How to analyse business models?
Right, maybe a dumb question. Currently sit in the product (M&A) group of a BB and after a slew of sell-sides have recently found myself advising on buy-sides as a junior associate.
My question is how best to understand business models, value chains of different businesses across sectors? Most CIMs are written to be flashy marketing docs, CDD / commercial reports are often overkill with directly relevant information not easy to weed out. Any tips on how to extract the relevant info? Mostly interested in strategic / commercial / business ops perspective rather than just the numbers side (model / FDD). Want to understand what the business actually does to be ale to pose the correct questions. Thanks!
Very rudimentary framework (still wip) that I try to use:
1. Articulate in very very dumb terms what is being sold. E.g. the customer calls the company when their windows break down. From here on , you reason why do they call this company instead of doing it themselves? Who else can they call? Try identifying (1) gravity of the problem being solved (2) frequency of the problem (3) all potential solutions to the problem.
2. Break down revenue into categories (customer types usually)
3. Identify the limiting factors for revenue - could be external (market is small, competition, spending power, macro considerations) and internal (need more salespeople, need capex etc)
4. Look at the cost structure - break into fixed vs variable and check for operating leverage. Check the company's ability to charge margin over cogs using historical trends.
5. Look at balance sheet / cash flow to see how the business is being financed. Not just debt but are they stretching their payables? Is this business cash generative? Where is the cash coming from?
5. You can now look at stock analyst reports to see what variables they use for similar companies - you will def miss stuff as very specific factors are at play but usually a good exercise to round up the view
This is very very basic and not comprehensive but works in the interest of time. Working to improve.