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.

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