Framework Triggers

Question 1

Bidding

Answer 1

Breakeven analysis:
P = (R - C)

Upfront cost - (Units * profit) = breakeven

Breakeven is the highest bid amount

Question 2

Large up front investment

Answer 2

Time value of money

Question 3

Should we stay in the business?

Answer 3

In addition to assessing profitability of business, explore alternatives:

• sell whole business
• sell assets and shut down the business
• keep operating as is
• keep operating with changes (e.g., investment in new technology)

Question 4

Company Value

Answer 4

[Units*(rev - costs) - fixed costs] / discount rate

Note:

• this is contribution margin minus fixed costs to get annual cash flow
• dividing by the discount rate assumes a perpetuity of the cash flows to identify value of a company

Question 5

Rule of 72

Answer 5

Investment will double in 72years/ rate

Ex., at a 10% rate it would take 7.2 years to double, at a 12% rate it would take 6 years

Question 6

Book value

Answer 6

Book value of investment is what it cost at the time of purchase. May need to appreciate to future value using growth rate (see rule of 72)

Question 7

Gross Margin

Answer 7

Profit/ unit cost

Question 8

Bains PE/ VC buckets

Answer 8

(1) market attractiveness
(2) company attractiveness
(3) competitive environment
(4) feasibility & profitable exit (eg., potential buyers , expected multiple at exit)

Question 9

Definition: CAGR

Answer 9

Compound annual growth rate

Question 10

Why look at profit multiples?

Answer 10

(1) allows firm to assess fair market price

(2) helps firm identify how much return they can demand on their improvements to the company

Question 11

Definition: relative market share (rms)

Answer 11

Measure of market dominance taking market fragmentation into account. A number greater than 1 means a market leader outperforms the next biggest competitor by that amount. A number less than one demonstrates how far they are behind the market leader

Question 12

Options for dealing with underperforming segments

Answer 12

(1) invest to improve profitability

2) sell off (whole business or dismantle and sell assets

Question 13

Fragmentation & what it means about strategic buyers

Answer 13

Fragmented market means there are likely going to be strategic buyers available when we decide to sell

Question 14

Clarifying questions to ask up front

Answer 14

• goal (profitability %, rev value, return goal - be specific)
• time frame for this goal

Question 15

When provided with numbers (sales, rev, profit ask for two things)

Answer 15

(1) growth over time

(2) comparison to competitors

Question 16

Sales growth

Answer 16

Emphasis to be on revenue, not profitability & costs - if you do go on a tangent like cost you need to state a hypothesis/ why (e.g., I hypothesize that if costs are too high big clients will just do their own development in house)

Question 17

High concentration of buyers or suppliers

Answer 17

The more highly concentrated one has more power (e.g., Walmart is a huge buyer so it can exert more power)

Question 18

How can you piggy back on complimentary goods?

Answer 18

Repackaging (e.g., selling cheese slices because they’ll pair better with crackers and tap into mom market)

Bundling (e.g., selling additional maintenance or repair services to keep customers coming back to you rather than outside services)

Question 19

Profitability & lifecycle

Answer 19

• If profits are low and something is in a late stage (many players, low growth left) it might make sense to wind down and sell off
• if profits are low but it’s in early stage and there is lots of growth left, it is worth exploring if there are ways to take advantage of this

Question 20

Considerations on competitor concentration

Answer 20

Highly concentrated competitors are harder to compete against

Other things that make competitors hard to chase:

• cost advantages ( so they can always compete on price)
• extremely high market share so they can force competitors hands

Question 21

Analyzing performance of multiple business units

Answer 21

Start with a question to help understand where to prioritize: what was the profitability of each segment?

From here you can drill down into what caused it

Question 22

Allocation mix and breakeven

Answer 22

Use allocation to calculate a weighted average profit and then back into needed sales from there

Question 23

Gross margin & profit relationship

Answer 23

Gross margin % * price = profit per unit

Question 24

Considerations regarding margins and profit mix

Answer 24

Can we change the mix to emphasize the products with the biggest profit margin?

Question 25

Market entry framework

Answer 25

(1) market (can include customer and maybe even competitors depending on industry)
(2) profitability

(3) HOW??
- m&a?
- acquire?
- jv?

Question 26

Clarifications to ask before market sizing

Answer 26

• willingness to pay!
• anything else that could further reduce (or increase number of people)
• also walk interviewer slowly through your assumptions: e.g, I am assuming the average life span is 80 and that people are evenly distributed across age groups

Question 27

Reading a graph

Answer 27

Start with:

• title
• legend
• footnotes

Interpreting:
- go big picture to little (e.g., I can see that market is growing and is fragmented, there are also new entrants/ other key changes, then talk about specific companies growth or movement)

Question 28

Non profit metric

Answer 28

Breakeven timeframe + other metrics

Question 29

Valuing a company

Answer 29

Y1 cash flow + y2 cash flow/(1+r) + y3 cash flow/(1+r)^2 etc for the expected life of the company (safe to assume 5 years if none given)

Question 30

Response to competitors stealing our market share

Answer 30

• copy/ see what they’ve done differently
• acquire competitor
• acquire another company
• hire their management
• increase our own profile (marketing, etc)

Question 31

Costs included in inventory planning

Answer 31

• cogs
• distribution
• unsold goods (!)