Background and Challenge

A private equity firm was considering an investment in a facilities management company that provided textile and washroom, courier and facilities management services. Prior to making a financial commitment, the PE firm wished to conduct thorough commercial due diligence to ensure that the investment had the potential to provide the necessary financial return at an acceptable level of risk.

L.E.K. Consulting was asked to draw on its experience in the transaction process and the business services sector to develop an in-depth report on the company’s commercial prospects.

Approach and Recommendations

The L.E.K. team addressed two main issues for each of the target’s three divisions:

  • Overall market growth prospects, an understanding of the level of cyclicality of the market relative to the general economy, and the target’s addressable market growth rate given its product/sectoral exposure. Value growth trends were disaggregated between volume and price effects
  • Competitive position and ability to grow at or above the addressable market growth rate, and the likely trajectory of price relative to input cost

To develop a detailed view of these two issues, a multi-country research and analysis program was undertaken to develop a clear picture of historical growth rates for underlying drivers of revenue, and to test the correlation between GDP growth and each of the drivers, enabling an understanding of the vulnerability to economic cycles.

Interviews were conducted with market participants (competitors and experts) to understand recent and future trends in service penetration rates and pricing, and customers were interviewed to understand market trends (volume and price) services and to assess differences by customer segment (sector and size).

Where possible, the team also analyzed the target against competitor revenue growth by country.

Results

The detailed report produced by L.E.K. delivered a clear perspective on historical and future market volume growth by product segment and geographic market (in major markets), as well as a view of the degree of historical and future price erosion and the target’s ability to pass on cost increases to the customer.