Conducting Due Diligence For The Acquisition Of A Portfolio Of Retail Stores
Quantifying Business Risks And Opportunities
What was the challenge?
The private equity owner of a mid-sized UK retailer was considering buying a portfolio of trading stores from a competitor. We were asked to undertake a due diligence review for the acquisition to establish the current valuation and future upside potential. The acquired stores were to be integrated into the existing retail estate and would thereby double the number of outlets available to the retailer.
What was the approach?
The approach that we adopted combined desktop analysis with a physical investigation of each location in order to assess the financial and operational considerations of the acquisition. The desktop analysis looked at the financial data, the customer proposition, pricing, geographic fit and local demographics whilst the physical investigation looked for more qualitative insights such as customer service, staff knowledge, locality, physical appearance, store format, equipment infrastructure and maintenance. We then combined these insights to establish how well the new stores might fit within the existing portfolio, the alignment of the customer base and what challenges could be experienced during any integration. We also examined the motivation of seller for the disposal, alternative expansion options for the client and alternative competitive scenarios if the client chose not to acquire these stores.
A number of integration options were developed and costed and we built a comprehensive financial model to test the outcome of a number of future scenarios.
How did we help?
The analysis that we carried out enabled us to present the private equity owners with a full understanding of the potential outcomes. We showed how the technology, operations and colleagues could be quickly integrated into the existing business however we highlighted that the mismatch in customer profile and proposition would require new format strategies to be adopted. The cost of the integration was relatively low however the risk of distraction to the existing management team was high and this could result in a fall in base profitability.
We used the available cost and trading information for the target stores to demonstrated how the initial asking price was significantly higher than the most optimistic current valuation. However, by applying available market and growth assumptions for the existing estate, we were also able to show that the three-year valuation could achieve investment expectations.
Based on our analysis the investors elected not to proceed with the acquisition but chose to accelerate the organic growth of its own store portfolio.