Logic for assessing businesses - PE perspective
Hi there,
I have some upcoming PE interviews which are quite case-study heavy. Does the following framework for analyzing businesses generally make sense?
- Is the target company a good LBO candidate?
- I.e., cash flows, collateral etc. 2. Is the company a good business (e.g., industry, business model, management)? 3. Can the PE company create additional value (e.g., portfolio fit, revenue growth) to justify the price/ a higher price in an auction? 4. Is it feasible for the PE company? Does it have the right capabilities? 5. Risks
I think the inherent logic in this framework is that all PE firms have a similar hurdle rate and that the seller knows how good/ bad his business is (i.e., this is already priced in). Hence - and as part of an auction process - a particular PE firm needs to have a superior investment thesis/ value creation logic than others (again assuming that all people have all necessary information). Does this make sense? :) Thanks!
I think it generally makes sense. If you are participating to an auction, you need to assess what sets you apart as a buyer.
Do you have a unique strategy or view on the industry?
Is the asset key to your platform?
Do you have the ability to realize cost/revenue synergies that other bidders might now have?
+ exit analysis. Which everything you mentioned will naturally leads up to. Although in some cases strong cashflow generators might have hairy issues that make that desired exit to a strategic / pension fund type not possible
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