By Erwin G. Krasnow, Esq., Garvey Schubert Barer
And finally, we present the third and final chapter in this comprehensive look at the due diligence process. We will remind once again that even if you are an in-market buyer with what you think is a thorough knowledge of the station you with to acquire, this is not a process that should be skipped. It can affect the deal itself, and it can affect your actions once the deal is done. Read on.
Engineering Review
The buyer should retain an experienced broadcasting engineering consultant to provide assistance in the due diligence process in at least two critical areas: the value and effectiveness of the station’s current technical plant and signal coverage plus an evaluation of how those assets compare with the competition in the market. In the first area, the consultant might be asked to inspect all physical assets of the station including the transmitter, power, remote units, cameras, wiring and control rooms. The engineer also might prepare a report that includes information as to the age and condition, type, location, FCC specifications, recommended replacements and possible improvements needed. Aside from equipment and upgrade concerns, the engineer should determine whether the station is operating within the FCC’s rules and regulations. In addition, the inspection should include an assessment of environmental concerns such polychlorinated biphenyls (PCBs) and radio frequency (RF) radiation.
The engineering consultant’s due diligence should go beyond the nuts and bolts of station equipment. While it is important to know the general condition of equipment in order to plan future purchases, other factors can have a far greater impact on station value. For example, can the power of the station be increased? Can the tower be moved to a location to serve the market better or to allow the sale of valuable real estate? For a detailed discussion of engineering due diligence, see Garrison C. Cavell and Erwin G. Krasnow, “Due Diligence — A Not Too Technical Guide, RBR-TVBR, Part 1, March 1, 2013; Part 2, March 15. 2013, Part 3, March 28, 2013; and Part 4, April 12, 2013
Business and Financial Due Diligence
Any due diligence review of a station must include a careful analysis of the seller’s business practices and financial records. A complete due diligence examination requires an analysis not only of what is inside the station but also what is outside. Business due diligence requires understanding the competitive environment and how the seller competes in the market as well as an analysis of the population and demographics of the market and the retail sales and growth rate. Financial due diligence includes a review of the financial statements of the targeted station, including an analysis of station revenues and program, technical, sales and general and administrative expenses.
A clear-headed business and financial analysis is essential to a successful purchase, At a minimum, that review should include:
* As a starting point, the buyer must be intimately familiar with the terms and conditions of the station’s affiliation agreement if the station is a network affiliate. When does the affiliation agreement expire? How strong is the relationship between the station and the network? Has the relationship been mutually beneficial? Has current management been considering a change in affiliation? Is there the possibility of modifying the agreement? Are there any restrictions on the ability of the seller to assign the agreement to a third party?
* All programming agreements also must be closely reviewed to determine the profitability of the arrangements and the length of the commitment. Is the station saddled with paying fees for programming that it no longer airs? Is the station about to lose the rights to its most profitable program or personality?
* The buyer should inspect the station’s accounts receivable. Are the accounts bona fide? Have there been extensive prepayments? Are there any advertisers that account for a disproportionately large share of the station’s business? Are any advertisers being given unusually large discounts and has that practice extended over a protracted period?
* The buyer must also carefully assess the situation with respect to the seller’s payables. Is the seller current on fees owed under its programming agreements? Is it current on its Arbitron or Nielsen payments? If it is streaming, is the station current on payments to SoundExchange? Are royalty payments current to ASCAP, BMI, and SESAC?
* Although more difficult to assess, the seller’s standing in the community must be analyzed. A buyer that purchases a station that traditionally has been behind in making payments to vendors or that has a history of heavily relying on trade arrangements may find it necessary to engage in a public relations campaign to alter the community’s perception of the station.
* The buyer should check on what the seller has reported to the IRS and review revenue reported on tax returns against corresponding internally prepared or audited financial statements.
* All of the station’s financial records must be analyzed to determine the extent to which the records are not being maintained in accordance with generally accepted accounting principles (GAAP) and to assess the impact of such noncompliance upon the station’s financial outlook.
For recommendations concerning the review of a station’s financial records, see John R. Brooks and Erwin G. Krasnow. “The Do’s of Doing Financial Due Diligence,” RBR-TVBR, Oct.12, 2012; and “More Do’s of Doing Financial Due Diligence,” RBR-TVBR, Nov. 2, 2012.
Collecting documents and compiling information about all aspects of the target station’s operation is just the first step in the due diligence process. Successful due diligence requires the buyer to draw meaningful and correct conclusions from a large amount of information in a short period of time. While due diligence helps protect the buyer against unpleasant surprises, it is unrealistic to expect that the process will unearth every issue and every potential liability. However, if the buyer assembles the right team and conducts due diligence with proper care, the chances for a smooth, headache-free transaction will be improved significantly.
Erwin G. Krasnow, the co-chair of the Communications Group of Garvey Schubert Barer, is a former General Counsel of the National Association of Broadcasters, Washington counsel to the Media Financial Management Association, and a coauthor of Profitably Buying and Selling Broadcast Stations and Washington counsel to the Media Financial Management Association. He concentrates on transactional matters and has represented sellers and buyers of broadcasting, cable, tower and telecommunications properties in transactions totaling in excess of $21 billion. He can be reached at [email protected] and (202) 298-2161.
