    • The experience and availability of the management team is sometimes an important factor for the acquiring party. The extent the business success is dependent on one person or a leadership team is usually carefully considered
  2. Merchandising Team
    • Unique and proprietary merchandise is a foundation of sales growth. The team responsible for developing new products can be very important to the future of the business
  3. Concentration of Buyers and Suppliers
    • How much of the supply or sales are generated by the top few suppliers and buyer?
  4. Barriers to Entry
    • What keeps competition from taking our market share?
      • Are there patents, trademarks, contracts, and other barriers to competition?
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