How to Structure this Actual BCG Case

Actual BCG Case Submitted by a Reader:

I had a friend doing a mock interview of a BCG case that he failed at in 2nd round.I tried to tackle it using your frameworks but, like my friend, I was getting nowhere.
This was the case:

"Your client, a private equity firm, is considering acquiring 3 companies active in selling and cleaning bed and linen for restaurants & hospitals. Should they pursue this or not?"

"Other information: these companies are currently not profitable"

I tried starting in the business situation framework, but the interviewer wanted to lead me somewhere else.

How would you start/structure this case?

My Questions for You:

1) What are the 3 - 5 MOST important KEY issues in this case?

2) How would you structure or frame your analysis for this case? (Since you don't have the benefit of asking me clarifying questions, it is acceptable make a few reasonable assumptions)

Click Here to Post Your Answer

(Don't peak at everyone else's answer First!  And to protect your privacy feel free to use just your first name or your initials when assigning a name to your answer)

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103 comments… add one
  • ram krishna Nov 28, 2010, 9:44 am

    the main imp points are
    1) pe firm– they need to see if the companies have some assets or not as they have not very good cash flows..
    2) what is the current situation of hospital industry
    3) how do they plan to acquire— Leveraged buyout or smthing else.. it depends on it a lot

  • d Nov 28, 2010, 9:58 am

    To assess the acquisition the PE firm would consider;
    1. The market – size, growth, profitability and customers
    2. The target – their capabilities, products, cost structure and brand
    3. The competition – who they are, their size and share of the market

    If these factors are favourable, the PE firm should consider a 4th;
    4. Feasibility: can the targets be made more valuable and do they have consistent revenue to cover interest repayments in the meantime, are their potential buyers for when the PE firm looks to exit, the opportunity cost of acquiring these companies rather than others.

  • RB Nov 28, 2010, 10:00 am

    I would split this into a few issue ‘blocks’

    1. The client itself:
    – What is the client trying to achieve? Does it simply want to make money with these businesses, or is there some more specific objective (e.g. merge them into one company, shed assets, and sell it off at a profit)?
    – How is the client doing for cash right now? Is its cash base and/or access to capital relatively healthy?

    2. The targets:
    – What’s happening to these acquisition targets? They are operating a loss – is there a problem on the cost side, the revenue side, or both?
    – Are competitors facing similar problems?

    3. The industry
    – How is the industry doing overall? Maturing, declining, or growing fast? Given that it’s two different industries really, we should split these up.
    – Are there any industry concerns we should be aware of (e.g. substitute services emerging)?

    A conclusion would depend on the answers to these questions, but could be:
    a) the client wants to make these businesses profitable
    b) the industry as a whole is suffering from declining revenues in the hospital segment, and stagnant sales in the restaurant sector. These clients are taking linen cleaning in-house.
    c) large contracts for hotel cleaning are appearing on the horizon
    d) we can lean our targets towards the hotel linen cleaning business to get new sales and therefore return them to profitability
    e) therefore, we should acquire the targets

    This is off the top of my head and, of course, the real answer would depend on what we find out in the diagnostic phase of this.

  • Amy Nov 28, 2010, 10:12 am

    I would first clarify with the interviewer that the goal of the client is to sell these businesses at a higher multiple at a later date, and ask if the client has a specific time span in mind.

    Assuming that the above assumption hold, and say the client wish to sell after 5 years, I could approach the case in the following way :
    1. Market – look at current and project market size in the next few years. Is the market growing?

    If market condition is favorable, I would hypothesize that this may be a good acquisition. Move on to consider
    2. Competition – Who are the major competitors and what market shares do they have? Is it fragmented or dominated by a few players? How do the three companies position in this market? Is there any differentiation in the services provided? Has any companies in this industry been acquired by private equities in the past, if so at what multiple? And what are the main drivers behind a high multiple (e.g. market share, profitability)?

    3. The three companies – identify why they are not profitable (assuming profitability is one the main drivers for sales multiple) ? At this point I would have eliminated external factors (e.g. general industry decline), so the only possibilities left are internal ones (e.g. revenue and cost issues). After identifying the cause, I would have to see if the client can install a solution to the problem within the given time frame. This may include the possibility of extending the service to hospices and hotels, possible synergy or joint venture with other companies owned by the client.

    Assuming all the above is positive, the summary would include a list of the actions that the client would have to take after acquiring the three companies and how much profit the client could expect to gain from selling these 3 companies.

    • Carl Nov 28, 2010, 11:35 am

      Here are some of my thoughts about this case:

      1. The most important question to ask is: whether our client, the PE company can make money through this acquisition or not? As PE companies buy low and sell high, if our client are to make this deal, we have to make sure there will be other buyers to buy these company with higher price. Also usually PE company cannot wait long to see that happen, we need to put a time limit(say, few years) into consideration.

      2. There are some issues that would affect potential buyers’ willingness to buy high some years later.
      1) Market: Is this market growing? How good the future is about this industry? An expanding profitable market would make the deal more appealing to other buyers.

      2) Competition: Are there any big competitors in this market? What is the market positioning of the competitors and our three companies? Is there any entry barriers for new comers? If they are facing big competition, it is less likely that some other buyers would be interested in them.

      3) Why the 3 companies are not profitable currently? There are possible two reasons: external and internal.
      If it is due to external competition, is it possible to merge three company to build economic benefits and increase profitability in the near future?
      It it is due to internal problem, we need to identify the problem and see whether we can solve it to make the companies profitable. If they are profitable, they are more appealing to buyers.

      If the market is growing, and the competition is not fierce, and there is a way to make the companies profitable in the near future, our client should pursue them.

  • Deepak G Nov 28, 2010, 11:13 am

    “Your client, a private equity firm, is considering acquiring 3 companies active in selling and cleaning bed and linen for restaurants & hospitals. Should they pursue this or not?”

    “Other information: these companies are currently not profitable”

    1) What are the 3 – 5 MOST important KEY issues in this case?

    2) How would you structure or frame your analysis for this case? (Since you don’t have the benefit of asking me clarifying questions, it is acceptable make a few reasonable assumptions)


    1. The PE firm
    • Strategy?: why are they trying to do this? Turnaround? Taxes?
    • Cash Flow and Debt load acceptable?
    • Current portfolio — does this acq make sense?

    2. The bed/linen cleaning business/industry
    • Is the industry as a whole not profitable? If so, why is it not profitable (revenue [pricing/volume] — cost structure blah blah blah)? If this can be fixed to turn profit with low input then it could be viable.
    • Is there growth?
    • Competitors and their offerings / pricing
    • Future?

    3. The 3 companies:
    • assume not industry problem
    • market share and benchmark with competitors
    • why are these 3 companies not profitable?
    • analyze value chain — identify problems and offer solutions

    4. Strategy : Go or no go?
    • If go — what is the exit strategy? and how do we get there?
    • If no go — ID other existing businesses that fit the investment strategy and advice appropriately

  • F Nov 28, 2010, 11:47 am

    I totally agree with Amy.

    I would take a look at the industry, competition, and finally each of the three companies:

    Like Amy said, if the industry is favorable (growing, not too many players, etc.) I would hypothesize that this is a good move, if the industry is not favorable then my recommendation would be a “no go” (if this is the case, then the case is over).

    Then, moving to competitors, if we found out that the competition is not offering something that these three companies do, that serious retaliation would not be an issue, etc…then I would refine my hypothesis saying that, based on the data about industry and competitors, buying these three companies is a good idea.

    Finally, I would analyze each company (projected cash flows, price, capabilities, financial situation, etc) and discard those companies that are not good enough (i.e. reject those hypothesis)

  • Ruby Nov 28, 2010, 12:08 pm

    I would assess 3 main elements to find out what is the cause of why these companies are not profitable. My assumption is if three are non-profitable at the same time, it is likely due to external environment reasons.

    1. Industry assessment – is this growing or not.
    2. Competitor assessment – are competitors consolidated ?
    3. Internal assessment – the current business model of these companies.

  • S.B Nov 28, 2010, 12:15 pm

    These are the “key” issues that first come to mind when i think of this case:

    1) private equity firm
    – what is the their goal in acquiring these 3 companies?
    – do they have a time frame set up in which to achieve this goal?(quick fix vs longer term/larger scale objectives)

    2) the 3 companies
    – why are they not profitable? a problem of volume? revenue? costs?
    – is the competition facing similar problems?(industry vs. these 3 companies)
    – what are the trends over time? past 5 yrs?

    3) the “clients” aka: restaurants and hospitals
    – what is the current status of restaurant and hospital industry in terms of buying and cleaning linens? has anything changed recently?
    – structure of the deals: contracts length and terms of agreement
    – is the industry favorable to future growth?

    I believe i would “custom make” a framework to tackle this problem by creating three different decision trees addressing the 3 key issues

    1) First and foremost, what is the goal of the PE firm? A long term restructure? A quick sale? Do the companies fit within the PE firm’s current portfolio and does it have the current know-how to achieve its set goals? Once i have established the goals of the PE firm, I will be able to structure the case with a hypothesis.

    2) Next comes perhaps the most apparent part of this case: why are the companies unprofitable. Here it would turn into the profitability framework where I would probe and ask questions that would allow me to isolate the source(s) of declining profitability. Is it an industry wide problem? where is the industry headed?

    3) hospital/restaurant industry

    How do clients select which company cleans their linens? How price sensitive is the market? Are we tying down our clients long enough with contracts that keep them coming back to us for cleaning needs? Have their been technology changes that have caused the clients to go elsewhere?

    After asking these questions and isolating the why the companies are not profitable and after aligning the industry realities with the goal of the PE firm, i would adjust my hypothesis accordingly and synthesize whether or not our client should go ahead with the acquisition. For example, if the PE firm wants a quick and fast fix, and the profitability problem is an industry wide problem of a mature industry, the goal and the realities may not be aligned in which case I would discourage the acquisition.

  • Arjun Nov 28, 2010, 12:47 pm

    1. What’s the price being paid for acquisition? What’s the timeframe for exit? What’s the profit that the firm wants at exit?
    2. The companies are unprofitable. Is it a revenue problem? Is it a cost issue?
    3. Can revenues be increased? I would look at market share of the companies. Can they grow their market share? If not, then is this market growing and how much would revenues increase if market share remained constant in a growing market? Also, are there any distribution or market access based synergies that can be expolited should we acquire all 3 companies
    4. Major cost issues. What are the key costs? Can we reduce some costs? Do any of these companies has a cost advantage that we can copy across all 3 companies to reduce costs? In other words, are there any cost synergies?
    5. Would an increase in revenue and decrease in cost occur during the time frame for exit? If yes, would it generate the desired exit multiple?

  • victor Nov 28, 2010, 1:02 pm

    So far S.B. is the closest in my opinion. While many of the issues are important and even if those factors are favorable, its still possible the deal does not make sense. This is the different between a factor vs. a key “deal breaker” factor.

    For example if the industry is attractive, is it possible for this deal to be a bad deal?

  • Raphaël Nov 28, 2010, 1:05 pm

    PE wants to buy now, and resell in 5 years, making a profit of 20% per asset.
    Selling price of each asset in 5 years will be 1 time its profits.
    No inflation.
    3 target companies operate in 3 different geographical areas, so they do not compete against each other and have no plan to do so.
    PE can buy either 1, 2 or 3 assets.

    Analysis to conduct on a per asset basis:
    Can we buy now, and resell in 5 years, making a profit of 20% ?

    Step 1 : is there any chance that profitability will come ?
    Profitability so it’s a volume problem, to obtain profit = X*(1+20%) in five years, volume must reach Volume=(X*(1+20%)-Costs)/Price

    Step 4 : can our company reach that Volume objective in 5 years ?
    Basically business situation framework with Consumers, Competitors, Company
    => what’s the target market share, is it possible ?

    Step 5 : are we confident there will be a buyer in 5 years ?
    What buyers are looking for ? Assume they look for “growth potential”, based on step 4 : what’s the horizon >5years growth potential ? Is that enough for someone to buy from us ? If yes, go, otherwise no go.

  • sophie Nov 28, 2010, 1:05 pm

    What’s the investement criteria? Hyp: profit and risk associated
    What’s causing the loss?
    What’s the market like?
    How are they complementary?

    Structure :
    Profit potential
    of companies individually and of potential synergies

    exit strategy, cost structure

  • Raphaël Nov 28, 2010, 1:11 pm

    whooops, something disappeared ! Let me take my steps once again.

    Step 1 : is there any chance that profitability will come ?
    Profit what’s the target market share, is it possible ?

    Step 5 : are we confident there will be a buyer in 5 years ?
    What buyers are looking for ? Assume they look for “growth potential”, based on step 4 : what’s the horizon >5years growth potential ? Is that enough for someone to buy from us ? If yes, go, otherwise no go.

  • Raphaël Nov 28, 2010, 1:12 pm

    okay there’s definitively something going wrong with the comments I’m posting. WordPress seems to be eating out my words… Sorry for the inconvenience.

    • Raphaël Nov 28, 2010, 1:14 pm

      whooop’s something disappeared ! Let me take my steps once again.

      Step 1 : is there any chance that profitability will come ?
      Profit what’s the target market share, is it possible ?

      Step 5 : are we confident there will be a buyer in 5 years ?
      What buyers are looking for ? Assume they look for “growth potential”, based on step 4 : what’s the horizon >5years growth potential ? Is that enough for someone to buy from us ? If yes, go, otherwise no go.

  • L Nov 28, 2010, 1:24 pm

    Basically, this case is an M&A case, with some twists of business situation/profitability cases

    The whole idea is to see if there are synergies (cost side/revenue side) that could make the 3 of them profitable TOGETHER.

    Revenue synergies could come in the form of
    – increased customer base
    – cross-selling potentially different products
    – possibly charging higher prices due to possibly reduced competition
    – winning new contracts/business due to potentially lower cost
    – …

    To know this we would have to see
    -customer base of each one (overlapping etc)
    -products/services offered
    -prices (i suspect that this is the problem, but it is just a feeling!) since i suspect that this is a mature market with minimal differentiation among competitors and they most probably compete in price rather than service/product offering or customer experience

    On the cost-side we would have to see the cost structure of each one as well as the cost-structure of product/service. We would have to see variable and fixed costs and see if cost savings could be realised & MAINTAINED

    We could examine
    – production/facilities
    – transportation
    – sales force
    – management

    Mainly we should focus on the large cost items and see if these cost savings could be maintened.

    Important loop: If cost savings are realised in terms of variable cost (product & customer cost-to-serve) then we could also win more customer or retain current ones

    Overall we should estimate all synergies and possible dys-synergies and arrive at a number through DCF to see if this is a good idea and get an idea about what is the right price to buy them (if there is one!)

  • Vlad Flamind Nov 28, 2010, 1:26 pm

    First, understand client obj (2 possibilities)
    – The firms can BECOME profitable
    – The PE is not looking for profits (very unlikely)

    Clarifying Q: What are the clients obj? When did the firms’ profits start to decrease? Is this an industry wide issue?

    1) The issue is NOT industry wide

    Hypothesis 1: The firms could provide sustainable profits individually
    Frameworks: Profit = Revenue – Costs
    a) Revenues: Business Situation FW –> can we increase revenues
    b) Costs: Product Mix, Value Chain –> can we decrease costs
    c) Acquisition Price vs expected revenue –> is this profitable for the client

    Hypothesis 2: The firms could provide sustainable profits collectively
    FW: M&A add relevant info in previously drawn Profit tree
    a) Revenues
    b) Costs: focus on value chain (cost sharing) and scale effect.
    c) Acquisition Price vs expected revenue

    2) The issue IS industry wide

    Hypothesis 1: PE is looking for short term profits (LBO)
    Clarifying Q: Has the client expressed its intention to sell the firms? If yes what is the expected rate of return? what is the expected payout period?
    FW: use FW as described in step 1) and determine the payout period

    Hypothesis 2: The firms can use existing capabilities to reach new markets (collectively or individually)
    Clarifying Q: Did the PE consider using existing cap. to reach new mkts? If so what does it have in mind?
    a) Industry attractiveness (Porter) –> is it a good opportunity?
    b) Business situation FW –> can we do it?
    c) Acquisition Price vs expected revenue –> Is this profitable for the client?

  • Neil Nov 28, 2010, 1:27 pm

    1. PE firms goals (time horizon 5-7 years, desired multiple)
    2. What is the state of the industry today?
    3. Possible to turnaround these companies?

  • victor Nov 28, 2010, 1:40 pm

    Person L is also on the right track, okay let me change the case a little…

    What is the single most important “core” issue in this case? As in if you understand this core issue, you could almost be certain this is a good investment even in the absence of all other data.


  • Vlad Flamind Nov 28, 2010, 1:55 pm

    Since we are dealing with a acquisition situation the core issue should be: Price paid for the target firms vs expected profits.

  • Tom Nov 28, 2010, 3:01 pm

    In my opinion the major hint is that we are looking at THREE companies.

    I’m taking Victor’s advice from today’s e-mail: hypothesis-driven case solving.
    HYPOTHESIS: Buying the 3 comps is a good investment for the PE firm.

    1. Industry is MORE attractive if I have 3 comps (generally means mature market, where success drivers are ECONOMIES OF SCALE)
    2. Companies are MORE attractive when merged (SYNERGIES)
    3. PE can sell off, and they sell of with a profit. Two ways:
    3.1 By making the 3 firms profitable (multiple-based pricing, sell off to any FINANCIAL INVESTOR)
    3.2 By making the 3 combined relevant enough in the market that a STRATEGIC INVESTOR (competitor, vertical integrator) would buy it.

    I would go through the case by inspecting each condition, pretty much like a customized decision tree. Bain have on their website a pretty good interactive PE case, I highly recommend it.


  • cw Nov 28, 2010, 3:40 pm

    1. Most important points:
    a. Current profitability of the 3 companies
    b. Potential growth opportunities of the 3 companies
    c. Potential PE restructuring, e.g. debt or equity restructuring to increase cash flows
    d. Price of the acquisition
    e. Financing options available to PE firm

    2. Structure:
    a. Look at 3 companies for acquisition – profitability and growth are driven by product/industry, customer base, overall economy, market position and can be further examined by both anticipated and historic trends
    b. Look at PE firm’s contributions – synergies, restructuring possibilities, debt structure, financing options, manpower requirements and taxes upon other resources
    c. Look at price – How much is it compared to other opportunities? Is it fixed or negotiable? Are we pricing it?

  • SaraE Nov 28, 2010, 4:17 pm

    Key issues:

    1- The growth stage could be declining for these firms/market
    2- Competing companies could be profitable
    3- Potential new substitutes appearing providing alternatives for hotels


    1) Take-over/new markets

  • Usman Malik Nov 28, 2010, 4:35 pm

    Company Specific Problems vs Industry problem
    (restaurants and hospitals, two different industries)

    Company Specific analysis:
    Is it a cost problem or a revenue problem?

    Cost=> Total fixed costs? variable cost?
    Revenue => total sales?
    conclusion: If total fixed costs are not being covered, sales are too low!

    thinking: why are sales too low?
    Company specific: Bad marketing
    Industry specific: market size, trend, competition.

    Answers to the above questions would tell me if there are company specific problems (if client can fix, buy them) or if it an industry problem (stay away)

  • Warren Nov 28, 2010, 5:41 pm


    Examine 4 major topics
    1) Holding Period/ return expectation
    In particular, what to do with the company after a certain years
    2) Attractiveness of the Industry
    Why this industry? Growth? Size? Margin?
    3) competitive environment
    Market share of competition, ease of substitution
    4) Attractiveness of the companies
    quick profit and loss analysis of each of the 3

    Finally decide which one(s) to buy, or not buy at all.

    This is a framework I learned from the Bain website; I also incorporated the business situation framework in it.
    Thank you!

  • Ben Nov 28, 2010, 6:06 pm

    Q1: There are four key issues: 1) is the market attractive? 2) why the companies are not profitable, 3) Does the PE firm possess the capabilities to make them profitable? 4) are there cost synergies by acquiring two or more of the companies (esp economy of scale, distribution, labour, fixed costs), 5) are there revenue synergies or overlaps (better distribution/sales forces? will one company cannabolise the other’s products, overlaps in customer, increase in brand awareness etc).

    Q2: There are three potential options for the PE firm, first, to buy all three companies. Second, to buy one or two of the three companies. Third, to not buy any of the companies. There are three steps to structure this problem. Firstly, to isolate the problem in terms of revenue or cost, then compare to competitors to determine if it is industry or company specific issue. 2) Use business situation to analyse why the problem exists, and what can be done to address the problem. If nothing can be done, then do not buy any company. 3) use merger framework to analyse fit of the three businesses, whether there are potential revenue/cost synergies etc, this will be used to decide whether to buy one or more companies, and which ones to buy.

  • Amy Zheng Nov 28, 2010, 7:34 pm

    1) What are the 3 – 5 MOST important KEY issues in this case?
    a. Why are the three businesses unprofitable? In both restaurants and hospitals or just one?
    b. Which business(s) has the highest earning potential with the least amount of investment?
    c. What is the client’s goals (ROI) and how long do they have to do this?
    d. Is there new technologies/competitors in this industry that is threatening to make these companies obsolete?

    2) How would you structure or frame your analysis for this case? (Since you don’t have the benefit of asking me clarifying questions, it is acceptable make a few reasonable assumptions)

    a. Start by analyzing the industry as a whole: historical trend, players, profit drivers (e.g. technological trend, demographics), barriers to entry
    b. Analyze the three companies individually – historical trend for profits in both restaurant and hospital business
    c. Analyze what the customers want and what are they willing to pay for it (restaurants and hospitals)
    d. Analyze what the competitors are doing; who’s getting the business in this market?
    e. Make recommendations

  • Shankar Ranganathan Nov 28, 2010, 9:28 pm

    1. Analyze the industry attractiveness of these companies
    2. Since they are not profitable, make sure the valuation is cheaper
    3. Do we have the industry expertise and management capabilities to turn the company profitable?

    We can always do macroeconomic analysis on top of this as part of overall due diligence.

  • Anna Nov 28, 2010, 11:26 pm

    Ask why the want to acquire, usually PE firms buy distressed companies and then sell them off for profit. Is this the case here? Or are there other motivations?

    Important Issues:
    Split into Internal & External

    -Management of the companies
    -Debt, Financing, what shape is it in?
    -Their access to Markets, Suppliers, Distribution Channels
    -Growth? Potential for growth?
    -Market Share
    -Legal reasons as not acquire or will make this difficult
    -Examine why profits have declined

    -Market: trends in growth? life cycle?
    -Competitors: who are they? Market Share? growing or not?
    -Customers: Who are they? Do we have a secure base?
    -Product: how is our product different/similar? can we increase revenue by differentiation?

  • MikeB Nov 29, 2010, 12:35 am

    This appears to be getting at a standard PE roll-up strategy. There are multiple ways to create value when employing this sort of strategy, including capacity rationalization as well as exploiting back-office expense synergies. As a result, I would employ a hybrid of the M&A and Industry Capacity frameworks.

    My initial avenue of inquiry would be focused on the three firms themselves:

    – What is their capacity? Are there opportunities for rationalization?
    – What are their costs at each stage of the value chain?
    – Who are their customers within the broader market segmentation? Is there overlap? Growing or shrinking client base? Is client base focused by geography, market segment or something else?
    – What is their pricing? Recent trends?
    – How is their sales/client servicing organization set up?
    – Are there any cultural or management issues that would portend integration problems?
    – Are they bed linen “pure plays” or do they have complementary products/services to sell into hospitals?

    Pending the results of those queries, I would then move to understand the broader industry:

    – Market concentration
    – Relative cost positions – are these three low-cost or high-cost vs. competitors
    – Any key recent market trends? Market disruptions of any kind?
    – Opportunities for growth outside of core hospital market?
    – What market segments do key competitors serve?
    – What do clients want? What do they value in choosing a provider?
    – Is this a commodity, or are there opportunities for differentiation?

  • Svante Nov 29, 2010, 1:51 am

    * Why do they want to invest in these companies?
    * Do you need all companies?
    * Why the companies aren’t profitable, it might be a industry-wide problem.
    * Are there any synergies buy getting all the companies.

    2) I would use start with using the capacity change framwork to see if it is a good idea to invest in the specific market, if it is, I would start using the merger and acquisition framework to look after synergies with buying all the 3 companies.

  • erik Nov 29, 2010, 4:39 am

    Since we no that none of these companies are profitable at today’s date, I would form my key issues out of this fact.

    – Why are they loosing money, poor management or industry trend? Once we know this, out next key issue would be

    – Do our client have the capability to fix this profit problem?

    Lets assume the answer on the second issue is “Yes”. Then I would continue by constructing this framework:

    – Competitive landscape
    – Customers
    – Products/services of each of these 3 firms.

    I would go throught each of these branches and compare the 3 firms and look for synergy effects. According to the competitive landscape, are these 3 firm able to gain marketshare together? Is there a overlapping in customers or not? Are our services pretty much the same?

  • Cédric V. Nov 29, 2010, 6:11 am

    Key issues:
    – How does this market look like and what is the strength of these companies within this market

    – Growth potential for this market

    – Synergy effects with other companies in PE’s portfolio

    – Limited timespan (as in 3 to 5 years). It’s not enough of being able to make them profitable. We should be able to do it very quickly.

    -Segment between Hospitals and Restaurants

    For each of the segments:
    Framework: start off with demand side capacity change framework:

    Start with the market Growth potential.
    If this market has a very limited growth potential, it makes no sense acquiring inprofitable businesses in this market.
    You may look at other countries where this industry has matured to have a comparison.

    Next up is growth of market share. Can we improve our market share in a profitable way?

    Then move to M&E framework: Are there any synergy effects within these 3 companies or with other companies in our portfolio?

    Finally:Can we make enough money to have a positive ROI in a timespan of 3 years? (Cap Change framework Cost of Expansion)

    Conclusion: Acquire if enough elements point out that we can have a positive ROI in 3 years. These elements can be Market growth, Market share Growth and synergy effects.

  • victor Nov 29, 2010, 9:30 am

    From my perspective, both Tom & Erik are both on the right track

  • CT Nov 29, 2010, 10:43 am

    Key Issues:
    1. Industry profitability compared with 3 target firms over time?
    2. Where do the 3 target firms operate now?
    3. What is the profitability of selling vs cleaning? Bedsheets vs linen? Restaurants vs hospitals?
    4. Can the target firms be turned around, and what would be the exit strategy?

    a. Industry is fragmented due to low barriers to entry, driving down profitability
    b. Industry growth is stagnant due to limited demand for additional restaurants and hospitals
    c. Complementary relationship between selling and cleaning, ie more selling can increase market share for cleaning

    Over-arching framework:
    Hypothesis – Restaurants are more profitable than hospitals
    * Segment market by customer: examine revenue and costs in serving restaurants and hospitals
    – Look for glaring liabilities
    – If none, proceed to next step.
    Hypothesis – Significant growth can be gained from tweaking the product mix or the customer mix
    * Consider the possibility of the following strategies:
    – Penetration (gain greater market share in existing markets through pricing or marketing strategies)
    – Related Diversification (look to other customer segments to serve within geographic area)
    – Expansion (look to other customers in other geographic areas to serve)
    – Unrelated Diversification (look at new product classes for new customer segments)

    If all still untenable, recommend not to buy. If tenable, what is the potential upside and would that translate to an attractive ROI, compared to other potential targets?

  • Cessna Nov 29, 2010, 11:03 am

    1. Why these three companies? – synergies? diverse/specific services? good location?
    2. Profitability – why are these not profitable?
    3. Clients – restuarants and hotels? Not meeting needs?

  • Jay Nov 29, 2010, 12:05 pm

    key issues:

    – What does the PE company want? (objectives)
    – Industry – Who is profitable and why?
    – Why are the companies unprofitable?
    – Can we make them profitable? (synergies?)
    – ROI (Price/expected profit of investment)

    Structure for analysis:

    – Profit Framework to identify industry vs. firm issues
    – Moving into Business Situation analysis –> synergies and possible starting points for a turnaround
    – Cost/Benefit analysis

  • 13rus Nov 29, 2010, 3:32 pm

    What purposes are pursued by the company, absorbing the given actives:

    1. What business of the client now?
    2. Why the client has reflected on absorption?
    3. Why for absorption these actives are chosen?
    4. For achievement of the purposes of the company it is necessary to absorb all three business?

    Then it’s necessary to analyze eacah business in terms of achievement of the objectives.

  • Sune Nov 29, 2010, 3:58 pm

    – Market: strukture, growth, semgments that are more profitable
    – Competitors: MS, growth, behaviour
    – Companies: MS, possible synergies,

  • Bankole Nov 30, 2010, 11:39 am

    Key issues:
    1. VC’s strategy – to acquire and merge the companies or hold them as separate entities
    2. What are the pro’s and con’s of merging or keeping the companies separate, e.g merging could result in cost savings and improved sales from synergies between the companies or there may be cultural issues that could threaten a merger.
    3. What is the client’s exit strategy – IPO, sale?
    4. Pricing – what is the fair price for acquiring non-profit making entities
    5. How will the acquisition be funded? Debt or cash

    Structure of my analysis:
    1. Companies – Why are they making losses – poor cost control, weak revenue? Are there opportunities for quick wins in turning around each of the companies into profitable businesses?
    2. Industry – Is the profitability an industry-wide issue or specific to the company. Where is the industry in its lifecycle? Is the industry emerging, mature, or in decline? The industry’s growth rate over the last 3 – 5 years and projected growth rates for the foreseeable future.
    3. Competition – what is the competitive landscape of the industry, few major players or highly fragmented? Who are the main competitors? What are the market shares of each of the target companies? Are the target companies gaining or losing market share?
    4. Customers – Are there customer segments? If yes, what are the characteristics of these segments in terms of buying patterns, bargaining power, preferences, e.t.c. What are the relative sizes of these segments and their current and projected growth rates, which of these segments do our target companies serve? What are the key competencies of the target companies and how can they leverage these to gain market shares in the higher growth, higher margin customer segments?
    5. Valuation and conclusion – Based on the results of my analysis above, I will make a list facts that my clients should consider in arriving at a decision to buy and a fair price for the acquisition.

  • Trier Nov 30, 2010, 1:27 pm

    The companies are all in the same area (I.e environmental conditions are the same for all the companies in question).

    – The 3 to 5 most critical issues
    1. Industry- It’s most likely that this is tough industry to operate in. Therefore is there likelihood of better market conditions in future that could improve revenues in future? Is the population/squre kilometer expected to increase (which suggests more restaurants and hospitals)? What percentage of market share do we have and can we improve that?
    2. Operations and Management- Is it possible to run these companies better? For example, how strong is the current management. If management is replaced can we improve profitability?
    3. Will purchasing all the companies realise potential costs savings through volumes or scale of operations (possibility of mergers)?

    – Structure
    1. Identify Profitability downfall cause (market, costs increasing, de-urbanisation, management capaility in sector)?
    2. Market – Investigate potential for upside (population/Squre KM, or expected growth rate of restuarants or hospitals).
    3. Management capability – Have they targetted the right markets? What has been their performance over the last five years? How much can we improve that by with new management?
    3. costs savings through merging that immediately give us an advantage?

  • S Dec 1, 2010, 9:44 pm

    1. What would make this an attractive investment for the PE? What is the specific timing and profit they are looking for?
    2. Would purchase (and subsequent combination) of these three companies represents a monopoly or close to one. This would be an instant tick in the yes column. If this is true, we continue further keeping in mind competition for this specific service is out.
    3. What are the synergies that can be achieved (using the M&A framework can cover this). Look for specific best practices of individual companies and see if they can be assimilated throughout.
    4. Address profitability after this. Compare the individual companies before purchase vs after purchase and achievement of synergies.
    5. Does the PE have the inherent skills to manage these companies or will they have to bring in help?
    6. What is the potential for a) others to enter the market b) clients to find a substitute for our service

  • fa Dec 2, 2010, 6:42 am

    1 – While the private equity firm is evaluating 3 companies, the first thing comming up should be cannibalization within them (geographical location, size of the company in order to be interstatal/intercity)

    2 – I will look for each non-profitability reasons (geographical market differences because of competence, customers presence, market trends, NewCos appearing) and in case reasons vary from one company to another, I will draw different scenarios. Otherwise I will only draw one. After that, I will go on with each scenario deep from step 3:

    3 – I order to analyze profitable reasons, I will first analyze internal reasons (costs increasing, sales increasing, prices decreasing) and secondly I will analyze external reasons (competence’s prices and services offered, new market threads, market share of the company vs competence’s, overall companies profitability within the sector) Framework related to business: Possible cost structure of the company to analyze: raw material buying and transformation into beds/line, hhrr needed (marketing, commercial, drivers, cleaners) logistics (warehouses, water, soap, sterilization products, electricity, transporting)

    Possible market threads (hospital&restaurants operating by themselves aqcuiring beds and line directly from importers and cleaning by their own, competence offer discount prices or faster response, cross-selling; start targeting hotels, residences…)

  • Min Dec 9, 2010, 10:49 pm

    1. PE’s objective(s)
    restructure and sell (e.g. split restaurant/hospital); synergy with existing portfolio(e.g. PE owns business complementary to the target companies); keep and grow; step-stone into a high-barrier market?why these three?
    2. Target companies
    financial situation; since non-profitable currently, how was past year; how is the industry overall; who are the competitors, how are they doing, what are their market shares. If industry problem, why; if competitors profitable, analyze why these three unprofitable(profit framework); how to turn it profitable once we find out why unfrofitable
    3. Pricing
    find out projected as-is future profits from the profit framework in step 2. , this is the minimum price; calculate the projected profits assuming the PE firm can restructure and turn it more profitable, this is the maximum price.
    4. PE itself
    are there expertise/experiences managing this type of business; how to finance the acquisition; regulatory concerns; exit strategy if the deal does not work out as intended.

  • guy Dec 11, 2010, 6:21 am

    My Key assumption would be that the private equity fund will leverage any sort of buy out with financial backing that would require an expected rate of return of the investment therefore the acquisitions would require capabilities to turn them around.
    The first step would be to asses the market, is this a market driven case where the whole industry is suffering due to a reduction in hotel business or is this an internal problem, therefore the obvious question is what is the 3 year profitability of these companies.
    Assuming this is not an industry wide problem the next step would be to look at the revenue and costs…apply framework how many unots what is cost per unit have costs increased….no then
    Hypothesis. Costs are to high, maybe reduced client demand and high fixed costs or lack of efficency etcetc.

    If it is a revenue issue then perhaps it is a result of reduced unit price maybe hotel leverage on price or is it reduced unit sales, ….

    Remeber to compare factors between three investments, establish whether taking on three gives increased capabilities to the others or whether one is likely to be a burden.

  • Alex M. Dec 14, 2010, 9:30 am

    1. What is our client’s goal?
    a. What ROI are they expecting?
    b. What time frame are they looking at?
    2. How much demand is there?
    a. What is the total market demand? Is it growing?
    b. Are there any obvious segments? What are the size and growth rates of each?
    3. How much supply is there?
    a. Who are the competition? What is their value proposition?
    b. How much market share does each have? Is that share growing?

    Assuming the market conditions are favorable, we need to look at each company to evaluate which ones to purchase.
    4. What does it cost to acquire?
    5. Does it make sense to acquire?
    a. How much market share will it grab? Is it capable of growing with the market?
    b. Can we make it profitable (in the time frame we specified earlier, and to the ROI we expect)?

  • Ivo Dec 24, 2010, 7:00 am

    My answer below:

    A) I thinks it is not very clear if they want to buy the 3 companies or one of the 3. So I would start by asking this first.

    Assuming that the answer is the latter:

    B) I would then follow asking more abut the nature of the business:
    a) Common revenue streams? (Services on offer?)
    b) About the Customers: i) segments (the purchase deciders); ii) Share and Trends of each segment; iii)
    c) Sales Channels (how is the business scaled up)?
    c) What is the cost structure or what are the main cost drivers? (FC or VC business?); CAPEX?
    d) Competition . Who are the major players of the industry?
    e) Multiples and ratios: Standard EV/EBITDA, D/E, and P/E of the industry?

    C) Once I understand the business I would start my Due Diligence by building a matrix comparing:
    a) Price taking standard Multiple (EV/EBITDA)
    b) P&L (Revenues, Gross Profit, Overheads -split by the main cost drivers-, EBITDA, Debt, Net Income).
    c) Stability of Revenues (LT Contracts, Margins on each contract?)
    d) Customer Segments, Market Share, and Trends.
    e) Future Sales Trends (Forecast) per: Segment, Sales/distrib. Channel, Competitor.
    Once I have all this information I can make an educated decision of the firm with more potential between the three.

  • Goli Dec 30, 2010, 1:23 pm

    The Private Equity Firm’s goal: Profit (turning these 3 businesses over, make them profitable, sell them)

    Profit = Rev – Costs + Synergies (of acquiring 3 similar companies)

    To analyze revenue of these 3 companies:
    – General market situation (going up or down)
    – Sales of each company
    – Customers segment
    – Market share of each company

    Costs of these 3 companies:
    – Look for ways to reduce their costs to make them profitable
    – Look for merging their costs, now that we own all 3, in a joint venture:
    * Merge Sales and Marketing departments
    * Merge Operation and Back Office costs
    * Merge suppliers to a few number, to apply economy of scale and get better deals from suppliers with more orders

    And the most important element: Synergies of having 3 similar sales and cleaning companies:
    1) reduce and merge costs
    2) merge operation
    3) merge customers
    4) merge marketing effort
    5) provide diversified and complementary services to new (and existing) customer segment:
    example ==> Now these 3 companies together can server Hotels as well (merging the service to restaurants and hospitals)

    Summary: if the industry is growing, the costs in these 3 companies can be merged and these 3 can work as a joint venture, there are a lot of synergy opportunities, which makes sense to buy three of them.

  • S. B. Jan 8, 2011, 7:39 am

    Assuming that the primary goal of the PE firm is to make a turnaround and sell these businesses at a later date for a greater profit multiple, I think the core issue that needs to be addressed is to assess whether the market is stagnant or if it is just an issue of segmented market share with no clear leader. Generally, higher relative market share corresponds to greater profit multiples in terms of sell outs, which would be the eventual goal.

    Judging by this, I would hypothesize that pursuing two different avenues (based on the business situation framework first and then the M&A framework) would be most prudent.

    1. Market/Competition – Is the overall market stagnant? Is there a relatively low growth rate? Is this an industry wide problem or is it an economy wide problem? Is the relative market share highly segmented? Is there a supplier concentration that creates some sort of a monopoly?

    2. Profitability Analysis – Performing a profitability analysis on each company by means of analysis of revenue and cost (further broken down by the value chain model) would help in assimilating the information in a neatly segmented manner.

    If the answer to the first analysis doesn’t have a supplier concentration problem, and the relative market share is indeed fragmented to a great degree, then perhaps, acquiring and merging the businesses into one might solve the problem based on the fit framework. But we only need to assess the cost and revenue components and see if the costs and revenue problems of one offsets the other.

    Depending on this analysis, we can conclude if its a wise move for the firm to purchase the three companies BUT only if there exists a market for future sales.

  • Khang Feb 23, 2011, 5:25 am

    I would structure it in 3 sections:

    1) Possibility of turn around of each of the 3 businesses
    Look at:
    Suppliers (aggregate their supplies to reduce costs)
    Market demand and growth
    Product and Management matching that of market demand
    Competitive pressure
    Costs (merge them to reduce costs)

    2) If so, how much input would we need to turn these companies around
    How much do they cost
    Fixers needed (management change)
    Duration/timeline of investment

    3) What are the exit opportunities/profits after exiting
    IPO, M&A, Dividends, sell business etc…

  • STH Mar 12, 2011, 5:02 pm

    1. Can I make a profit from this purchase by turning it around?
    – Can I generate revenue synergies from buying the 3 companies?
    – Can I generate cost synergies..?
    2. Is this the best investment opportunity for me?
    3. What is my long term exit strategy?

  • Victoria Apr 12, 2011, 6:08 am

    Questions”Your client, a private equity firm, is considering acquiring 3 companies active in selling and cleaning bed and linen for restaurants & hospitals. Should they pursue this or not?”

    “Other information: these companies are currently not profitable”

    First I would briefly ask WHY the client chose this industry/these three companies. especially when the “other information” (if given immediately, if not it would probably show already in the second step of my analysis) is that they are not profitable. if this would give me any indications, I would tell the below structure with a potential reconstruction according to what information was just given.

    Second, I would like to know if the client SHOULD invest in these companies by trying to understand the market and see if this could be a cause to the existing non profitability and find opportunities to grow the possibilities.

    Third, I would like to know if the client CAN invest by looking at its internal capabilities and resources, including the financials.

    Yeah, then go on and listen to the aha moments….

  • Nag Apr 18, 2011, 3:10 pm

    Most Important Case Issues:
    1) WHat is the Market for Selling Beds and cleaning Linen? Growth of market? How much of the market share does the 3 companies have separately and together. What are the revenues of these companies, how many units did we sell and what are the manufacturing costs/unit of each company?
    2) DO the companies Manufacture the beds or buy them from somebody else? If they all Manufacture, then may be we can go down the Supply Capacity Framework to identify if we can reduce costs and manufacture beds more cheaply? What are the manufacturing costs/unit of all 3 companies, what is the existing capacity together? So, what will be the unit costs and will we be able to make profit out of this?
    3) Who are the competetors and what is their share of the Market?
    4)Who are our customers? is this a growing Market? what is the growth Rate?

  • Nag Apr 18, 2011, 3:43 pm

    So, I think this is one of those cases where we start with profitability Framework and identify why these companies are losing money (revenues vs COsts) and identify if this is an Industry specific problem or company specific…..and move on to Business situation framework to identify the Market growth, Competetors, Main Customers and overlap of Customers within these 3 companies….and then check if the companies are manufacturing the Beds or buying it from Other manufactures….If they do manufacture beds, use the Capacity framework to identify if we can leverage the 3 facilities capacities to Manufacture at a lesser cost base… increase our profit potential….Then , we can identify ….whether this acquisition makes sense or we have better ways to invest our money somewhere else….

  • Nag Apr 18, 2011, 3:47 pm

    Also, We have to do M&A framework to see if we can cut costs across the board by combining these comnpanies…and increase revenues and profitability as a whole…So, I think it is one of those cases wehere we have to use all 4 of Victor’s frameworks to come to a conclusion….Am I making sesne? 🙂

  • Nag Apr 18, 2011, 7:04 pm

    Second Attempt at Answering this Case Question: (After reading through other people’s answers) Let me take another stab at Crackin or getting Cracked 🙂


    So, to answer Victors Question of the Single most IMPORTANT CORE issue, I think it is the PROFITABILITY of the Joing Company. If the firm is not profitable, it is waste of time to Pursue an acqusition, in mature low growth business. It is not true for Emerging HIGH growth business though.

    So, as the Consulting Partner, the first and most IMPORTANT step is to identify why these firms are losing Money! Is it an Industry Wide issue (benchmark all the major competetors and seee) or Is it specific to the internal workings of these 3 companies only?

    If it an Industry issue, then there is no reason to Acquire these Money losing companies in a Bad no profit low growth Industry. (may b like Airlines). We can target better potential acqusitions with our PE Firm’s money.

    But, if it is specific to these Companies, then it becomes an interesting case to crack. And the next question is how to go about identifying the root cause of it. Then, we need to look at the Revenues and Costs of the profitability framework and see where the real issue lies. If it lies on the Revenue side, like if revenues are decreasing and Fixed Costs are the same, then its a problem of trying to Increase Revenues by looking at the Customers, Product line and Competetitors. Since, it is an undifferentiated industry, it is better to not acquire these companies in this types of situation where they have no competitive advantage and more importantly are losing Money. May be we can target their Competeors who have higher Revenue streams.

    But, if the core issue is the Costs, then may be we can see if we can leverage the 3 companies to consolidate the Fixed Assets (Manufacturing Facilities), considering they are all Manufacturing their Beds and not sourcing from Other Manufacturers…..Then we can dive into the Capacity Framework and identify if we can get ECONOMIES of SCALE and reduce the manufacturing price/unit sold (COGS) and see how it impacts our Bottom line. If it does really Make our Joint COmpany substantailly more Profitable, then we should benchmark against the existing best Companies in the industry to get a good perspective of our competetive advantage.

    So, once Profitability is analysed from all dimensions and the PE firm has identified the root cause why these companies are losing money, then, we can dive into the Business Situation Framework and think about all other important but secondary issues like Market Growth Potential, Competetors and interestingly the Customers consolidation of those 3 target companies. How much of an Overlap there is and what % of Induatry segment do our Customers cover from these 3 companies……

    Thats probably why the Interviewer drove our Interviewee away from the Business Situation framework when he started the Case…..Because Its More of a Profitability – Capacity – Business Situation/M&A case in that order of preference respectively!!

  • BV May 11, 2011, 9:26 am

    Would first start by stating assumptions for what the PE’s criteria in investing:
    -how long will they hold the investment
    -what is their expected return

    Once you’ve laid out these assumptions, then I would look at the performance of the companies and see how they would perform under the PE ownership. First ask for th revenue and costs of these companies and work out where we can extract synergies. On the revenue side, look into how we sell the product, types of customers. On the cost side will look at the organizational structure, the supplier network. Then I will look at the industry and economic trends to round out my assessment of how the companies will likely perform under the PE ownership.

    Finally, will want to look at how the PE will fund this acquisition. If they can raise debt easily, this will make it easier to achieve their returns.

  • Pietro Aug 29, 2011, 6:52 am

    Hypothesis: We can make the companies profitable.

    Data needed:
    – Is the market overall profitable? Is it growing/decreasing?
    – Who are the competitors? What are their market shares?
    – Are there synergies between the 3 companies, and/or between them and some companies that we already own?

  • YA Sep 14, 2011, 3:16 pm

    – Initial general questions:
    * What is the objective of this P/E firm (Return and length of investment)
    * Current portfolio (to see if there’s a match in terms of risk/return and investment objectives)
    * Do they consider other options? Are they welling to buy only 1, 2, all or none?

    – Then move to the actual framework I’d use:
    * Market attractiveness (for each) in terms of growth, size, etc.
    * Company attractiveness (each) in terms of facilities, talent, management, etc.
    * Competitive landscape (for each)
    * Feasibility and potential exit

    This is generally how I’d start the case.

  • amin Oct 12, 2011, 11:46 pm

    Whether good idea or not

    Looking at current market demand for these services to see whether other companies are profitable

    Look more directly at each specific company to see why they are not profitable

    Look at whether they can be made profitable

    Will it be a good investment? What is the goal of our client (time frame to make them profitable and ROI)

  • sean Nov 8, 2011, 2:39 pm

    – what is private equity client’s objectives?
    – hospitality linen market growing as a whole?
    – synergies between the 3 firms?
    – why are these firms not profitable?
    – how are their competitors faring?

    2) assuming A) P.E. firms wants to combine and sell off companies at net profit within a given period of time and B) there is nothing wrong with the market as a whole:

    – M&A framework comparing the customer segments, company (reputation, profitable branches?, capabilities)
    – Then go into a profitability framework to figure out whether it would be profitable for the client to buy and sell these firms.

  • Sharian Nov 18, 2011, 10:21 am

    My hypothesis is that it is a favorable idea to buy these bed/linen changing companies. In order to test my hypothesis, I will look into four key areas for evidences supporting or rejecting my hypothesis.

    1) The client’s objective: Why do the client want to buy these service companies? Do the client already hold other companies in this service industry so that the client can now control the majority of market share in this industry? Do the client currently own companies that provide complementary service to the bed/linen changing companies (e.g. hotel chains, large hospitals). If the answer is yes, then the hypothesis has the potential to be favorable because although these linen changing companies are not profitable by themselves, they could work well with the other holding companies by saving cost.

    2) Information on the linen changing companies: What is the industry situation? Growth? How much market share do these three company represent? How is their customer segmented? Is there a particular profitable customer segment? What is the service they provide exactly? What are they good at when compared to their competitors? How can they take advantage of their expertise? Can we easily increase the profit margin by cutting cost (e.g. streamline processes, get the economy of scale by combing 3 companies and/or increasing revenue (e.g. by offering innovative, value added new product such as a signature scent for a hotel chain)?

    3) Acquisition cost: What is the acquisition cost compare to the value of these 3 companies? Is it a fair price or even better, heavily discounted? How is the investment return rate compare to the client’s other holdings?

    4) Exit strategy: How long does the client want to hold the companies? Who do we want to sell the companies to in the future?

  • TheoM Nov 19, 2011, 1:45 am

    Let say they should pursue this opportunity to buy out 3 unprofitable companies because our client can turn around the fortunes of our acquisition targets and that the investment will have a profitable ROI. For this to make sense, I’d like to analyse three areas – 1. Profitability of each of the companies; 2. Synergies with our companies capabilities; and 3. Whether there will be a positive ROI.

    1) In terms of current profitability, what I’m looking for would be to identify the key drivers of loss of profits. So, I would need the profitability, revenue and cost of each beneficiary for this year and last year. It would be favourable to see that this is a company specific type of problem because our capabilities maybe able to fix these. It wouldn’t be favourable if it was an industry wide problem. Once we identify the numerical drivers of loss, we can then verify the company’s own capabilities.

    2)In terms of our company capabilities, I’d be looking to see if we could ameriolate the losses or key drivers. If we can identify an opportunity or a synergy, then it would be favourable If we can’t do that; then it would seem like it would not be a good idea.

    3) In terms of ROI, we would probably need to estimate whether our investment would reach its goals by estimating revenue generated and determing that the revenues would be higher than the cost; or that the acquisition/fixed cost cuts down our own variable cost for this investment to make sense.

  • Tlaloc Nov 26, 2011, 5:01 pm

    Key issues:
    – How has the bed&linen market been developing over the last years in terms of revenue?
    – Are there other, profitable companies in this market?
    – What is the current concentration of competitors and are their substantial syngergies to be expected from merging the three companies?
    Hypothesis: It’s a fragmented market and while revenues are more or less stable (or even increasing), the small scale of the three companies has kept them from being profitable. Merging them might lead to increased efficiency, resulting in a profitable investment for the PE firm.

  • Martin Dec 11, 2011, 5:19 am

    what directly would pop to my mind as structure is looking A) at the market and industry itself to see whether there is a lucrative market at all for what these companies are doing (else we do not need to proceed) and B) Due dilligence of the companies to see why they are not profitable (might be industry problem since all are not, but might be due to the pre-made choice of our client) -> See which acquisition targets we can make lucrative.

    key issues after thinking about it for 2-4 mins:

    market services cleaning linen (growth, competitor structure and MS, customer segments, customer needs, substitutes e.g. in-house cleaning)

    due diligence of acquisition targets and possibilities to make profitable

    if possible economics of the transactions (and financial situation of client)

    and also experience of client with companies from a comparable field

  • Martin Dec 11, 2011, 5:43 am

    Above I assumed that also individual companies can be acquired. This is something to ask as a clarifying question.

    PS: Core issue in my opinion is:

    ==== whether the acquisition targets can be made profitable or not ====

    —->It leads to the necessary underlying analysis involving the key-factors of company, competition, product and customers.

    And here it might very well be that merging them is the way to go, but we have to probe that because it could also theoretically be better to only acquire one:

    For example two companies could have a substantial problem, lets say, they are located too far away due to poor management and transport prices are too high but money for relocating would not pay back.
    BUT the third company might only have slight cost problems and inefficient sales-force so that people are not aware of their services even though they are cost efficient and let us assume extra clean and shiny which customers like. (Of course this is pure invention but we should not rule anything out. It is only a few questions to get to the base of this)

  • Stephanie Jan 15, 2012, 10:20 am

    Objective: why do I want to acquire any of these companies and why do I want to acquire the 3 together?

    I would look at 3 different aspects:

    1. Industry (where). How is the industry structured, it is fragmented/consolidating? it is growing? what is the market share of each company? How big is the market? My objective here is to know how much pressure I have to acquire, the availability of other targets and why I would acquire 3 similar companies. This will allow me to further define my pricing and urge to make a decision.

    2. Companie capabilities (what & why). I would look at the 3 companies: what went wrong, why are they not profitable? Here my objective is to look at the problem of profability, why I can bring a differential approach. I am hoping to find a strong advantage in lower costs (through synergies and economies of scale) and/or complementary offer of product/service (diversification). Where can I add value and how? In the end, what I want to know is: does 3 make more together than separate?

    3. Acquisition & Exit strategy (how). Look at the price (is it affordable? how would I structure the transaction?) and look at the exit strategy: what does the industry look like in 5y? who would be a potential acquirer? could I do an IPO?

  • J Jan 22, 2012, 5:57 pm

    1. Customer: is the marketplace growing, what segments are there, is the growth structural?
    2. Competition: what are the competitors, marketshares, what are outperformers, how are they different, cost structure, market entry and exit
    3. Company: capabilities, what can be improved, cost structure, performance, marketshare

  • Sid Feb 2, 2012, 4:22 am

    I will start with clarifying the exact work done by the three companies: Are they manufacturer / distributor, where are they located, their clientèle, do they compete against each other, etc etc.
    Once I have understood what do these companies do and how they do it, I will try to understand the market size and growth rate of the industry (both selling and cleaning linen).
    Then I will do a Porters 5 forces on these industries.
    After that I will look for synergies between the portfolio companies of the private equity and the three new companies. Is there any scope of vertical integration or economy of scale that the private equity can benefit from.
    In the end, as it is a private equity I will try to understand the exit options for my client.
    If all goes well, I would recommend a go ahead.

    • Sid Feb 2, 2012, 4:24 am

      @Sid: And also, I will try to gauge the reason behind current loses being made at the three companies. If time permits then apply a profit and loss model.

  • cb Feb 13, 2012, 11:36 pm

    I want to prove that they should pursue, and my two main objectives are
    1 : prove that the three businesses together will be profitable (we should first if we know why they were not profitable, then potential cost synergies, then potential revenue synergies)
    2: prove that the price to buy the three companies is less than the value of the three companies, and that we can finance it.

  • Tanvi Mar 7, 2012, 3:12 am

    Industry attractiveness – market opportunity, growth, substitutes, competition, customer patterns and demand, barriers to entry
    Companies attractiveness: product segments, customer segments, geographical locations, which segment maximum market opportunity and growth rate, which segment constitutes maximum percentage of overall sales? where is profit margin highest? How can the client add value to the companies status quo?
    Risks – competitive response, barriers to exit
    Acquistion cost – are we breaking even in desirable pay back period

  • Anton May 12, 2012, 4:05 am

    Answering the 1st question, the most important issues are:
    – is overall market attractive?
    – can profitability problem be fixed and if yes – in what time horizon?
    – do companies have a sustainable competitive advantage?
    – is the price reasonable?

    Answering the 2nd question, I would look into:
    assess if the industry is growing and the mkt is big, undestand major customers segments and their needs. this would help me further to understand where we could win;
    Mkt shares in each customer segment, products and services offered, customer satisfaction. Cost structure (this is important since we are unprofitable)
    What customer segments do we cover? What do we offer? What is our mkt share? If it is low – why so? Why unprofitable? Can we fix that problem? In what time? Is the price fair?

    Assuming that the price if reasonable, I would structure the answer as smth like this:
    PURSUE: financials can be fixed in short term and we could have sustainable compatitive advantage
    SHOULD THINK A BIT: financials can be fixed but no competitive advantage
    DO NOT PURSUE: financial cannot be fixed shortly and no competitive advantage

  • SC May 30, 2012, 9:01 am

    First I will clarify the objectives of the Private Equity:
    – What is their target in terms of ROI
    – How do they plan to structure the deal financially: what % of debt vs cash
    – Do they usually change all the management team?
    – Do they plan on acquiring all 3 or non of the targets? Or can they acquire only 1 or only 2?
    – After how long do they plan to exit the deal(s)

    Second I will clarify the 4 key points below for each of the targets:
    – Customers
    – Product
    – Company
    – Competitors
    Customers, Products and Competitors may be quite similar so I will probably focus on Company – only once I have checked the 3 other key points are indeed similar

  • B Jun 8, 2012, 11:58 am


    I would start with M&A framework. and Use the Business situation framework for each company.

    I would want to look at:
    -Who the customers are
    -What product/service they are buying
    -Why each of the three prospects are not profitable. Is this an industry issue?
    -Who the competitors are and what is the competitive landscape

  • JA Jun 12, 2012, 5:16 pm

    Key components to consider:

    1. Our client’s perspective
    Why acquire these companies? For what benefits?
    Possible reasons:
    1) to diversify their investment porfolio
    2) because our client firm has caught potential growth/prospect of these companies and our client views them as underevaluated in the market – so our client buys them, earn the middle margins, and sell them to other larger companies that may want to expand their business pipeline

    If the industry as a whole is not performing well but these 3 companies have been performing relatively less poorly then there is potential for value recovery.

    *We need to know:
    – Growth rate of the bed/linen cleaning/selling industry vs. these companies over the past 3 – 5 years
    – Profitability of the bed/linen cleaning/selling industry vs. these companies over the past 3 – 5 years
    – Current stock value of the competitors vs. these companies
    – How much is the price that our client is offering for acquisition? ($/share)
    – Our client firm’s current investment porfolio

    2. The 3 companies’ perspective
    Why would they want to be bought out to a private equity firm? Possible reasons:
    1) They view that their future prospect is bleek – thus want to exit the market this way
    2) These companies have been performing so poorly that they are in urgent need of cash

    *We need to know:
    – The companies’ business structure and cost structure
    – At what price ($/share) are they willing to sell?
    – These companies’ current market share and major competitors
    – Their products’ differentiation and positioning

    I would use CPCC framework, with more focus on company and competition. In this case I think it’s important to look at both sides’ situation in terms of breaking down the issues.

  • AS Aug 16, 2012, 11:48 am

    I would first ask what is the objective for acquiring these companies? Is that to improve operations and exit by selling at a higher price or learning about the market/business or …? If its the earlier one, companies should offer some leeway where operations can be improved. If its the latter, companies should be the best in the market.

    My hypothesis would be “Yes, the PE company should acquire these 3 companies”. To test, I need to ensure that the following is true which would confirm/prove my hypothesis:
    – These 3 companies are most attractive of all candidates
    – Acquisition price for these 3 companies is attractive
    – PE company can achieve its objective (improve these companies’ profitability post acquisition to sell off at higher price OR understand market/industry better)

    For branch # 1:
    To figure this out, the questions I would ask are:
    – How many possible candidates exist?
    – Do we already know that these 3 are the best candidates? If yes, then I don’t need to dive deeper in this branch. If no, I would need to understand whether these are the best choices that PE company can make. If these are not the best choices, then my hypothesis is weakened. To figure this out, I would start with competition – how many of them are there, what is each of them’s market share, how is market share changing. I would need to explore customers, products, and company branch of each of these. I will start with company branch to figure out capabilites/expertise and financial situation for these. Based on this information, I will focus on few companies to figure out which companies are the best of the lot depending on the objective that needs to be achieved. For this, I will ask questions about customers and products.

    For branch # 2:
    – Need to go into valuation – ask about public vs. private. ask about comps for approx. premium.
    – Ask about PE’s acquisition price offer and premium on value derived from DCF
    – Does the price look attractive?

    For branch # 3:
    – If understanding the market/industry better, ask how would PE company benefit from this acquisition.
    – If profitability, ask if operations can be improved (can talk about costs and benchmark. Can also talk about value chain)

  • AS Aug 17, 2012, 3:32 pm

    Many of the comments above discuss the synergy. This is assuming that PE firm wants to merge these 3 companies into 1. If these would operate as stand-alone companies, there wouldn’t be any synergy except shared management expertise provided by PE firm.

  • Brian Sep 6, 2012, 11:57 pm

    The PE firm should consider the following:
    1.) What’s the objective?
    2.) What’s the market like? (size, growth, trends, threats?)
    3.) What shape is the company in (relative to others, its strengths)
    Assuming the objective is to sell,
    4.) Feasibility: do strategic buyers exist?

  • KP Sep 9, 2012, 10:46 pm

    I am assuming that the objective is for the company to grow and to increase the bottom line.

    The key issues are –

    1. market opportunity – is there enough opportunity in this market to make it worthwhile for us to enter?

    2. acquisition target potential – do the targets have the capacity to generate profits, even if they are not currently doing so (good contracts/customer loyalty)? If there anything that our company can bring to the table that will make them profitable on acquisition – ie. potential synergies?

    3. what is the competitive landscape? is it low enough to enter (ie. no dominant players, low threat of new entrants, substitutes – hospitals performing this operation on their own without outsourcing)

    4. what is our capacity for acquisition? do we have the financial and operational means to acquire the companies?

    5. alternative strategies – could we acquire one company not the others? could we look at other ways to grow by targeting more profitable companies?

  • N Sep 18, 2012, 5:10 am

    Organizational Effectiveness
    Market Opportunities
    Industry Threats

  • Shelly Sep 28, 2012, 11:08 am

    First of all, I am assuming that the client’s losses are due to bad decisions in choosing their investments, and not because of an economic slowdown or internal issues.
    The main purpose here is to find out if the 3 companies will help our client achieve profits, preferably enough for them to recover the losses they are in currently.

    So our main points of focus are:
    1. What is the profitability of the 3 companies? Are they consistently performing well? What is the present market share of the 3 companies, their rate of growth, and also how does it measure against their competitors?
    2. What will be the break-even for our client, if it chooses to go ahead with this decision, and whether the answer is viable for the client.
    3. Is this business integrable with the client’s portfolio? Would it mean sourcing of new talent/change in current functioning?
    4. The quality of management/personnel currently employed in the 3 companies, are they uses the best industry practices, also is their method of operation the latest- we dont want their technology/method of working to become outdated within a short period. Also, is the general industry feedback about them positive?

    With answers to the above questions, we can determine by and large if it would make good business sense to acquire the 3 companies.

  • Michael Nov 28, 2012, 9:52 pm

    Three most important key issues:

    – Is this an industry-wide problem or a company-specific problem? i.e. is the market for this industry unprofitable or is this inherent to these three companies?

    – What is the private equity firm’s investment objectives; i.e. what is their desired ROI and investment timeline?

    -What opportunities exist to create value within these companies?

    Proposed Structure:

    1. Market: Is the market attractive in terms of profitability? What is the size of the market? Are there many competitors? What is the compound annual growth rate (CAGR) for this market?

    2. Company: Why is current profitability low within these companies? Internally, one should analyse a breakdown of revenues and costs, while externally considering effects of competition, products and customer demand.

    3. Acquisition strategy: If the PE firm does decide to acquire this company, how should it fund this acquisition, i.e. what mix of debt or equity? What percentage stake should the firm take in each company? How long should the investment be and what is a reasonable ROI? How should the company post-acquisition attempt to create value among these three companies in order to fix the profitability issue?

  • SL Dec 27, 2012, 7:20 am

    Key issues in this case:
    (1) Determining why the companies to be acquired are not profitable.
    (2) Determining whether these companies have some other demonstrable capacity for sustained growth that would make acquisition a reasonable step forward.
    To structure this case:
    I would begin with a hypothesis: Lack of profitability within the companies to be acquired may constitute a good reason not to acquire them.
    Then I would break down the case in terms of business situation. If profitability is not a factor, we can safely assume that there could be other market indicators (external/internal indicators) that might tell us why this may or may not be such a good idea.
    MECE — reasons that this is financially viable vs. not financially viable.

  • Arun Mar 24, 2013, 4:06 am

    1) Why are we looking to purchase these companies?
    2) What is our Objective? Does it fit in our overall objective?
    3) At what phase in the PLC are these 3 companies?

    1) Why?
    2) Cost – Amount / Is it fair / Valuation is it done / How are we going to purchase them – Equity / Debt / Can we recover the amount soon?
    3) Due Diligence- Diversify our holdings? / Any synergy / Competitors / The market size / The products different? / Management? / Associated Risks involved / Prior experience in this buisness?
    4) Exit Strategy – How long are we going to hold the investment? / Risks assocaited / Buyers avaiable to sell – Liquidity?

  • benjamin Aug 23, 2013, 5:00 am

    firstly, I would like to explore the customers, who is the main customer received this service, do they have strong bargaining power or not? and suppose this is no-difference and mature service (considering the cleaning service happened frequently), if the main customer have bargaining power, this business is difficult to get the good margin (unless if they could control the cost extremely lower than competitors-but as what we supposed before, in this industry, cost is not the key). then, the only way to profit is to increase turnover rate compare to competitors.

    So, secondly, I would like get the situation data of the current competitors. Is our client the main player or have some others? if our client is the main service provider, I would like to explore the third one:

    How possibility would our clients use the resource, whatever from other channels or their own business unite, to change and increase ROE?

  • Stark Sep 2, 2013, 6:34 am

    Hypothesis: Go ahead with the acquisition.

    Information required:
    1) Customers: Information on the target customer (large scale vs small scale), customer segment, growth in each segment and sales distribution across segments.

    2) Product: There seem to be two distinct services: Cleaning and Selling; sales distribution across the services
    3) Company: Reasons behind unprofitability, reasons behind decrease in revenue (losing customers or drop in prices) or increase in cost ( rentals, washing etc). Market share of the companies before and after.
    4) Competitor: Major competitors, competitor market share, market growth, competitor growth.

  • Pradeep Oct 2, 2013, 10:17 am

    1. Clarify client’s objective -Turn into profitable business/Sell business at higher price/Liquidate assets and keep cash and timeframe being considered by client
    With hypothesis that the profitability can be turned around in clients timeframe, need to explore three key areas:
    2. Client capability – Experience in Linen selling or cleaning business, Ties or connects that would help turnaround this business
    3. Target companies profitability – Understanding profit trends, if increasing volume (look for volume, market share, market trends, customer preferences and channels) or increase in pricing (differentiated service vs. competition, elasticity) or decreasing operating or fixed costs will get us to profitability
    4. Financial – what is the price of the acquisition compared to valuation of the companies, do we have cash at hand

  • RS Jan 15, 2014, 4:05 pm

    PE firm objectives: timeframe/ROI target
    Market: Analyze the market for cleaning bed/linen for rest/hosp. Is this a growing market? Who are the main players and what mkt share do each have?
    Target firm: Products/services provided; customers segments served within restaurant/hospitals; what differentiates them from competition; core capabilities of these firms; their profitability (loss in this case) from each segment; future prospects
    PE firm: Synergies to leverage; capability of mgmt to run this business
    Risks: Exit options; ROI; competitor reaction

  • AK Jan 21, 2014, 5:07 pm

    1. clarify objective of the acquisition. Since our client is a PE firm, I’d assume that the objective is financial (i.e. it wants to buy the companies, improve their performance, and sell them at profit) but I’d ask if my assumption is correct.
    2. Is the market for restaurant & hospital attractive?
    -market size
    -market growth
    -current market profitability
    -level of competition
    3. Is each company attractive?
    -Does each have the products that the market wants?
    -Who are the customers for each target companies? Are their customers growing? If yes, it means profit pool is getter bigger.
    -Does each have strong relationship with its customers? the stronger, the better
    -What is the market coverage of each target company? The bigger, the better.
    4. Feasibility of profitable exit
    -existence of buyers
    -exit multiple is high enough to justify buying price

  • AP May 9, 2014, 1:06 am

    1. Client’s Objectives
    2. Synergies with Firm’s Industry and Client (does the client own a lot of hotels that could use the product/does the client have expertise in reducing costs in this industry?)
    3. Growth in this market (are these firms part of a niche market that are going to take off?)
    4. Acquisition Price
    5. Firms X,Y,Z competitive advantage (what are these companies doing well?)

  • Ana Aug 28, 2014, 3:57 am

    3 key things to consider:

    – the objective of the private equity firm. This is most likely profits/ROI, by how much? short term vs long term?
    – Can each of the firms be profitable INDIVIDUALLY? – what’s wrong with them? Can it be fixed?
    – Can the firms be profitable if MERGED/taking advantage of all of their strengths and capabilities? e.g. does this maximise resources?

    HYPOTHESIS: My initial hypothesis is that the private company should buy them because it is possible to make them profitable (enough) by optimizing resources. In order to prove my hypothesis I’d like to look at each company individually in terms of its profitability, determine where the problem lies, see if it can be solved within that company and if not, determine if it can be solved by using the other two firms’strengths.


    Company A Profitability: Revenues – Costs -> What is the problem? Can it be solved inside the company? YES/NO What would we need to solve it?

    Company B Profitability: Revenues – Costs -> What is the problem? Can it be solved inside the company? YES/NO What would we need to solve it?

    Company C Profitability: Revenues – Costs -> What is the problem? Can it be solved inside the company? YES/NO What would we need to solve it?

    At this point I assume I would have a better idea of the companies (e.g. size) and I would use a business case scenario or custom issue tree to determine if any outstanding problems (e.g. Company C profitability) could be solved by Companies A & B resources.

    If YES, consider buying all three. If NO, consider just buying A &B

    – If given time, I would then like to consider each company’s price and what their expected benefit is (either their own profit, or helping another company achieve more profits), quantifying the problem and giving a ROI.

  • AA Oct 6, 2014, 4:34 pm

    The reasons the company wants to acquire the other companies
    Could the failing companies become potentially profitable if acquired?
    Why are the companies failing at the moment?

  • Alvaro Feb 11, 2015, 4:12 am

    Assuming the objective is to acquire and turnaround the companies to sell them at a later stage:
    1. Is it worth buying the companies?
    a. In terms of profitability
    b. Industry’s attractiveness
    c. Customer’s potential
    2. If yes. Can we fix the company and make it profitable?
    a. Product segmentation
    b. Company analysis
    c. Other
    3. Are there any potential synergies from other companies the P.E. firm own? i.e.: hotel firms

  • jay May 2, 2015, 4:36 pm

    Key Issues :

    a) are all the three companies being targeted, doing well financially (what are the individual profits currently ? any negative years?)

    b) Is this M&A favorable (synthesis)

    c) Any of our current competitors done something similar ?


    Structure :

    Profit analysis for all three..

    M&A framework – combining Private equity plus all three.

    Go through
    a) Products
    b) Competition
    c) Customer
    d) Company

  • ZHANG Mar 2, 2016, 4:00 pm

    The key issues that I would like to know are the companies’ positioning, competitive advantages, revenue profile, cost structure and cash flow status. In the first place, I want to know the positioning of these companies. What are their target clients? Do they provide products to luxury hotels and high-end hospitals or to the mass market? What’s their pricing strategies? What are the types of the companies’ products? Do the companies rely on very view kinds of products or is there a diversification? In the second place, this is an industry where there is no strong barrier to entry in my opinion, so there might be fierce competitions among industry players. Therefore I want to know who are the main competitors of the target companies and whether the target companies have some competitive advantages and core competencies to face the competition and to win market share. In addition, since the companies are currently not profitable, I want to know the main sources and drives for their revenues, and whether the revenues are stable or cyclical. Did the companies have stable growth of revenues and EBITDA? In terms of costs, what are the cost structures of the companies? Do the companies have too much overhead and are they heavily leveraged either operationally or financially? At the end, I want to know whether do the companies have stable and sufficient free cash flows which the private equity fund can use to serve the debt repayment. What I mentioned above are the key issues that I want to know and that’s also the framework of my analysis.

  • shohm Jun 12, 2016, 11:45 am

    1. Market analysis – Products & services existing in the market; Size; segment; Growth; Profitability; Trends

    2. Competitive analysis – Products & services offered by competition; Pricing; operations & cost structure; advantages/advantages

    3. Company analysis for all 3 companies – Products & services offered by Co.; Pricing; operations & cost structure; advantages/disadvantages

    4. Investment analysis : Cost of acquisitions, FC and VC of running the individual Cos., Any Cost efficiency that can be achieved, Revenue expansion that can be achieved, ROI (NPV analysis). Decide whether all 3/some/none of the Co’s investment is profitable.

  • wei Jul 12, 2016, 7:08 pm

    1 Market Growth/Payback period:
    Any growth or shift in the hospitality and tourism industry? Sharing Economy?

    2 Synergy of Companies: A+B, A+C, B+C or A+B+C in terms of market segments and access, capacity, shared costs, info technology, brand value

    3 Potential Acquirers/Exit Strategy/Risks

  • Harry Nov 19, 2016, 8:54 pm

    If possible, I’d ask 2 questions to the client: Why bed and linen companies? Does our client have an existing portfolio of companies that can achieve synergies with these companies? Or is this just a profitability/growth play? (Q: What is our client’s intentions behind the acquisition of these companies?)

    Second, is the ROI. What payback period are we looking at, as well as does return rate hit our internal company targets. (Q: What is the intended payback period and ROI for our company?)

    3 key issues I’d like to look at:
    Market Attractiveness:
    Market growth rates – strong market growth rates, showing robustness and long term growth sustainability.
    Market share and growth rates of market share – bench-marking this to industry growth rates will show if we are growing in tandem with growth in market or not.
    #of competitors, respective market share and growth rates – to figure if there’s an industry leader and if we can capture significant market share.
    New substitute products: products that increasingly enable operators to clean their linen by themselves on an industrial scale, anti-bacterial spray, UV light etc.

    pretty self explanatory

    Acquisition and Exit Strategy:
    Price point to pay for these companies: What is a fair price to pay? Revenue/Profit multiple?
    Open to acquisition: Are these companies open to acquisition? If averse, do they have mechanisms to block the acquisition from taking place? Poison pills, lobbying etc.
    Dividend or grow and sell case?

    Strategic fit and risks:

  • Jg Dec 20, 2016, 10:03 am

    My thinking on this is influenced by all three companies being loss-making.

    So, my three buckets:
    1) operating environment
    2) clientele
    3) the economics

    In operating environment, I want to consider 3 things. First, state of the restaurant and hotel industries: are they both suffering or cutting back wallet? Second, competition: is our bed linen cleaning sector in trouble as a whole, are these three cos part of a trend? Third: who are the suppliers in the industry, are they unusually powerful?

    For clientele, I also have to three factors to consider: what linen/cleaning needs do restaurants and hotels have; what’s their price elasticity and what other purchasing criteria do they have; and what substitutes are available?

    For economics, I want to consider not only profitability fundamentals (and which factor is behind the losses), but also quantitative metrics suchas the investment multiple and return targets, and what the view is on exiting the investment.

    I first want to look at the state of the industry to know whether losses come from this being a competitive and unattractive industry. If not, then I’m definitely keen on knowing clientele needs. If we find the problem, then I’d like to run the numbers on solutions and see whether any of the three firms are viable investment targets.

  • Pedro Feb 11, 2018, 8:01 am

    The hypothesis would be that the PE firm can make a return on this investment by turning around the companies. In order to test this. I would look at three main factors.
    I. The current situation of the firms and the respective industry — since we are looking to improve the situation, it is important to gain context on what are each firms’ capabilities, customers and competitors.
    II. The potential combined profits of the three entities — this must be positive if the hypothesis is to hold.
    III. Risks associated with the venture — it might be that there’s potential for a turnaround, but that said project does not fit within the PE’s risk profile.
    Regarding II in particular, I would subdivide it into profits from (1) selling linen and (2) cleaning linen. For each, we would look at current combined revenues and costs, and test whether revenues can be increased or costs decreased, either due to a different business strategy or merely because of scale.

  • Ds Jul 7, 2018, 2:16 pm

    The client being a PE firm the key issues will be –
    1) Reason for Non Profitability of the firms – Internal or External
    – starting with profitability framework for identification of the real cause
    – may have to transition into Business situation framework depending upon the info provided
    – whether the cause can be rectified and profitability can be improved
    – if yes, what will be the timelines for break even and profit
    – whether the timeline fits the acceptablity criteria of the PE firm

    2) overall Industry size, performance & growth potential

    3) Growth prospects/Diversification of the firms – eg getting into other avenues of hospitality industry – hotels or into B2C model of home / fabric cleaning

    4) Exit Options

    In business situation framework, we may have to look into –
    A) Customer
    – Customer segments if any apart from hospitals and restaurants
    – what drives the customer’s want ( they may opt doing it in-house or through other alternatives)
    – Any identifiable gap
    – customer concentration
    – pricing expectation

    B) Competition
    -alternatives/ Substitutes
    – strengths
    – concentration

    C) Product / Service, in this case
    – differentiation if any
    – Strengths and capabilities
    – any identifiable gap in the “want of the customer” and the “services currently available” in the market
    – diversification possibilities
    – entry possibilities into other customer segment like hotels

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