M&A for Management Consultants & Business Analysts

1
M&A for Management
Consultants
Practical guide how do analyses during mergers &
acquisition projects

2
Consulting firms are hired very often to help with Mergers & Acquisitions. Those projects are
difficult as you have to deliver results fast and you have to deal with many stakeholders.

3
You not only have to help select potential targets, model businesses in
Excel, but also you will have to estimate the potential benefits of M&A

4
In this course I will teach how to perform fast and
efficiently different types of analyses during M&A projects.

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Target Group What you will learn What you will get
 Management Consultants &
Business Analysts
 Analysts working in PE, VC funds
 People responsible for M&A in
corporations
 What kind of analyses you may
have to do during M&A project
 What frameworks, tools
techniques to use during M&A
 How to perform analyses fast and
efficiently during M&A project
 Ready made analyses in Excel
 List of Recommended readings
(articles, books)

6
How to select potential
targets for M&A
Essential Modelling the
Business in Excel
Essential information on
M&A
Estimating Potential Impact
of M&A
Essential Valuation
Techniques
How to do research during
Commercial Due Diligence

7
This presentation will help you perform fast and
efficiently M&A analyses on the level of top
management consultants

8
What you will see in this presentation is a part of my online course where you
can find case studies showing analyses along with detailed calculations in Excel
M&A for Management Consultants &
Business Analysts
$190
$19
Click here to check my course

10
When M&A are done?–
Introduction

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Mergers & Acquisition are done for a lot of reasons by different players. In this section
we will discuss how do they differ and why they invest so much money in M&A

12
When it comes to players that do M&A we have 2 main group of players
Strategic Investors Private Equity Funds

13
M&A done by
Strategic Investors

14
To understand why Strategic Investor may be interested
in M&A let’s have a look at the strategic framework.

15
Every company can follow one of the 5 main strategic directions
Do what you do
but better
Expand Transform
Go niche Disrupt yourself

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Do what you do
but better
Expand Transform
Go niche Disrupt yourself
M&A makes sense only when you consider Expansion, Transformation
or Disruption

17
Benefits of M&A for Strategic
Investors

18
For a Strategic Investor there are some strong benefits of doing M&A
M&A usually is faster than organic
growth
M&A helps you enter certain markets
that are beyond your reach
You kill current or potential
competition
M&A may be cheaper than organic
growth
M&A can give you access to valuable
technology or people
M&A can help you achieve economies
of scale
You can gain access to important
customers
You can block your competitors from
gaining advantage over you

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In the next few lectures we will discuss some examples of using M&A
strategically
Expand via M&A M&A potential competitors

20
Do what you do
but better
Expand Transform
Go niche
Penetrate
existing
markets /
products
Target new
customers
with existing
products
Enter new
markets for
existing
products
New
products
within old
categories
New
products
expanding
brand
Go up /
down the
value chain
Capitalize on
business
assets
M&A
Improve
processes
Pricing
Cross-selling
Up-selling
Sell non-
core assets
Operational
Excellence
Optimize
Working
Capital
Renegotiate
the deals
Review
what and
why you buy
Upstream
niche
Low cost
player
Blue Ocean
Change the
business
model
Build add-on
business
Build
entirely new
businesses
Disrupt yourself
Change the
business
model
Intrapre-
neurship
M&A
potential
competitors
Copy
competitors
that may
disrupt you
Sell some
business
units

21
Expand via M&A –
Introduction

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You can also expand via Mergers and Acquisitions (M&A)
M&A
Vertical (along the
value chain)
Horizontal (on the
same level of the
value chain)
Totally not
connected

23
M&A makes sense in the following situations
To gain strategic advantage i.e. block
competitors
Leverage your core competence on
different assets i.e. performance
improvement, marketing etc.
Achieve scale effect
Gain from multiplier arbitrage or
multiplier difference
High cash position of your
company
You buy asset almost free of debt
Synergies

24
In the next lectures I will give you 3 examples
Altassian Amazon Amazon

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M&A potential competitors –
Introduction

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M&As are a fast way to disrupt yourself. It has plenty of advantages
You tame potential significant
competitor that could have killed your
business
M&A is a fast method of creating
alternative business models
Acquihire
Diffusion of knowledge from bought
company to your current business
You de-risk your business model
against future trends
Acquired firm can be used to kill
competition

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Altassian

28
Altassian is a M&A machine
2 IT guys built on
the side their own
issue tracker called
Jira
2002 2004 2007
M&A
They created a new
dev team
collaboration
platform —
Confluence
Altassian buys
Cenqua, which
made 3 developer
tools — Fisheye,
Crucible, and
Clover. These tools
filled the gaps in
Atlassian’s product
offerings
Atlassian raised $60
M for M&A
2010 2012
Atlassian acquired
and integrated into
its main products
the hosted private
chat service
Hipchat
Atlassian combined
all of their Git-
based services
under the Bitbucket
brand
2015
IPO – starting
market cap $ 5.8 B
Atlassian acquired
Statuspage, which
allows businesses
to keep users
updated about the
status of their
online services
2016 2017
Acquisition of
Trello – a simpler
version of Jira for
Project
Management. It
cost them $425 M
Organic growth

29
Let’s recap the changes done to the business model of Altassian thanks
to M&A
Simple tool for
tracking tasks for
Developers
Complicated tool for
tracking tasks for
developers
Simple tool for
tracking tasks for All
Integrated solutions
that makes the life of
developer easier

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Adobe

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Adobe released
PostScript. The
software could
control output
devices like laser
printers from
personal
computers
1983 1987 1993
M&A
Adobe released
Illustrator, and a
year later
Photoshop
Adobe released
Acrobat, a suite of
applications for
creating and
viewing files in a
new way. Adobe
has come up with
the pdf format
Adobe acquires its
main competitor
Aldus (PageMaker)
1994 1996
Adobe released
PhotoDeluxe as an
“easier to use”
version of
Photoshop
Adobe released
Acrobat 4.0, an
important set of
updates and
feature additions
that skyrocketed
sales for corporate
users
1999 2003
Adobe bundled all
of their products
together in the
Adobe Creative
Suite to unify their
branding and start
tying their products
together
Adobe acquired a
competitor,
Macromedia –
owner of an easier-
to-use Photoshop
competitor called
Dreamweaver and
a platform for
animations and
video players called
Flash
2005 2008
Adobe released a
webtop version of
Photoshop called
Photoshop Express.
This was designed
as a consumer
product to be really
easy to learn and
use
Adobe acquired the
top enterprise
analytics company
Omniture. It
allowed to offer
web analytics,
measurement, and
optimization
technologies to
Adobe product
users
2009 2013
Adobe released
Creative Cloud (CC)
to replace Creative
Suite. From now on
it would only be
available for
purchase through a
subscription-based
service
Organic growth
2015
Adobe Stock – a
microstock agency
that is part of
Adobe Creative
Cloud has acquired
one of its
competitors -
Fotolia
Adobe was busy not only with organic growth but also acquisitions

32
If we would like to observe their journey we could sum it up in the
following manner
Software allowing
printing
Integrated text and
image processor
Adobe Illustrator
Acrobat, a suite of
applications for
creating and viewing
files on any device
and system
Adobe Creative Cloud
– integrated solution in
the cloud
Photoshop, a photo
editing tool
Adobe Stock - stock
agency

34
Since 1998 Amazon has been aggressively expanding using also M&A. They have
been doing the M&A for different reasons. Mainly to expand and kill competitors.

35
When it comes to players that do M&A we have 2 main group of players
Why Amazon does
M&A
M&A to enter new
markets
M&A of competitors
M&A to acquire
technology giving
competitive advantage
M&A of
complementary
businesses
M&A to change the
business model
Other
 On some markets
Amazon has bought
local companies to
speed up the
entrance (Germany,
UK, China, Arab
countries)
 This is faster and in
some cases cheaper
 Amazon also buys
firms to enter new
product categories
(e.g. Ring and Blink
to enter security for
home; Pillpack to
enter healthcare)
 Amazon bought
existing competitors
(e.g. Zappos,
diapers.com, Book
Depository)
 Amazon has been
also buying potential
competitors that
could compete with
him in the future
(e.g. Stanza –
potential rival to
Kindle bought &
killed; Audible)
 Amazon bought Kiva
(producer of robots
that helped him
automate the
logistics) to slow
down adoption by
competitors
 Amazon bought
Zoox to probably
create self driving
trucks that UPS,
FedEx will not have
 They have acquired
Alexa and IVONA to
get into the voice
search
 Amazon has bought
many businesses to
strengthen AWS,
Amazon
Marketplace, Twitch
etc.
 Amazon bought
Wholesale Foods to
shift from pure
online to
omnichannel

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While Amazon’s acquisition streak peaked just before the dot.com bubble, it is
noticeable to observe that the number of deals has been increasing after 2015
Number of M&A deals per year
In # of deals*
5
9
2
1
4
2 2
7
3
6
5 5
4
5
9
7
12
4
9
2
1998 1999 2001 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
* When it comes to the most important acquisition Amazon has acquired around 100 companies in the period of 22 years

37
Let’s break down the deals by sector. It becomes apparent, that the main focus
for acquisitions has been e-commerce and software businesses
1
4
1 1 1 1
8
3
6
1
3
2
4
2
1
2
1 1
3
2 4
3
3
2 2
1
1
3
1
2
1
2
4 2
2
1
2
1
1
2
1
1
1
1
1
1
1
1
1
1
1
1
1
1998 1999 2001 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Cloud & Software Services E-commerce & Marketplace Entertainment Financial Services Home Offline Retail Robotics & Logistics
Number of M&A deals per year per category
In # of deals*
* When it comes to the most important acquisition Amazon has acquired around 100 companies in the period of 22 years

38
While Amazon’s acquisition streak peaked just before the dot.com bubble, it is
noticeable to observe that the number of deals has been increasing after 2015
Money spent on M&A
In M of USD*
305 675
6 75 0 3 0 300
1 200 755 312
801
0
970 885
0
14 510
1 672
372
1 200
1998 1999 2001 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
* Only deals with known value

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By far the biggest M&A of amazon was their attempt to get into offline retail by
taking over Whole Food Market in 2017
13 700
305 675
6
75
0 3 0
300 1 200 755
312
801
0
970 885
0
810
1 672 372 1 200
1998 1999 2001 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Offline Retail Others

40
Apart from that they did a few pretty big M&A in other sectors as well
250 273
885
130
40
250
300
6
75 0 0 0
300
1 200
755
26
580 753
55
0
312
970
102
3
40
90
839
97
775
1 200
1998 1999 2001 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Cloud & Software Services E-commerce & Marketplace Entertainment Financial Services Home Offline Retail Robotics & Logistics
Money spent on M&A by broad category without Offline Retial
In M of USD*

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Let’s look at some of their acquisition done for the e-commerce & marketplace
BookPages.co.uk
Company
Acquired
Year Country Strategic Reasoning
 1998  United Kingdom  Cornerstone for UK expansion, was transformed to Amazon UK
Telebuch.de
 1998  Germany  Cornerstone for Germany expansion, was transformed to
Amazon Germany
Joyo.com
 2004  China  Now Amazon China was back then the start of Amazon’s China
business
Audible
 2004  USA  Made Amazon the largest platform for audiobooks and one of
its largest producers
Zappos
 2009  USA  Gave Amazon a leading position in the USA fashion e-
commerce sector
Quidsi
 2010  USA  Provided Amazon with bigger access to parents as a segment
(baby-products)
Touchco
 2010  USA  Gave Amazon a manufacturer for its Kindle books
Evi
 2012  USA  Produced software that became an essential part of „Alexa”
Souq
 2017  USA  Cornerstone for their expansion into Arab countries
 Access to Arab countries by acquiring the largest e-commerce
platform

42
Let’s have a look at some important M&A done in Robotics & Logistics
Kiva Systems
Company
Acquired
 2012  USA  Provided access to automized logistics and robots for
operational excellence
Kiva Systems
 2012  USA  Provided access to automized logistics and robots for
operational excellence
Zoox
 2020  USA  Self-driving technology that can be used for trucks but also to
get into uber/cab/taxi business

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 2015
Annapurna Labs
NICE
CloudEndure
Elemental
Technologies
Let’s have a look at some examples of M&A done in Cloud Business
Company
Acquired
 Israel  Gave Amazon its own chip-designer
 2016  Italy  Delivers comprehensive Grid & Cloud Solutions for companies
and institutions
 2019  Israel  CloudEndure provides Live Migration and Disaster Recovery
for any application. Helps them expand the cloud services
 2019  Israel  Elemental Technologies is the leading supplier of software-
defined video solutions for multiscreen content delivery. Helps
them expand the cloud services

44
Ring
 2017  USA  Gives Amazon a home automation and home security platform
 In this way they have entered the home sector
Blink Home
Let’s have a look at M&A they have done to create the “Home” business
Company
Acquired
 2018  USA  Expands Amazon’s network for home automation and home
security

45
Twitch
Let’s have a look at some M&A done in Entertainment business
Company
Acquired
 2014  USA  Leading game streaming platform. In this way they have
entered new category and have also secured capacity usage
for AWS.
 2019  Sweden  IGDB is a gaming database. Will help improve Twitch search
and discovery features.
IGDB
 2020  USA  Wondery is a big producer of podcasts. It helps them improve
their offer in the Prime sector (along with Prime Video and
Prime Music). Again, it is an attempt to secure usage for AWS
Wondery

47
Let’s look at how the approach of Disney has changed when
it comes to M&A and what they have actually bought.

48
At the beginning Disney was growing by developing new concepts. Later
on the company focused on acquiring other brands
Walt signed a
contract with M. J.
Winkler to produce
a series of “Alice
Comedies” — the
date used as the
start of the Disney
company first
known as “The
Disney Brothers
Studio”
1923 1928 1940
M&A
Mickey Mouse is
created and Disney
concentrates on
producing own
content
Walt Disney
Productions issues
its first stock.
Walt Disney Music
Company formed.
1949 1954
First airing
of Disneyland
television show.
Opening of first
Disneyland in
Anaheim,
California.
1955 1969
Walt Disney
Educational
Materials Co.
incorporated.
The Disney Channel
begins
broadcasting.
1983 1995
Agreement to
purchase Capital
Cities/ABC for $19
billion
Fox Family Channel
acquired and
renamed for ABC
Family Channel
2001 2006
Disney purchases
Pixar Animation
Studios.
Organic growth
2009
Disney’s acquisition
of Marvel
Entertainment is
completed.
2012 2017
The Walt Disney
Company
announces its
agreement to
purchase Lucasfilm
Ltd.
The Walt Disney
Company acquires
21st Century Fox
for $71.3 billion.
The acquisition
was completed
within in 2019
2019
The end of the deal
for sharing the
content with
Netflix. Strong
entrance into
online streaming
services with
Disney +,
ESPN+

49
Apart from that they did a few pretty big M&A in other sectors as well
75 7 400 4 000 4 000
71 300
400 1 770 450 2 580
19 000
2 900
1 996 1 998 1 999 2 001 2 004 2 006 2 009 2 012 2 014 2 017 2 019
Brands & Content Other Streaming TV channels
Money spent on M&A by broad categories
In M of USD*

51
M&A can also be done by PE funds. In this case you buy a firm,
and you want to sell it in a few years at much higher price.

52
Buy & Grow fast a
successful business
Multiplier Arbitrage
Consolidate the industry
Performance Improvement
Refinancing Turn Around
There are 8 main ways in which PE want can make money from M&A
Asset Striping
Carve Outs /
Deconsolidation

53
For more details and content check my online course where you can find case
studies showing analyses along with detailed calculations in Excel
Business Analysts
$190
$19

55
M&A process
– Introduction

56
M&A is a pretty difficult process. We will discuss in this section how it roughly looks and
what you can do during each and every stage as a management consultant or an analyst.

57
In this section we will discuss the following concepts
How does the M&A
process look like?
What Management
Consultants do during
different stages of M&A

58
How does the M&A process
look like?

59
M&A process consists of 5 main stages
Strategy Definition Target Selection Due Diligence
Negotiation &
Transaction
Value Creation
 Define your
strategy, especially
what business units
you want to have, in
what countries,
where you want to
grow organically
and where you may
consider M&A
 Define core assets,
competences
 Define criteria that
will help you select
optimal targets for
M&A
 Pick the method for
selecting the best
targets
 Define which
countries, areas you
will consider
 Gather required
data
 Use the selected
method to decide
which targets are
interesting and
which are not
 Create a shortlist of
firms that you may
consider for M&A
 From the firms on
the list of potential
targets pick firms
that you will start
analyzing
 Contact potential
sellers and check
whether they would
be interested in
selling
 Decide how you will
conduct due
diligence
 Gather data
 Contract the firms
that will do the due
diligence
 Carry out due
diligence
 Using data from the
due diligence and
your strategy
decide whether you
buy specific
company or not
 Negotiate with the
Seller the prices and
the terms of the
transaction
 Arrange financing
 Sign in the deal and
take over the firm
 Decide what will be
the value creation
projects
 Decide how you will
supervise value
creation
 Implement the
method of
supervision and
make sure that it
works
 If the results are
below expectation
react

60
M&A projects done by
Management Consultants

61
Let’s see what services you can perform on each and evrey stage of M&A
Strategy Definition Target Selection Due Diligence
Negotiation &
Transaction
Value Creation
Strategy Definition
Market Research
Strategic Workshops
Data gathering on
potential targets
Evaluating potential
targets
Ranking potential
targets
Competition
Strategy Analysis
Research of
Advanced Markets
Commercial Due
Diligence
Operational Due
Diligence
Vendor Due
Diligence
Financial Due
Diligence
Legal Due Diligence
PMO
Participation in
Negotiations
Participation in the
Transaction
Value Creation Plan
Post-merger
Integration Plan
PMO
Performance
Improvement
Projects
Turn Around
Interim
Management

62
Selecting Potential Targets

63
Selecting Potential Targets
– Introduction

64
M&A starts with picking the right targets that make sense. In
this section I will show you how you can do that in practice.

65
Generally speaking, there are 3 ways of selecting potential targets
Case by case analysis
Ranking of many
potential targets
M&A vs Green Field

66
In this section we will discuss the following things
What is ranking?
Ranking Case Study –
Expansion into other
countries
Selecting Potential
Targets for a Milk
Producer – Case Study
Selecting Potential
Targets for a Beer
Producer – Case Study

68
Quite often you have options that you want to somehow compare and
rank them
Option 1
Option 3
Option 4
Option 5

69
Thanks to the ranking you not only give points, but you can sort them
from the most wanted to the least desired
Option 5
Option 3
Option 1
Option 4

70
You may use ranking for many things
Pick the best option from
available options
Create priorities for further
actions
Rank people / team members
Rank business ideas
Motivate
Create benchmarks

71
Rankings are done in 5 steps
Create criteria and
weights for the
ranking
Gather data
Calculate the points
and create the
ranking
Pick the preferred
option
 At least 3-4 criteria,
preferably
independent
 Every criteria
should have a
weight – not all
criteria have to
have the same
importance
 For defined options
gather data on the
criteria so you are
able to calculate
the points for every
criteria and option
 Define the rule /
function that
assigns points for
every criteria
 Calculate the score
for every option-
criteria
 Using weights
calculate the total
score
 Use the total score
to rank the options
 You can use
additional criteria
 Using the ranking
and additional
criteria you can
pick the preferred
option
Define options
 You have to define
all options that you
will be choosing
from

72
In the next lectures I will show you how to create and use the rankings
in practice. I will be talking about 2 examples
Milk Producer
Expansion strategy for foreign
markets

73
How to expand the brand –
Introduction?

74
Let’s have a look at milk producer that wants to expand its product
range
Leader in milk
2nd place in butter
25 products considered

75
There are things you should consider when selecting the right products
to be developed within the same brand
Is the product consistent with the
current brand?
Does it require the same
distribution?
Do you have strong players on the
market you enter?
What is the potential of the market?
Are there customers who already
think that you have the product?
What is the growth rate of the
market for the product?

76
How to expand the brand –
Case Solution

77
After we have gone through research we got the following results. This suggest
that we should start with yoghurt and yellow cheese
0
50
100
150
200
250
300
350
0 0,5 1 1,5 2 2,5 3
Market size
In mln USD
Attractiveness
(1-Low;3-High)
Cheddar
Cottage cheese
Yoghurt
Milk Desserts
(i.e. Monte)
Yellow (swiss)
cheese
Ice cream
Feta

78
Expansion strategy into other
countries – Introduction

79
Creating an expansion strategy requires you to do a number
of things
Define criteria and
weights for the
criteria
Gather data on the
markets
Create the ranking
of markets to enter
Define limits that
you have
Set priorities
 4-6 criteria on the
basis of which you
will value specific
markets
 Ranking on the
basis of criteria and
weights created
 Money for
expansion
 People for
expansion
 Logistics
 Lead time due to
your supply chain
 Limitation in stock

80
Expansion strategy into other countries
– Introduction

81
Imagine that you are working for fashion player from Spain that wants
to expand abroad
He currently has 310 stores in Spain
He wants to decide where to
expand now
He takes into account 4 criteria
Estimate potential size and
attractiveness of markets

82
Just as a reminder creating a ranking of countries consist of the following
stages
Define criteria and
weights for the
criteria
Gather data on the
markets
Create the ranking
of markets to enter
Define limits that
you have
Set priorities
 4-6 criteria on the
basis of which you
will value specific
markets
 Ranking on the
basis of criteria and
weights created
 Money for
expansion
 People for
expansion
 Logistics
 Lead time due to
your supply chain
 Limitation in stock

83
In our case we will use 4 criteria and we will estimate the size of markets
using the population and the number of current stores
 GDP per capita PPP
 Similarity in product range
 Competition level
 Share of online sales
Criteria for
measuring the
attractiveness of
the market
Potential of the
market
 Potential was measured using the size of the markets in terms of
potential number of standard stores

84
Expansion strategy into other countries
– Solution

85
Just as a reminder that you are working for fashion player from Spain
that wants to expand abroad
He currently has 310 stores in Spain
He wants to decide where to
expand now
He takes into account 4 criteria
Estimate potential size and
attractiveness of markets

86
6,3
6,3
6,3
6,3
6,3
6,3
6,5
6,5
6,5
6,5
6,5
6,5
6,8
6,8
6,8
6,8
7,0
7,0
7,0
7,5
Greece
Italy
Lithuania
Netherlands
Portugal
Spain
Belarus
Estonia
France
Germany
Latvia
Slovak Republic
Belgium
Denmark
Sweden
Switzerland
Austria
Finland
Ireland
Norway
73
400
20
112
70
310
63
9
438
536
13
36
75
37
64
54
57
36
31
34
Greece
Italy
Lithuania
Netherlands
Portugal
Spain
Belarus
Estonia
France
Germany
Latvia
Slovak Republic
Belgium
Denmark
Sweden
Switzerland
Austria
Finland
Ireland
Norway
Ranking of market attractiveness
(1-low; 10-High)
Potential of countries / regions to capture assuming
achieving share like in Spain
In standard stores
If we look at potential top 20 markets there is quite a lot of room for
expansion

87
Potential
In number of standard stores
0
1 000
2 000
3 000
4 000
5 000
6 000
7 000
8 000
9 000
10 000
0,0 1,0 2,0 3,0 4,0 5,0 6,0 7,0
China
Russia + Asian
ex USRR
Malaysia
Indonesia
North America
South America
Turkey
Western Europe
Attractiveness
(1-Low; 10-High)
India
Eastern Europe
Africa
Let’s look how the potential is distributed between regions

88
Milk Producer – Selecting Targets –
Case Introduction

89
We will try to help a milk producer that wants to grow via M&A select potential
targets. Since he is considering 100 potential targets, we will have to create a ranking.

90
The firm considers 100 potential
targets
The markets are divided into 10
regions
The firm wants to consider 4
criteria
A few information about the firm
Try to rank all the potential targets

91
Beer Producer – Selecting Targets
– Case Introduction

92
We will try to help a beer producer that considers growing via M&A select
potential targets and decide whether M&A is a better option than organic growth.

93
They consider entering 5 markets
In every country there are 2 breweries
they consider buying
On top of that they consider for all
market's greenfield investments
A few information about the firm
Pick the best option for every market

94
Business Analysts
$190
$19

95
Modelling the Business in Excel

96
Modelling the Business in Excel
– Introduction

97
During M&A projects you will quite often have to create a model of the
business in Excel. I will show you how to do that using a few examples.

98
# transactions
Average
revenue per
transaction
Total revenue
x
% Fee of the
marketplace
Average
transaction value
Total searches % conversion
x
x
Total Costs
Total margin
-
Rent
People
Cost of traffic
Ratio of visitors
to searches
Average cost of 1
visit
+
x
Development
Modelling in Excel requires first to identify the business model and the
drivers

99
SaaS
E-commerce
Media site
2-sided market
User Generated Content
Mobile Applications
Retail
B2C Service
B2B Service
FMCG
SMCG
Commodity
There are 6 offline and 6 online business models that we can consider

100
In this section we will discuss the following business models
Hotel
FMCG Retail

101
Excel model
For the 3 business models we will discuss 2 things
Main drivers

103
Introduction to FMCG
Business Model

104
We can be talking about 2 different models here
Branded FMCG with strong brand
awareness
Private labels
Private
label

106
Brand Awareness
Reach (Weighted and
numeric distribution)
Your strategy across
many channels
Managing price across
channels
Leveraging the brand
Spreading beyond
original target group
Product lifecycle
Managing customer
experience across
channels
Efficiency of marketing
activities
Lifecycle of your target
groups
Seasonality
For branded FMCG product I propose to have a look at the following
aspects

107
Introduction to modeling
FMCG in Excel

108
In the modeling phase I will concentrate on branded FMCG products.
The model will be created for cosmetics
Branded FMCG with strong brand
awareness
Private labels
Private
label

109
# transactions
Average
revenue per
transaction
Total revenue
x
% Fee of the
marketplace
Average
transaction value
Total searches % conversion
x
x
Total Costs
Total margin
-
Rent
People
Cost of traffic
Ratio of visitors
to searches
Average cost of 1
visit
+
x
Development
In the next lecture I will show you the main drivers of the FMCG model
and on the basis of this we will create a business model in Excel

111
The FMCG business model is driven by some basic KPIs
# sold
Unit production
cost
Gross Margin Head office
Operational profit
Fixed Cost /
Quantity produced
Unit variable cost
+
Cost of sales &
marketing
Net Margin
-
-
Average price
Unit Gross Margin
-
x
Market share Market size

112
FMCG business model –
modeling in Excel

113
Let’s go through basic assumptions of the model
FMCG product Marketing
Sales Channels
 Cosmetics – 1 product
 1 production site
 Traditional small stores
 Retail chain
 TV ads
 Market research
 Social Media
 Mailing
 Loyalty program
 Outdoor campaigns

115
Introduction to retailer business
model

116
Retail sounds very simple. You have to get the right stock in front of the
right customers at the right moment

117
Yet there are some issues that simply make it difficult in execution
You have many
segments of
customers
Their come with
different missions
Product Range is
huge
Demand is very
erratic / seasonal
Your supply chain is
very complex

118
Let’s have a look at the example of a home improvement /DIY store
You have many
segments of
customers
Their come with
different missions
Product Range is
huge
Demand is very
erratic / seasonal
very complex
 Regular people
that do renovation
infrequently
 Fans of renovation
you are constantly
doing something
 B2B customers
 Building new
house
 Preparing the
apartment to
move in
 Renovation
 Small
improvements
 Small refill
purchases
 60 K SKUs regular
 15 K SKUs seasonal
 Peaks in the Spring
and summer
 Low season in
winter
 You have local
suppliers of heavy
things (i.e. bricks),
 National suppliers
 Foreign regional
suppliers (i.e.
European)
 Asian suppliers
(especially China)

119
Let’s have a look at another example of a kids’ ware retail chain
You have many
segments of
customers
Their come with
different missions
Product Range is
huge
Demand is very
erratic / seasonal
very complex
 Parents
 Non-parents
 Pre-born purchase
 Regular purchases
 Gifting
 Education and
Development
 40 K SKUs regular
 10 K SKUs seasonal
 Short life of SKUs –
Toys last in most
cases up to 1 year;
Fashion – 6
months
 Peaks in the
Christmas and
around special
gifting days
 Low season in
Summer and after
Christmas
 Regional brand
suppliers
 Asian suppliers
(especially China,
India,
Bandgladesh)

121
Let’s have a look at the main challenges in Retail
Margin Management
Stock / Inventory
Management
Multichannel Strategy
Managing price across
channels
Expansion to new
markets
Saturation of existing
markets
New product
development
Managing customer
experience across
channels
Format evolution
(possible death)
People rotation and
knowledge management
Disruption esp. from
external forces /
business models
Automation

122
Business model of Retailer in
Excel

123
The retail business model is driven by some basic KPIs
# Transactions
Average Value
Transaction
Total store revenue Total store costs
x
Store EBITDA
Average Value
Transaction of basic
purchase
Average Value
Transaction of
additional purchase
# of Visitors % Conversion
Rent
People
# of People
Average wages
+
x
x
Others
+
# of sq. m
Fee per sq. m x
% Gross Margin
Gross Margin generated
by the store
x -

124
Introduction to e-commerce

125
In e-commerce you will have 3 types of players depending on their
presence in off-line and their approach to both channels
E-commerce
Pure players
Off-line players with
separate on-line presence
Multichannel /Omni
players

126
Customer behaviors has huge impact on the business model and on
what the e-commerce should concentrate on
 Less than 40% of the buyers will buy this year
 Focus is on customer acquisition
 Loyalty program are not good investment
 70% of e-commerce businesses are in this model
Acquisition
mode
Description of the business model Examples
 E-commerce selling only 1 type of Slow-Moving Consumer
Goods (SMCG) bought infrequently i.e. vacuum cleaner,
scuba diving, furniture
 E-commerce for 1-time in the life event: strollers,
 40%-60% of the buyers will buy this year
 You have a nice mix of new and returning customers
 Focus is on customer acquisition as well increasing the value of the
customer (increased frequency and increased purchase per visit)
Hybrid mode
 E-commerce that sells SMCG with relatively big frequency
of purchase(1.0-2.5 times a year ) i.e. shoes (Zappos)
 More than 60% of the buyers will buy this year
 Focus is on increasing the value of the customer (increased
frequency and increased purchase per visit)
 10% of businesses are in this model
Loyalty mode
 Very strong brands with high frequency of purchase (i.e.
Zara, Amazon)
 Marketplaces i.e. Udemy, Uber
Source: Lean Analytics: Use Data to Build a Better Startup Faster; A. Croll, B. Yoskovitz

127
Just to remind you some examples of well-known e-commerce
businesses
Products sold On-line / Off-line situation
 Virtually everything esp.
books, toys, fashion
Mode
 Pure on-line player  Loyalty mode
 Fashion  Multichannel player  Loyalty mode
 Tickets for events  Pure on-line player  Acquisition mode
 Groceries  Multichannel player  Hybrid mode
 Razors and cosmetics
for men
 Pure on-line player  Loyalty mode
 Fashion  Pure on-line player  Hybrid mode

128
VISIT
PAID DIRECT SEARCH
To understand the logic of e-commerce business model have a look at the
visualization of how it works
RECO ENGINE
NAVIGATION
BOUNCED
NOT INTERESTED
ABANDONED
UNSATISFIED
ONE-TIME BUYER UNSOCIAL BUYER
CALL TO ACTION
OPEN RATE
SEARCH
CART
ADDITIONS
CONVERSION
LOGISTICS, DELAYS
VIRAL
RETURNING
CAC PageRank
Bounce rate
Sharing rate
Abandonment, conversion
rates
Ratings, delivery issues
Signups
Mail/RSS/Twitter
Returning rate
Customer Lifetime Value Transaction size
Emphasis on repurchase rate,
frequency, click-through rate,
lifetime value
Emphasis on
maximizing cart
value, minimizing
acquisition costs
DELIVERY
SHARING
ENROLLMENT
Source: Lean Analytics: Use Data to Build a Better Startup Faster; A. Croll, B. Yoskovitz

129
There are some KPIs for e-commerce model that you have to follow…
 Percentage of visitors that buy products
 Should be calculated by sources of traffic
 Use funnel analysis to get to the stage / factor that kills your
conversion rate
Conversion rates
Definition Why it is important?
 Shows you whether you have good selection of products,
how good is the customer experience, pricing.
 Average value of purchases done by a single customer during a
single transaction
 Should be calculated by groups of customers
Average
shopping cart
size / Average
transaction
value (ATV)
 Shows you how much a customer spends during one visit to
your site
 Look also at the number of items in the basket
 Compare the average transaction to the average which
should be if you were doing proper cross selling and sales of
complementary products
 % of people who abandon their basket – stop the purchase
although they had intent
Abandonment
rate
 Tells you that there is some sort of friction at the very end
of the process – customers despite the intent does not buy
 High abandonment rate can be caused by: too complicated
procedure of buying, hidden costs that are shown at last
moment, shipping costs, limited payment methods (you do
not have some method very popular in a given country) etc.

130
There are some KPIs for e-commerce model that you have to follow…
 Total margin generated by customer from start to end of his
relationship with you
 LTV=Average transaction*% Gross Margin* Number of transaction
during the relation with the customer
 Analyze it by cohorts / segments
Life-Time Value
of the Customer
(LTV)
 Shows you how much your customer is worth from cradle
to grave
 Helps you take decisions on acquisition techniques
 % of traffic generated by your efforts to create brand, understand
and connect with the customer (incl. loyalty program), SEO,
affiliate programs
 Measure it by methods / sources of traffic
% traffic
generated by
non-ad methods
 Tells you how much traffic you are able to create regardless
of advertisements
 Average cost of acquiring a customer
 Should be calculated by methods of acquisition
Customer
Acquisition Cost
(CAC)
 Tells you how much you have to spend to acquire a new
customer
 Helps you estimate your CF burned with scaling of the
business
 Helps you optimize acquisition methods and select the right
source of traffic
 Number of purchases done by unique customer per year with you
 Compare it to the average ideal number of purchases
Number of
purchases per
visitors per year
 Helps you understand how important you are to the
customer; how much do you weight in his basket of
purchases of this category
 Helps you estimate the potential to grow with your current
customers

131
There are some operational KPIs for e-commerce model that you have to
follow…
 % of goods return by customers due to not matching their
expectation
 Extremely important for pure players
Return rate
 Shows you how many customers where not pleased with
the products and what is the operational burden of the
customer promise not met
 Average additional sales generated for multichannel players by
customers who ordered on-line but pick up the product at the
store
 Extremely important for multichannel players
Average
additional sales
for click and
collet
 Multichannel player to stay competitive should generate
additional sales during the visit of customer picking up the
goods at the store.
 Small value shows future problems in competing with pure
players
 % of click and collect orders in orders generated on the web
 Extremely important for multichannel players
% click and
collect orders
 Shows you how willing the customers are to visit your off-
line shop to collect the product and thus to experience the
brand promise represented by the shop
 Small value shows future problems in competing with pure
players

132
Have a look at the typical values of KPIs for the e-commerce
 Most sites will have 2-3%
 For some very niche sales
this should be much higher
(>15-20%)
Conversion
rates
Values which are ok Best practice values
 For sites with strong blog you should exclude the traffic for
the blog to get the right picture
Average
transaction
Abandonment
rate
Return rate
Comments
 General sites – 10-15%
(Amazon, Tickets.com, eBay)
 Niche sites – up to 40 %
 Depends very `much on
industry
 In multichannel you should
see 50% bigger ATV for on-
line than for off-line
 Look at ways in which you can improve it: cross-selling,
complementary sales, playing with shipping costs (with
lower or subsidize above some threshold people ten to buy
more), up-selling,
 In multichannel you should
see up to 400% bigger ATV
for on-line than for off-line
 < 50%  Analyze it by reasons of abandonment and solve them as
soon as possible
 10-25%
 10-25%  Depends heavily on the industry – the more customizable,
dependent on customer features product is the higher the
return rate will be
 2-5%

133
You should test and find optimal solution for the following key topics in e-
commerce
 Due to easiness with which you can establish the e-commerce
business it becomes vital to be able to attract cheaply / for free
loads of traffic
 This includes SEO, loyalty, content marketing and others
Getting a lot of
cheap traffic
Description Goal
 More important is to find ways to get free search, entries
from newsletters and social media than direct entry to the
webpage
 Pricing is very complicated in the e-commerce due to existence of
aggregators and sites comparing offers.
 You have to be on comparable products competitive and earn on
the non-comparables and long tail items, obscuring comparables,
bundles
 In a multichannel environment you may have different prices for
the same product bought on-line an off-line
Pricing
 You are looking for such pricing policy that optimizes total
margin generated
 You have to gather as much information on your customers and
create automated actions build into your website as well as your
other assets (i.e. email list, blog, YouTube channel)
Understanding
your customer
and automate
marketing
 Increase conversion,
 Increase AVT
 Get more free traffic
 Increase purchasing frequency

134
You should test and find optimal solution for the following key topics in
e-commerce
 Although it is easier than in physical store to keep wide range of
products you will be not able to satisfy customer needs only on
the basis of your own stock
 You have to integrate yourself with other suppliers to get access to
wide range of stock
Managing the
long tail
Description Goal
 Depending on your concept and brand you have to decide
what is your target in terms of long tail products availability
and how you meet it (own stock or 3rd parties)
 Maximize gross margin
 Minimize stock-outs
 Your site – the way it is designed, its features may have big impact
on how you convert traffic into customers therefore you have to
optimize it through series of A/B testing
 This also includes following the trends in the way customers
purchase (i.e. the mobile trend)
Continuous
optimization of
your site
 Increase conversion,
 Increase AVT
 Get more free traffic
 Increase purchasing frequency

135
Business model of
e-commerce in Excel

136
Before we go to Excel let’s talk about the logic we used to build the
e-commerce Excel model
 Conversion rate
Visits
# of
transactions
Revenues
Gross Margin
Net Margin
Operating Profit
 ATV
 Cost of traffic
 Cost of logistics
 Transaction fees
 Fixed Costs
 % Gross
Margin

137
The e-commerce business model is driven by some basic KPIs
# Transactions
Average Value
Transaction
Total revenues
Selling, General &
Administrative costs
x
EBITDA from e-
commerce
Average Value
Transaction of basic
purchase
Average Value
Transaction of
additional purchase
# of Visit % Conversion
Cost of Acquiring Traffic
Logistics costs
# of delivered parcels
Cost per 1 parcels
+
x
x
Others
+
# of paid visits
Cost per 1000 visits x
% Gross Margin
Gross Margin generated
by e-commerce
x -
People in the Head -
office & Development

138
Main drivers for a hotel business
model

139
Let’s first look at Margin after Variable Costs
# of nights sold
Average Daily Rate
(ADR) Average Revenue
per hotel
x
Average price per 1
night
Additional revenue
per 1 night
# of available
nights
% Occupancy rate
Cost of Breakfast
Booking &
Transaction Fees
Cost of breakfast per 1
night sold
+
x
Cost of Cleaning
the Rooms
Cost of cleaning per 1
night sold
Variable Costs
Margin After Variable
Costs per Hotel
x
# of nights sold
x
x
Average fee as % of
revenue
x
+

140
Now let’s have a look at fixed costs and their drivers
Fixed costs related to
space
Labor Costs / People
# of People
Average wages
# of sq. m
Fee per sq. m
x
x
Other Fixed Costs
Fixed Costs of the Hotel
without Depreciation
+

141
Now let’s have a look at the EBITDA
Fixed Costs of the Hotel
without Depreciation
Margin After Variable
Costs per Hotel
Average EBITDA per
hotel
-

142
Now let’s model the whole chain
EBITDA on Hotel
level
Rent
People
# of People
Average wages
x
Others
+
# of sq. m
Fee per sq. m x
Head Office Costs
Total EBITDA
-
# of hotels
Average EBITDA per
hotel
x

143
Hotel Model in Excel –
Case Introduction

144
Paul has some capital from selling his SaaS startup. Now he wants to invest some of his
money into a chain of hotels. Help him estimate how much money he has to invest.

145
Let’s have a look at the general information we have
He considers building 1 hotel every
year
An average hotel will have 70 rooms
He plans to build 1 hotel every year
for 12 years
He wants to mainly use loans to
finance the investments

146
Business Analysts
$190
$19

147
Check my playlist on Financial modeling available on YouTube
Click here to check my playlist

149
Valuation Case study–
Introduction

150
Introduction to
Valuation
Introduction to DCF
methods
Difference between FCFF
and FCFE
Introduction to using
multipliers for valuation
Case study

151
We are going back to our example of ceramic tiles producer and we will
see what kind of methods we can use to estimate its valuation.

152
They have 4 groups of products
We have DCF models
Use DCF and multiplier method to
estimate their value
Just as a reminder a few information about the firm

154
You can try to estimate the value of 2 different categories
Enterprise Value
Equity Value Net Debt Value

155
For valuations you can use 2 groups of valuations methods
DCF methods
 DCF of Free Cash Flows to
Firm (FCFF)
 DCF of Free Cash Flows to
Equity (FCFE)
Multiplier methods
 EV/EBIT
 EV/EBITDA
 P/E ratio

156
Introduction to
DCF methods

157
In DCF model you use forecast of cash flows to estimate the value of the
company
Step 1 – Calculate the cash
flows
2018 2019 2020 2021 2022
𝐶𝐹2018 𝐶𝐹2019 𝐶𝐹2020 𝐶𝐹2021 𝐶𝐹2022
t+1
𝐶𝐹𝑡+1
𝐶𝐹2018
(1 + 𝑟)
𝐶𝐹2019
(1 + 𝑟)2
𝐶𝐹2020
(1 + 𝑟)3
𝐶𝐹2021
(1 + 𝑟)4
𝐶𝐹2022
(1 + 𝑟)5
𝐶𝐹𝑡+1
(1 + 𝑟)𝑡+1
𝒊=𝟏
𝒕
𝑪𝑭𝒊
(𝟏 + 𝒓)𝒊
Step 2 – Calculate the
present value of CF
Valuation
𝑻𝒆𝒓𝒎𝒊𝒏𝒂𝒍 𝑽𝒂𝒍𝒖𝒆
(𝟏 + 𝒓)𝒕+𝟏
Valuation
+
𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 =
𝐶𝐹𝑡+1
(𝑟 − 𝑔)
Valuation
Step 3 – Calculate
Terminal (Continuing)
Value
𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 = 𝐸𝐵𝐼𝑇𝐷𝐴 𝑥 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟

158
In the next lecture we will use 2 different methods for DCF valuation
Free Cash Flows to Firm
(FCFF)
Free Cash Flows to Equity
(FCFE)
Cash flow before financial
activities

159
Difference between
FCFF and FCFE

160
In the next lecture we will use 2 different methods for DCF valuation
Free Cash Flows to Equity
(FCFE)
 DCF Cash Flow before
financial activities
 As a discounting rate we use
Weighted Average Cost of
Capital (WACC)
 The Terminal Value is
calculated using 3% growth
rate assumed after the
period of forecast
 DCF Free Cash Flows to
Equity
 As a discounting rate we use
cost of equity
 The Terminal Value is
calculated using 3% growth
rate assumed after the
period of forecast
Free Cash Flows to Firm
(FCFF)

161
FCFF and FCFE evaluate different things
Enterprise Value
Net Equity Value Net Debt Value
 Cash flow before financial activities / Free Cash
Flows to Equity (FCFF) estimates the Enterprise
Value
 Afterwards using the Net Debt Value you can
estimate Equity
 Free Cash Flows to Equity (FCFF) estimates
Equity Value

162
Introduction to using
multipliers for valuation

163
For simplicity often valuation is calculated using multipliers. Multipliers also
help you check the valuation from DCF which is subject to many assumptions
EV/EBIT EV/EBITDA P/E ratio

164
Using the Multiplier method of valuation is relatively easy
Find comparable
companies
Estimate the
multipliers for the
comparable.
Eliminate outliers
Estimate the EBIT,
EBITDA and net profit
for the company and
adjust them
Apply the multiplier Estimate Equity Value

165
The methods we discussed estimate different values
Enterprise Value
 Using EV/EBITDA multiplier and EV/EBIT you can
estimate the Enterprise Value
 Using P/E ratio you can estimate Equity Value

166
Below how we can use the EV/EBIT multiplier to estimate the Equity
Value in 2 steps
EV/EBIT
multiplier
x =
EBIT of the
company
Enterprise Value of
the company
Enterprise Value of
the company
- =
Debt of the
company
Equity Value of the
company

167
Using P/E ratio is even easier
P/E ratio x =
Net profit of the
company
Equity Value of the
company

168
Business Analysts
$190
$19

169
Estimating Potential Impact

170
Estimating Potential Impact –
Introduction

171
In many cases you have to estimate what would be the impact of acquiring potential
targets. In this section we will have a look at case studies related to that issue.

172
What impact you can
expect from M&A
M&A in Plywood – case
study
Multiplier Arbitrage –
General Approach
Vertical consolidation in
fitness industry – case
study
Increasing Cash
Generation – General
Approach
Reduce Cash Gap after
M&A in Services – case
study
Debt Restructuring in
Retail after M&A – case
study

173
What impact you can expect
from M&A

174
For every M&A you can define in a different way the potential impact.
Below what impact the M&A can have on the buying firm
Cheaper option than organic growth /
greenfield investment
Potential cost savings (synergies,
economies of scale, HO reduction)
Increased ability to increase prices –
more monopoly power
Increased ability to get lower prices
from suppliers
Enter markets with limited access
Multiplier Arbitrage
Lock-in the customer
Generate Cash from the M&A

175
Expand via M&A –
Plywood – Introduction

176
Let’s have a look at plywood producer that has 2 factories and is
considering taken over another one
2 plants
Considers taking over a
plant in Lithuania
Try to estimate the
possible benefits

177
Expand via M&A –
Plywood – Solution

178
Let’s have a look at plywood producer that has 2 factories and is
considering taken over another one
2 plants
Considers taking over a
plant in Lithuania
Try to estimate the possible
benefits

179
There are plenty of potential benefits that you can expect from this
particular M&A
Reducing Head Quarters costs
Savings on Capex
Less competition on price Cross-selling among customer baes
Lower Purchasing price on wood
Exchange of best practices

180
From the analysis of benefits we can see that we can gain up to $17 M
from acquiring the Lithuanian factory
2 100
3 500
3 720
2 739
576
4 280
16 915
Reducing Head
Quarters costs
Savings on Capex Less competition on
price
Lower Purchasing
price on wood
Exchange of best
practices
Cross-selling among
customer baes
Total benefit from
M&A
Annual additional benefits from M&A
In million of USD

181
Multiplier Arbitrage –
Introduction

182
Just as a reminder one of the ways to value a firm is to use the so-called
multiplier method
EBITDA Multiplier = Enterprise Value
x
40 5 = 200
x

183
Due to many reasons sometimes the same firm with the same EBITDA
may get a different multiplier
x
40 10 = 400
x
40 5 = 200
x

184
Your aim as an investor is to buy something at a low multiplier and sell
it at a higher multiplier
x
40 5 = 200
x
40 10 = 400
x

185
The difference in the multipliers comes from the following things
Firms on unconsolidated markets have
usually lower multipliers
Firms on private markets have usually
lower multipliers
Lack of professional buyers lowers
multipliers
Lower multipliers exists on markets
not well understood
Lower multipliers exists on markets
perceived as risky
Higher multipliers are product of
proper positioning (i.e. big data)
Certain owners are in a hurry to sell
the firm (age, lover, fear)

186
In the next lectures we will have a look at a case study
Vertical consolidation via
M&A – fitness card operator

187
Increasing Cash Generation –
General Approach

188
Enterprise Value
How much the company is worth for shareholders is the difference
between Enterprise Value and Debt

189
Enterprise Value
You can increase the Equity Value by increasing the Enterprise Value
Enterprise Value

190
Enterprise Value
….or you can try to reduce the Net Debt. This will require increasing
cash generation
Enterprise Value
Enterprise Value

191
There are number of things you can do to increase the value of the firm by
increasing its ability to generate cash and reducing the debt
How to generate more
cash
Reduce
Inventory
Reduce
Receivables
Improve
Payables
Restructure
Debt
Improve
Margins &
Revenues
Revise
Investment
Cut Costs &
Improve
Efficiency
Strategic
Moves

192
In the next lectures we will have a look at 2 case studies
Reduce Cash Gap – Service
Company
Restructure Debt – Retailer

193
Reduce Cash Gap – Case
Introduction

194
Imagine that you have bought a firm providing Data Science services. You will mainly use
a Debt put on the purchased firm but there is still Cash Gap you have to take care of

195
A few information about the firm that we will be analyzing
The company has 500 Data Scientists
80% of their time are billable hours
Customers pay on average EUR 48 K
fee per Data Scientis
Consider 8 scenarios

196
Let’s have a look at the scenarios
Scenario 1 – Small reduction
of the Receivables Conversion
Period
 We reduce Receivables Conversion Period (Days Sales Outstanding) from
90 days to 60 starting from Year 2
 No impact on sales growth in the forecast period
Description of the scenario
Scenario 2 – Big reduction of
the Receivables conversion
 We reduce Receivables Conversion Period (Days Sales Outstanding) from
90 days to 30 starting from Year 2
 Growth rate will go down from 20% to 15%
Scenario 3 – Factoring
 You use factoring to reduce Receivables Conversion Period (Days Sales
Outstanding) from 90 days to 10 starting from Year 1
 Annual rate used for factoring is 5%
Scenario 4 – Additional Credit
Line
 You take in Year 1 additional credit line of EUR 1 500 K
 This line you keep throughout the forecast period and you pay the same
interest rate as on the debt you used for the purchase of the firm

197
Scenario 5 – Medium increase
of Payables
 We increase Payables Conversion Period from 10 days to 30 starting from
Year 2
 No impact on margins
Scenario 6 – Big increase of
Payables
 We increase Payables Conversion Period from 10 days to 60 starting from
Year 2
 EBIT margins moves from 20% to 19% in Year 2
Scenario 7 – Small increase of
prices
 We increase the price per 1 Data Scientist from EUR 48 K to EUR 50 K per
year
 We assume that this will not have impact on growth rate
 EBIT margin will increase from 20% to 24%
Scenario 8 – Big increase of
prices
 We increase the price per 1 Data Scientist from EUR 48 K to EUR 52 K per
year
 The revenue growth rate will go down from 20% to 5%
 EBIT margin will increase from 20% to 28%

198
Restructure Debt– Case
Introduction

199
Imagine that you are working for PE fund that has just bought a low-cost fashion Retailer.
You have to estimate the impact of debt restructuring efforts they are considering

200
A few information about the firm that we will be analyzing
The company has 200 stores and adds
50 new every year
The PE bought them using only high
yield debt (12% interest rate)
They consider 4 scenarios to
restructure Debt
Analyze and propose the optimal
solution

201
Scenario 1 – Refinancing using
debt with lower interest rate
 In the Year 2 you refinance the purchase with cheaper debt. The interest
rate goes down from 12% to 7%
 You don’t reduce debt
Scenario 2 – Increasing Equity
and repaying part of the Debt
 In the Year 2 you put in EUR 100 M and repay part of the Debt
Scenario 3 – Increasing Equity,
repaying Debt &
renegotiating
 In the Year 2 you put in EUR 100 M and repay part of the Debt
 You renegotiate the interest rate as you have improved the balance
sheet of the firm. You expect to be able to get interest rate of around 5%
Scenario 4 – Low Growth
Scenario
 Since you have a lot of debt you have decided to lower the growth from
50 stores to 25 stores a year

202
Business Analysts
$190
$19

205
The aim of the Due Diligence is to answer 2 questions
Does the company the Investor wants to buy have a winning business model or a
constant way to look for it?
How much is worth the business?

206
To answer those 2 questions you will produce the following products
during a Commercial Due Diligence
Overview of the Business
Model, Market, Competition
and Trends
Financial Model that shows /
forecasts the value of the
business

207
To produce those 2 products you have to gather and digest
huge amount of data
Internal data from the Target Company the
Investor wants to buy
Data set
Competitors data
Data and information from Experts
Independently gathered data
Overview of the Business
Model, Market, Competition
and Trends
Financial Model that shows /
forecasts the value of the
business

208
Components of a Due
Diligence

209
Commercial Due
Diligence
Financial Due
Diligence
Legal Due Diligence
Due Diligence consists of 3 parts

210
Here I will concentrate on the Commercial Due Diligence
Commercial Due
Diligence
Financial Due
Diligence
Legal Due Diligence

211
Steps needed to deliver a great
Commercial Due Diligence

212
I will show you how to create high quality Commercial Due Diligence
fast in 6 simple steps
Financial Model
Template
Presentation template Data prepared by the Target Company
Filling in Templates Discussing the results
Independent Data
Gathering

213
The last step will be iterative
Present
the
documents
Discuss
Get
feedback
Check data
against
feedback
Modify the
documents

214
How long does the Commercial
Due Diligence take?

215
Just as a reminder we have 6 steps to finish the Commercial Due
Diligence
Financial Model
Template
Presentation template Data prepared by the Target Company
Filling in Templates Discussing the results
Independent Data
Gathering

216
A lot of things have to be done ahead of time to guarantee smooth
execution of the project
 Prepare Financial Model Template
Task 0
-4 -3 -2 -1 1 2
 Prepare Presentation Template
 Send data request to Target Company
and the Investor
 Gather independently data
 Fill in the templates
 Discuss the results
3 4 5 6 8
7

217
Questions you want to answer during a
Commercial Due Diligence?

218
The aim of the Due Diligence is to answer the following questions
Does the Target Company have a winning business model or a constant
competence to look for it?
How much can it grow in size and in profit?
What is the true competitive advantage of the business?
What happens on more mature markets?
How much is the business worth?
What could kill the business?

219
Independent Data Gathering –
General remarks and rough estimation

220
Introduction

221
It will take Target Company some time to gather data so start also gathering
independently the data you may need
Financial Model
Template
Presentation template Data prepared
by the Target Company
Independent Data
Gathering

222
This step as you can see should be executed roughly 4 weeks before the start of
the project, but it will take you 4-8 weeks to get everything you need
Task 0
-4 -3 -2 -1 1 2
and the Investor
3 4 5 6 8
7

223
Market size
estimation and
General Data
Analyzing
competition
General remarks
and rough
estimation
Independent data gathering consists of 5 streams we will discuss in 5
separate sections
Analyzing trends
Consumer /
Marketing research

224
In this one I will concentrate on general remarks and rough estimation. That
you should do the very first week. Luckily it does not require much data
Market size
estimation and
General Data
Analyzing
competition
General remarks
and rough
estimation
Analyzing trends
Consumer /
Marketing research

225
In this section I will discuss the following tools
The value of rough
estimations
Bottom-up approach Top-down approach
Backward Reasoning

226
The value of rough estimations

227
Rough estimation is extremely valuable
You get fast some point of
reference
You can use it to cross check
other results
You don’t need much data for
rough estimation
Everybody can understand it
Helps you prioritize you work
during the project
Speeds up the learning process

228
Market size estimation and General Data

229
Market size estimation –
Introduction

230
Just as a reminder we are now on the 4th step – Independent Data Gathering
Financial Model
Template
Presentation template Data prepared
by the Target Company
Independent Data
Gathering

231
Task 0
-4 -3 -2 -1 1 2
and the Investor
3 4 5 6 8
7

232
Independent data gathering consists of 5 streams
Market size
estimation and
General Data
Analyzing
competition
General remarks
and rough
estimation
Analyzing trends
Consumer /
Marketing research

233
In this section we will discuss market size estimation and General Data
Market size
estimation and
General Data
Analyzing
competition
General remarks
and rough
estimation
Analyzing trends
Consumer /
Marketing research

234
Where you can find info that will enable
you to estimate the market size

235
World Bank
Keyword Planner by
Google
Ubersuggest Public data by Google
Euromonitor
Markets for mobile
applications
Statista
Trendy Economy – public
data
Trading Economics
Store Checks and
financial reports from
competitors
Bottom up approach
using general data (i.e.
population)

236
World Bank Open Data –
General remarks

237
World Bank keeps data on many subjects
Macro Data on the Economy
Quality of Life
Population
Stats related to Government
Environment
Link to the world
Stats related to technology
Negative keyword

239
Euromonitor apart from ready made reports offers access to database for micro
markets, specific industries (Passport) where you can dig out a lot of useful
data
Size of specific markets
Share of main players
Quantity sold
Average prices
Trend analysis
Dashboards / Maps of
consumption analysis
Macro data and analysis
Ready made reports

241
You can learn a lot by having a look at the searches fed into the google
 You can see for what people were searching and how many
searches there were
 Size of the market (in terms of people interested or rough
number of transaction) can be estimated on the basis of it
Size of the
market
Description Tips
 Key word planner gives you estimate how much you would
have to pay per click for a given keyword
 If you know how much paid traffic you want to attract you
can estimate the needed budget for google AdWords (ads
showing when people search)
Potential money
you would have
to spend on
marketing
 Use many different phrases
 Look what keywords pop-up
 Look how many clicks there were per keyword
 Look at the price per click but also look for the
number of searches performed. Ideally you would
want to have a lot of searches at lowest possible cost
 AdWords gives some estimation on the level of
competition
 Sometimes it is not that optimal (for conversion
purposes) to go for Page 1 in searches. Those willing
to go beyond Page 1 are more likely to convert
 Always when thinking about the marketing budget
have in mind how much you benefit from a customer.
CAC should be much lower than LTV

242
…here you have an example of key words for t-shirts in USA

244
Ubersuggest can estimate for you a lot of things and has additional nice
features
Volume of searches
Competition Level
CPC
Organic vs Paid
Can be limited to i.e. Images,
YouTube, Shopping, News
Can be limited to specific
language
You have filters
Negative keyword

246
Which
markets you
should have a
look at
 How many users have the applications
 How the application is perceived by customers
 What is working well and what is not in the application
 Is it still used to the same extent
What you can
learn from the
markets
 Nr of downloads
 Average rating
 Nr of comments (positive and negative –
calculated separately)
 Dates of comments – if you have a lot of
comments and the beginning and afterwards
nothing it may mean it is not used to such extent
anymore
Markets KPI
 Apps on the market:
 Amazon App Store: 330 K
 Google Play: 1 500 K
 Windows Phone Store: 300 K
 App Store (Apple): 1 400 K
..if you are into mobile applications or B2C markets you should have a look
at mobile application markets

247
Analyzing competition

248
Analyzing Competition –
Introduction

249
Just as a reminder we are now on the 4th step – Independent Data
Gathering
Financial Model
Template
Presentation template Data prepared by the Target Company Independent Data
Gathering

250
the project but it will take you 4-8 weeks to get everything you need
Task 0
-4 -3 -2 -1 1 2
and the Investor
3 4 5 6 8
7

251
Market size
estimation and
General Data
Analyzing
competition
General remarks
and rough
estimation
Analyzing trends
Consumer /
Marketing research

252
In this section we will discuss Analyzing Competition
Market size
estimation and
General Data
Analyzing
competition
General remarks
and rough
estimation
Analyzing trends
Consumer /
Marketing research

253
Gathering official data
Where you can find
financial data on the
companies
How to figure out the
strategy of other
companies?
Store checks
SlideShare and YouTube
Facebook Audience
Insight
SimilarWeb
Mystery shopping

254
Gathering official data –
Introduction

255
If the company is quoted on some stock exchange most likely it will
report a lot of interesting data
Quarterly and annual reports
Additional presentations
Strategy Documents
Shareholder structure
Additional Operational Data
esp. in Excel
Conference materials / Earning
Results coverage
Open Dashboard
Other news, warnings

256
Where you can find financial data
on the companies

257
There are plenty of places where you can look for financial data of the
firms you are interested in
Investor Relations EMIS Yahoo Finance
Bloomberg
Local Aggregators of
data from stock quoted
firms
Local Agencies
Crunchbase
Financial Times
Local Agencies using
publicly available data
Courts

258
How to figure out the strategy of
other companies?

259
It is worth understanding the strategy of competitors. For this you need
to dig a little bit deeper
Official Strategy
Investor Relations –
Annual Reports &
Financial Statements
M&A and asset selling
Interviews with CEO /
CFO / COO / VPs
Market changes on more
developed markets
Track record in other
countries

260
Store checks in Retail –
Examples

261
5 10 15 5 35
Number of SKU
Location:
Number of salesmen:
Competition: Saturn, Karen Notebook, iSpot
Size:
Number of SKU
Presented products
Structure of the exposition (%)
=100
PC Laptop Printers Phones Monitors Photos Others
0
1
2
3
4
5
Knowledge of
the product
offer
Sales skills
How active
salesmen are
Behavior
Usage of marketing
materials
Level of service
• Salesman was able to respond to the request placed by the customer and it seemed that he had deep knowledge of the
products
• Salesman did not try to figure out what price level I was interested in. Surprisingly was proposing always the cheapest
products
• Salesman did not show the full potential range of benefits coming from the purchase (price of the software was for some
models incl. in the price, possibility to buy in installment)
• Salesman was very enthusiastic during the talk
• Salesman did not try to convince that the price is good and did not try to understand why I leave without the purchase
• Salesmen did not try to do some cross selling or up-selling to other customers who purchased the base products
Shopping mall
70 sq m
2
Other observations
Here you can see an example of store check for B2C – a shop selling computers
Laptops:
Pendrives: Firm No. of pieces
Cool drive
Kingston
Toshiba
6
1
1
Brand No. of pieces
HP
Toshiba
Asus
Sony
Samsung
Lenovo
Fujitsu
10
11
5
3
2
1
1

262
10 5 85 0
0
0
0
0
Store profile
Location:
Rating of the location:
No. of salesmen
Competition level:
Size:
Number of SKU
Presented products
Structure of the exposition (%)
OSB Others
=100
0
1
2
3
4
5
Ability to adjust the product to the customer
Technical knowledge and
knowledge on the application of the
products
Ocena pracowników składu
Center
1
500 m2
4
Service level
3
Plywood
Chipboard
MDF i HDF
OSB
Plank
Veneer
Countertops
Furniture fronts
Fittings
Other
0
0
0
2
0
0
0
0
1
1
Number of competitors in
radius of 3 km
3
Fittings
No. of SKU
Lead time
Home delivery
Other services offered
Shop with fittings
Limit on receivables
Payment terms
Other nonstandard products
immediate
n/a
no
Yes
n/a
n/a
Building materials
Here you can see an example of store check in B2B sector for a company selling
wooden semi-products
Sales skills
How active
salesmen are
Knowledge of the
product offer

263
Store checks –
Examples in restaurants

264
Let’s have a look at the store check done at a Bobby Burger – a slow burger
concept
Country of origin  Poland
Typical size
In sq m
 60-120
Investment needed
In thousands of USD
 50
Average price
In USD
 6.5
Production of food  Produce to
order
Staff
In people per shift
 1+ 2 cook
Monthly revenues
In thousands of USD
 45
Number of open restaurants
In pieces
 38
Food Main competitors
Basic Data

265
Let’s have a look at the store check done at a Café Vincent – a french cafe and
bakery
Country of origin  Poland
Typical size
In sq m
 130
Investment needed
In thousands of USD
 200
Average price
In USD
 3.5
Production of food  Produce to
shelf
Staff
In people per shift
 2+3 baker
Monthly revenues
In thousands of USD
 100
Number of open restaurants
In pieces
 4
Food Main competitors
Basic Data

267
Mystery shopping has 3 stages and concentrates more on the customer
experience
Preparation of the visit & choice of
channels
Visit
Data analysis and
conclusions
 Prepare the scenario of the visit
with written questions
 Chose recording tools (hidden
cameras, phone, pen and pencil)
 Make a list of things you want to
collect (marketing materials,
offers, contact details)
 Chose channels and the sample
 Execute the visit according to the
plan and collect data
 Analyze gathered data
 Prepare summary
 Try to map the customer service
process from what you have
gathered
 Analyze the offers and materials to
understand the legal construction

269
SimilarWeb enables you to spy on your competitor and learn where they get
the traffic from as well as what is the engagement of their customers
 Estimated Visits
 Time On Site
 Page Views per visit
 Bounce Rate
 Favorites subdomains
Customer
engagement
What you can learn Application
 Estimate how much attention you can get and what level is
achieved by competition
 Traffic source (direct, referral, mail, social, etc.)
 Countries where they come from
 Referring sites
 Top destinations
 Detailed analysis of search traffic, social and advertising
Where
customers
come from
 Guess marketing and sales strategies used by others
 Estimate their cost
 Audience interests
 Similar sites
 Connected / similar mobile ads
Audience
analysis
 Analyze specific group of people i.e. customers of specific
company
 Figure out where you customer gather and how you can
approach them

270
…here you have an example of results of www.wp.pl – Polish media site

272
Facebook Audience
Insight is a module
available to
Advertisers but can be
also used for market
research
Click to check

273
What enables you Facebook Audience Insight
 You can choose any segment on the basis of demographics, income,
behavior, interests and other criteria
 For the chosen segment you can see how active and in what way do
they act on Facebook, how much do they spend (relatively), what do
they buy, what are the household characteristics for the chosen
segment, status and what are their interest (what pages do they like)

274
Analyzing trends

275
Analyzing trends –
Introduction

276
Just as a reminder we are now on the 4th step – Independent Data
Gathering
Financial Model
Template
Presentation template Data prepared by
the Target Company
Independent Data
Gathering

277
Task 0
-4 -3 -2 -1 1 2
and the Investor
3 4 5 6 8
7

278
Market size
estimation and
General Data
Analyzing
competition
General remarks
and rough
estimation
Analyzing trends
Consumer /
Marketing research

279
In this section we will discuss Analyzing trends
Market size
estimation and
General Data
Analyzing
competition
General remarks
and rough
estimation
Analyzing trends
Consumer /
Marketing research

280
Google Trends
Consumer Barometer
by Google
How to talk with
experts?
How to find experts?
Trendy Economy –
public data
Public data by Google
World Bank
Statista
Market changes on
more developed
markets
Market structure on
more advanced
markets

282
During consulting projects including Due Diligence it is a great idea to
talk with experts
Main players strategy – how it has
been changing
Main trends in sales, operations,
consumer trends, investment
What could disrupt the business?
Growth rates of the industry and
underlying factors
Cost trends – Labor, Materials
Bottlenecks of the industry
How the industry looks like in
more advanced countries

284
It is worth understanding the strategy of competitors. For this you need
to dig a little bit deeper
Your Network LinkedIn Specialized Firms
Universities
Guilds & Professional
Associations

285
Consumer Research
– Introduction

286
CAPI CATI
CASI
Bulletin Board (BB)
Exit Surveys
Focus Groups
TGI
Assisted shopping
Blind Tests In-home visits
CAWI

288
Discussion of the results will start after the 2nd week of the project and
will continue till the end
Task 0
-4 -3 -2 -1 1 2
and the Investor
3 4 5 6 8
7

289
Discussion is iterative process
Present
the
documents
Discuss
Get
feedback
Check data
against
feedback
Modify the
documents

290
Check our playlist on commercial due diligence available on YouTube
Click here to check the playlist

291
Business Analysts
$190
$19

M&A for Management Consultants & Business Analysts

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