A Broadcaster’s Guide to Due Diligence Part 1

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Erwin KrasnowBy Erwin G. Krasnow, Esq., Garvey Schubert Barer
The acquisition of a radio or television station is one of the riskiest activities a businessperson can undertake. A thorough due diligence process will help a buyer minimize risk. The purpose of due diligence is to obtain information about the strengths and weaknesses of the target enterprise, potential legal or other obligations or vulnerabilities, cash flow and future profit potential, competitive position, the physical facilities and other matters that can help the buyer decide whether to go forward with a purchase. If the acquisition is completed, the same information derived from the due diligence process can provide the buyer critical guidance for initial operating decisions as well as help the buyer define acceptable levels of risk.


The due diligence process involved in the acquisition of a broadcast station should include a review of the general economic and operating conditions as well as such areas as the financial and accounting systems, sales, programming, technical facilities, legal matters, marketing, FCC compliance, employee benefits, taxes, personnel and environmental matters. The objective of the due diligence review is to obtain information that will not only help decide whether or not to proceed with the acquisition but also assist in determining the amount of the purchase price or the projected working capital adjustment. This three-part series of articles provides practical tips on organizing and executing the due diligence to maximize the benefits of the process. Although written from the vantage point of the buyer, many aspects of due diligence discussed in the articles may be equally applicable to the seller. Sellers should consider performing due diligence for themselves for the purpose of helping them prepare for the sale of the station and maximizing the purchase price.

The extent of the due diligence investigation will depend on the experience and needs of the buyer, the magnitude of the purchase price, time constraints affecting the transaction and various other factors. For example, the financial scope of the effort may range from reviewing the prior year’s financial statements and tax returns to a complete audit examination as of a specified date.

The time and money that might be expended in the due diligence effort should be balanced against the potential losses associated with an unsuccessful acquisition. The scope of the buyer’s investigation prior to the execution of the agreement or the closing will depend in part on the nature of the representations and warranties contained in the acquisition agreement, whether the representations and warranties will survive the closing, the strength of the indemnification provisions and the financial ability of the seller to meet any event calling for indemnification. If the representations will not survive the closing or there is no effective provision for indemnification spelled out in the acquisition agreement, a more exhaustive investigation is warranted. While all acquisition agreements contain representations and warranties and usually indemnification provisions, it is far more preferable to unearth all possible liabilities before the buyer executes the agreement, rather than resort to a lawsuit after the sale.

Timing
The due diligence process begins the moment a station becomes of interest to the buyer. By starting the due diligence process early, the buyer will be in a stronger position to ask the seller the proper questions and to structure the terms of the transaction. By gathering information in the early stages of an acquisition, the buyer will be in a better position to understand the strengths and weaknesses of the target station, to anticipate crucial issues and to determine the areas that will affect the purchase price. Common “deal breakers” that may be uncovered in the first stage of the due diligence process include inaccurate financial representations, legal and environmental contingencies, title to and condition of the assets, onerous employment and/or union contracts, tower leases which have a short remaining term or are not assignable, under-funded pension plans and other burdensome post-employment obligations which the buyer would assume.

Assembling the Due Diligence Team
The buyer’s investigation should be a team effort and should encompass an examination of business, engineering, accounting and financial, and legal issues. To perform due diligence successfully, the buyer must assemble the right team. Ideally, both the due diligence investigation and development of the business plan should be conducted by a team of executives and professionals who will continue to be associated with the buyer if the deal goes through. In selecting outside advisors, it is very important to inquire about their previous experience in buying or selling broadcast stations and confirm their track records and references. Because broadcast executives or acquisition consultants, engineers, lawyers and accountants each have a tendency to focus solely on their individual areas of expertise, it is important that the evaluation in these specialized areas be coordinated with one another. A failure to appreciate the roles of the others may result in the failure to pass on essential information and to make a complete assessment of problems that arise; rarely do problems encountered in an acquisition review affect solely one particular area (e.g., engineering). Each investigator should strive to keep other members of the team informed, and the coordinator must see to it that there are frequent exchanges of information.

One person should be responsible for coordinating the due diligence investigation and ensuring that the work is completed in a timely manner. The coordinator can be an experienced transaction lawyer, an acquisitions consultant, or a seasoned officer or employee of the buyer. Such a person should serve as a central point of communication and should be familiar with all of the data accumulated in order to answer any questions that may arise. He or she must identify significant problem areas and promptly bring them to the attention of the buyer’s decision-makers.

Coming next week: Part 2.

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.