Simple framework to analyze companies?
What stuff are you looking at when you evaluate companies? Especially in interview situations without boiling the ocean, stuff like
Market
Target
Value Creation
But how do I make sure that I am comprehensive without overcomplicating?
If you want a simple framework you can use in your interviews or general purposes, you generally want to break down a potential opportunity into the following buckets:
1. Fit with fund: does the opportunity fit the fund's mandate? You want to check the firm's criteria (e.g., deal size, geography, industry, company stage, rationale for coming to market, etc.).
2. Industry fundamentals: Is this an attractive industry to invest in? Generally, you want to see it is large, growing, predictable, fragmented, absence of existential threats. You also really want to understand what trend/bet you're actually underwriting. E.g., if you're underwriting a 3PL that specializes in pickleball equipment and apparel, you're not just buying a 3PL business, you're buying exposure to pickleball. As such, you'll want to understand resilience, growth projections, etc. of this end market. Silly, niche example - but hopefully you get the point.
3. Management team: This is key and why 99% of deals are successful (assuming you picked the right industry). Generally you want to see a team with industry experience, well connected and respected, positive track record of execution, and economically aligned (or an ability to make them economically aligned).
4. Business fundamentals: Generally this means predictable nature of revenue, high and sustainable FCF growth, repeatable playbook with high returns on invested capital, customer and supplier diversification, and defensible competitive position.
5. Clear path to add value: Is there a reason why your fund is best positioned to own this asset? Perhaps this is a service business looking to consolidate a market and your fund has a deep, successful history of assisting similar companies execute this exact strategy. Perhaps your fund is dedicated to a sector and can bring unique a knowledge base, network, etc. to drive growth. Etc.
6. Exit opportunities: You will need to eventually sell the business to return capital to LPs - this is the game we play. As such, the more exit opportunities, the better. Consider the three general exit options: sell to another sponsor, sell to a strategic, or IPO. Is it clear who is going to buy this in 5-10 years? Will there be sufficient interest?
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