When an acquisition target operates a unique business model within their industry, investors are often starry-eyed at the prospect of quickly expanding the company to new locations. At DPO&Co, our strategy consulting practice is 100% focused on PE clients, covering the full deal cycle -- everything from pre-close diligence, to post-close synergy and ops improvement, to sell side prep.
Below are some common refrains we hear from clients, particularly when performing a market study or voice of customer analysis just prior to closing:
What we have learned is that expansion is so much more than just weighing Buy vs. Build and picking a few new cities that seem like easy targets. A structured approach to geographic expansion factors a series of variables and dramatically increases the probability of success. We have fortuitously guided many PE firms down this path on several occasions using our proprietary approach, often surprising clients with the results. It starts with a root cause assessment, then shifts into deep data analysis, and comes full circle back to what made the business a success in the first place.
Many astute investors can identify “What” makes a business successful fairly quickly. We begin our process with a deeper examination of “Why” and “How” the company has captured market share and gained customers over the years. One of the first things that must be examined is whether, and to what extent, the location of the business boosts its success:
The answers to these questions begin to inform what matters most when expanding the business, and more importantly, if profitable expansion is truly a probable outcome. (Spoiler Alert: we have talked clients out of investments because it was proved out that a new platform company that they intended to rapidly grow by opening branches in new MSAs was unlikely to be a success!). As the results come into focus the story begins to take shape, as does a rigorous prioritization strategy of the next best markets to enter.
Once we arrive at what truly led to the company’s success, we can begin a robust analysis of Metropolitan Statistical Areas (MSAs - which are used in place of cities to better capture an entire metro area and not just the city limits) in order to identify potential landing spots for locations 2, 3, 4, and so on. Collating as many variables as warranted, we visually prioritize the ideal MSAs using our proprietary method of Agnostic Strata. Below is the initial result of a 4-variable analysis, with the parameters on the left and results on the right:
However, this “1.0” quadrant-based methodology falls short in several dimensions. First, it assumes that all data points in Quadrant A are created equal. Furthermore, is there actually a discernible difference between a data point in the lower right corner of Quadrant B and the upper left corner of Quadrant C? To find the most optimal growth markets, we want to target data points as close to the bottom left corner as possible, and therefore need to cut the data differently. Next, let’s look at the exact same data set cut into strata, where we are variable agnostic and only concerned with the cumulative result:
In the bottom left strata, we now have the 12 most ideal locations to recreate what made the original location successful in the first place; down from the 30 that appeared in the lower left quadrant in the first cut of the data. With this powerful information in hand, we can now finally address the Buy vs. Build question that many consultants try to answer straight off the bat.
If it is indeed Buy that wins out over Build, DPO&Co can be of even greater value. Using our proprietary search methods, we will conduct a robust search for businesses in the desired industry and MSA that are available for sale, as well as a thorough search of all the businesses that are NOT listed for sale. We then can help clients conduct a strategic and proprietary search where we contact owners to test the waters of a potential sale. As business owners ourselves, our clients are in the best possible hands; we are available to be as involved as desired in contacting brokers/sellers to fill the top of the funnel, facilitating Q&A, guiding a transaction through diligence and supporting negotiations towards a purchase agreement.
This type of engagement brings the full package of DPO&Co capacity and capabilities to our clients, as we guide PE Firms and Family offices toward sound decisions through a highly analytical approach that drastically accelerates EBITDA growth while reducing the risk of false starts in a challenged market.
Copyright © 2020 DPO & Co - All Rights Reserved.