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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.

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!

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!

3 answers

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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

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

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

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

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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

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

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