Background and Challenge
A private equity firm evaluating an acquisition of a value-added distributor of nutraceutical ingredients hired L.E.K. to advise them on the validity of their investment thesis. Specifically, they asked us to assess the overall market attractiveness, identify key risks, evaluate growth opportunities, and determine post-close management imperatives.
The client’s concerns were determining to what extent distributors like the target company were susceptible to disintermediation, what actions could be taken to mitigate this risk, and what opportunities existed for future growth.
Approach and Recommendations
We developed a four-step structured assessment framework that included extensive secondary research on the nutritional supplement and functional food markets, in-depth interviews with customers, suppliers, competitors, industry experts, and analysis of company data and financials. Key research areas included:
- Market analysis – We created a market model to forecast growth of the ingredients market, developed an understanding of key issues relating to the market and how customer needs were evolving, and generated a detailed review of the role of the distributor in this market and the defensibility of distributor margins
- Customer and supplier review – We conducted interviews with the target’s leading customers and suppliers to better understand the strength of the target’s relationships and to validate the value added by the target and its reason for being
- Competitive position assessment – We identified the attributes of successful distributors and benchmarked how the target performed against its competitors across a number of dimensions including products and services offered
- Growth opportunity identification – We assessed the target’s market positioning and evaluated future growth opportunities and risks, which included assessing the feasibility of its growth projections and quantifying how this assessment would impact the company’s five-year revenue forecast
The insights developed through this process enabled us to identify and prioritize the key management imperatives during the post-acquisition phase. Our recommendations gave the client sufficient confidence in its investment thesis to proceed with the acquisition. Shortly after we concluded the assignment, the client successfully completed the acquisition and now has the company on a new growth trajectory.