Commercial due diligence case studies

UK Pram manufacturer

Issue
This had been in business for over 100 years. They were a family run firm and are proud of their traditional products, which had been used and trusted by many generations of parents. Endorsed by royalty and many famous people, they were the by-word for security for the child. They sold over 80 per cent of their output to the large retailers in Europe. Their brand was universally recognised. However, their newer models had not been as successful as their traditional ones, with some issues over quality. The directors were all family members and shareholders. They wanted to capitalise their assets and sell the company to a private equity company. They had a loyal, highly skilled workforce that was willing to work flexibly to secure the future of the business. There was one big problem though: their turnover was £10 million per annum but they are making a £2 million loss. The Managing Director and majority shareholder believed that the loss was a short-term issue associated with not producing enough stock to sell (the products are still largely handmade) and being forced to accept lower margins by the large retailers. The private equity company wanted to see if this business could be turned around.
Solution
There were two areas that were key here. First was the value of the brand name and second the marketing of the products. Through consumer research, I confirmed the strength and uniqueness of the brand and showed how the products were significantly underpriced. There were quality issues that also had to be addressed and more investment would be needed in production, possibly using a third-party.
Result
While the company was in a relatively strong position from a marketing point of view, there were significant costs associated with restructuring the business and the private equity company's offer was not acceptable to the shareholders. A year later, the company went bankrupt but the brand has since been successfully revived by its new owners.

International clothing brand

Issue
This brand originated in the 1960s and was best known for its buttoned-down, narrow collared shirt that was beloved of the ‘Mods’. Throughout the 70s and 80s, it became part of the ‘uniform’ of the skinheads and other groups of young men seeking to define their identity. By the 1990s, however, the company that made them in Ireland was suffering, like many of its competitors, from cheap, foreign competition and was struggling to survive. A white knight arrived in 1995 in the shape of a private equity company that saw an opportunity to make the brand popular once more, and they bought the company. They employed a dynamic new management team who brought with them extensive experience of the fashion industry.

In the following five years, sales and profits rose fivefold as the brand was extended into menswear, womenswear, shoes and other accessories. This was on the back of a successful campaign that highlighted the heritage of the brand. Practically all the sales came from the UK as the management team concentrated on developing the brand there. There always had been a small amount of sales abroad, particularly to Germany and the US, through small specialist retailers, catering to young men who followed the ‘skinhead’ fashions.

The private equity company were reviewing their investments and asked the management team to put together a three-year plan. In order to continue with their investment in the company, they wanted sales and profits to double. The management team’s response was to expand internationally, building on the business that they already had in their two main export markets of Germany and the US. Their reasoning was that these were two of the biggest markets in the world and they would only need to get a 1 per cent market share in both countries to achieve their targets. They also felt that they did not need to change their strategy that was to exploit the ‘Britishness’ of the brand and in particular to use the advertising that highlighted the brand’s appeal among young men of a certain type. They argued that as it had worked so well in the UK, it was bound to work elsewhere. The private equity company was not entirely convinced by the management team’s arguments.
Solution
I examined the market and the brand position in each of the three key markets: UK, Germany and the US. I found that while there were considerable sales in the UK, there was further scope for expansion with a lower risk than the export markets. In Germany and the US, the brand was very much a niche and it would be better to concentrate in a few key large cities. My overall recommendation was that there was enough justification for the private equity company to continue their investment
Result
The private equity company accepted my recommendations and re-invested in the business. It was sold four years later to a trade buyer for £80m: their initial investment having been £4m.

UK Vending Services company

Issue
This was the vending services operation of a large company, specialising in providing contract catering services to large organisations both in the private and public sector in the UK. The Board conducted a strategic review and decided that the vending services operation was no longer core to their future strategy and they sought a buyer for it. One of the potential buyers was the operation's own management team, who were being backed by a private equity company. Sales and profits have been declining for the last five years but the management were confident that as an independent entity, they could turn this around. The private equity company believed that this was a good investment for the medium term but the manager in charge wanted an independent review of the proposed acquisition and the management team’s business plan. The senior staff were wary of my involvement and reluctant for me to talk to their customers. This is a business based on customer relationships. They thought that I may inadvertently jeopardise these relationships, as the customers will want to know why I was talking to them. So they gave me a very limited number of customers to contact. These I found have been ‘briefed’ by the company and so I was mainly getting a very positive message about the company.
Solution
After the first few interviews, I changed tactics and talked to the customers more generally about the marketplace and less specifically about the client company. This highlighted a major problem for their long term prospects. Unlike the contracts of the main parent company, which tend to be fixed for at least five years, those with the vending operation dealt with, were ‘rolling ones’ renewable every year over a three to five year period. The management team optimistically believed that this means they can pick up a lot of new business. I though realised the downside of this ‘flexibility’ in the marketplace. In a worst case scenario, the vending operation could lose all its existing contracts within three to five years. While they may be able to replace them with new business, it will probably be at a higher cost, thus impacting profits. I therefore did not believe that the business model the management team were using, was a viable investment opportunity. I met with the manager at private equity company to discuss my concerns. However he was keen to complete the deal and asked the management team to prepare a more robust plan. This would involve changing the way the vending company operates to ensure longer, more sustainable contracts.
Result
The acquisition went ahead but on much more favourable terms for the private equity company.

X