A private equity fund is considering buying this company: is it a good investment?

• That you take the investor's point of view. A fund has no industrial synergies to count on: it earns through profit growth, debt paydown and sometimes a sale at a better multiple.
• That you look for what could break the thesis. Due diligence is as much about finding reasons not to buy as about confirming the deal's appeal.
• That you think about the exit from the start: who will buy this company in five years, and why would they pay more?
• That you can work out a simple return on investment from a few figures.

1. 1

   Understand the fund's thesis

   What attracts it to this target, how long does it plan to hold it, and what return is it aiming for?
2. 2

   Judge the market and the target's position

   Is the market growing, is it exposed to disruption or to a cycle? Is the target protected by something durable, and is its revenue recurring or concentrated in a few customers?
3. 3

   Identify the value creation levers

   What the fund can do in a few years: speed up growth, improve margins, buy small competitors to gain scale. Separate the probable from the possible.
4. 4

   Compare price with exit value and list the risks

   Estimate profit at exit, resale value and the return that represents. End with the two or three risks that would make the thesis fail.

"If I understand correctly, our client is a fund looking at buying a publisher of practice management software for dental surgeries, and it wants to know whether to make an offer. One clarification to start: does it have a holding period and a target return in mind?

I would look at four things. First the market: the number of surgeries, how many are equipped, and above all how easily a surgery switches software, because if customers rarely leave, revenue is very predictable, which is exactly what a fund looks for. Then the target: its market share, the proportion of revenue that comes from subscriptions, and any dependence on a few key people. Then what the fund could improve in five years, for example selling extra modules to existing customers or buying small publishers. Finally the asking price, which I would compare with what the company could be worth at resale. My first question is about the customer churn rate..."

This example is made up: it shows the tone and the construction, not a script to memorise. Your answer has to come from your own experience or from the data the interviewer gives you.

• Treating the case as an industrial acquisition and looking for synergies, when a fund generally has no business to combine with the target.
• Concluding on the quality of the company without mentioning price or return.
• Forgetting the exit. Without a plausible buyer in a few years, the value created stays on paper.
• Presenting only the reasons to buy. A good candidate actively looks for what could go wrong.