Hi, share your knowledge with the community!

Got this question at an interview today: a private equity firm wants to invest in a company that produces roses. The company grows them in Africa, exports them to the Netherlands and then distributes them to 5 countries in Europe. What approach would you take to due a commercial due dilligence of this target firm? The second part of the case was a market sizing of the market for roses in Europe.

Anonymous A

I think I tackled the question quite well but then the interviewer didn't seem very confident. I would like to hear your thoughts on what would be a good approach / framework?

Many thanks!

  • Upvotes
  • Date ascending
  • Date descending
Currently non-active expert
Expert
replied on 02/01/2018

Hey,

Let me give you the example on how I would have approached it (that said, there are several other ways to approach that could be equally effective):

- analyze the market/external factors: how sizable is currently the market and any growht expectation into the future? (demand side); what about the competitive landscape? any relevant regulations/barriers to entry? (supply side)

- analyze the company internal factors: what's the historical financial performance (traditional profitability tree; include benchmark vs. competitors and market share)? do they have the right/needed capabilities (production, distribution, transport, management)?

- transaction itself: adequate pricing, how to finance the transaction

Anyway, if you want to have a better understanding on whether your framework was good or not, just add it here, so that we can check

Best

Bruno

Francesco replied on 02/01/2018
#1 Expert for coaching sessions (1600+) | Ex BCG | 800+ reviews with 100% recommendation rate

Hi Anonymous,

I agree with Bruno, it would be easier to judge your framework if you could report it below. It could also be that your framework was good, but you did not communicate it effectively, for example not linking the various layers to the actual goal of the client.

In terms of the general structure for a due diligence you can consider the following:

1) Goal clarification. It is always good to start with the end in mind – thus what is the specific reason why they want to buy the company? Just make profits reselling in 3 years for a higher price? Benefit from synergies with a portfolio company? Test the market for a bigger acquisition?

2) Industry. There are two macrovariables here.

  • Key industry numbers/facts. This includes for the market and potential subsegments the following
    • Growth
    • Size
    • Barriers to entry (BTE)
  • Key industry players. This includes:
    • Customers segmentation
    • Competition
    • Occasionally for some cases: suppliers and substitutes.

You should present this area connecting with the goal, and not purely listing the elements to analyse as if it was a laundry list. The best way to do so is explain how a certain variable will help you to achieve you goal. Eg, if your goal is to increase revenues, don’t simply say “I want to look at growth, size and BTE”, rather “I want to look at growth and size – this will tell me if the market has the potential to provide enough revenues for our client. I would also like to check BTE, to understand which are the obstacles in entering such a market and thus increase revenues”.

3) Company - Target objective feasibility. Here you want to check the fit between the client and the selected industries.

  • Can our specific client reach its objective in the selected market (eg profits, revenues, increase in value, etc)?
  • Are there positive or negative synergies with the acquisition?

In the first point, you will probably have to go through a profitability/revenue/cost framework, to calculate the effective result.

4) Price and capabilities. Once you know the industry is attractive and you can reach you goal, you should consider if the price is fair and you have enough capabilities

  • Is the price fair? To understand so, you should do a comparison between the acquisition price and the company value, using multiples in the industry or a DCF analysis.
  • Do we have enough money and other required resources (eg more proper management) to implement our strategy?

You can find more information on the DCF analysis at the link below: https://www.preplounge.com/en/consulting-forum/case-net-present-value-calculations-325

5) Risks and next steps. What are the major elements that we should further analyse based on the previous points (eg regulator decision, potential other targets to consider, implementation risks)?

Hope this helps,

Francesco

Vlad replied on 02/01/2018
McKinsey / Accenture / Got all BIG3 offers / More than 300 real MBB cases / Harvard Business School

Hi,

For commercial DD you can use the following structure:

Market

  • Size
  • Growth rates
  • Profitability
  • Segments
  • Distribution channels

Competition

  • Market shares of competitors and their segments (see the next point)
  • Concentration / fragmentation (Fragmented market with lots of small players is less mature and easier to enter from a scratch. Concentrated market is hard to enter but has potential acquisition targets)
  • Unit economics of the players (Margins, relative cost position)
  • Key capabilities of the players (e.g. suppliers, assets, IP, etc)

Company

  • Unit economics (Margins, costs) in current or target markets
  • Brand
  • Product mix
  • Key capabilities

Feasibility of exit:

  • Exit multiples
  • Exit time
  • Existence of buyers

Best

Related BootCamp article(s)

Market Sizing

Market Sizing Cases are used to test your quantitative and reasoning skills. The interviewer evaluates your structure, numbers-handling and business sense.

15 Comment(s)

Important Facts

It's essential to know some key figures regarding geographies, population, economies for your case interviews. We summarized them for you here.

9 Comment(s)

Related case(s)

Your client, large automotive OEM WyCar, has developed its first fully electric vehicle (EV) and introduced it as a pilot on the Austrian market last year. However, sales have been far below the expected numbers. The management has engaged you to support them in understanding the reasons and advise ... Open whole case

Bain Case: Old Winery

Solved 5.4k times
4.5 5 152
| Rating: (4.5 / 5.0)

You have inherited the “Old Winery” from your grandfather, a winery which has been family owned for five generations and can be dated back to the 16th century. Half of the eleven hectares are used to grow white grapes, the other half to grow red grapes. They are grown in the conventional way, i.e ... Open whole case

Nutripremium

Solved 36.8k times
4.5 5 1088
| Rating: (4.5 / 5.0) |

Nutripremium is a very well-known premium nutrition food company in Europe (€1 billion revenue last year). It is based in Spain and has an excellent market share not only in its home country but also in Portugal, France, Italy and Germany. Nutripremium has two main lines of products: Vitam ... Open whole case

Children vaccine

Solved 34.1k times
4.4 5 1058
| Rating: (4.4 / 5.0) |

Beyer, one of the biggest pharmaceutical companies in the world, just invented a very reliable vaccine against Chickenpox, a disease that affects children in the age from 2 to 16 years. Beyer came to you wondering what their potential sales in Europe in the first year would be if they launched th ... Open whole case

Gas station

Solved 24.1k times
4.3 5 479
| Rating: (4.3 / 5.0) |

How many gas stations are there in Paris? Suppose a friend of yours wants to open a gas station in Paris. What aspects should he consider? Open whole case