Case 005Screening and ranking businessesWarm up

Consulting-style case: should the fund invest in a pest control business? Structure your answer across market, company, returns and risks.

Advent InternationalNew York · 2021

The situation

Nirvik Pest Control serves food factories, warehouses, hotels, offices and homes across western India. Revenue is Rs 150 crore, of which 70% comes from annual service contracts. EBITDA margin is 18%, so EBITDA is Rs 27 crore. The founder says the market grows about 12% a year and is split among hundreds of local operators.

The owner will sell at 11x EBITDA, Rs 297 crore. Lenders will provide 3x EBITDA of debt, Rs 81 crore, leaving Rs 216 crore of equity. The fund holds for five years and wants at least 2.5x.

Your task

Should the fund invest? Give a structure first, fill it with the case numbers, and end with a view.

Quick check

What should the last box in your structure be?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Yes, on the base case, but only just above the hurdle: about 2.7x and 22% IRR. The market grows, contracts recur and fragmentation allows bolt-ons. At 11x the return depends on margin rising from 18% to 20%; without it and at a 9x exit the fund makes 2.0x. Diligence should test contract renewal rates and the margin plan.

Step 1What structure do you lay out before any numbers?

Four boxes, in this order: market, company, risks, returns. Say them out loud before filling any. The order matters because the first three tell you whether this is a good business, and only the fourth tells you whether it is a good investment at this price. A neighbourhood tiffin service can be well run with loyal customers and still be a poor buy if the owner wants ten years of profit up front.

Four boxes, and the one that decides the answer is the last1 MarketGrowing 12% a yearFragmented: many local operatorsDemand set by hygiene rules,food plants, offices, homes2 CompanyRevenue Rs 150 crore70% on annual contractsEBITDA Rs 27 crore, 18% marginRoom to buy local rivals3 RisksContract churn at renewalRules on chemicals tightenTechnicians leave for rivalsBolt-ons harder to integrate4 ReturnsEntry 11x: equity Rs 216 croreExit EBITDA Rs 53 crore at 11xBase 2.7x, IRR 22%Downside 2.0x, IRR 15%Market and company say whether it is a good business; box 4 says whether it is a good investment.
Market growth, recurring contracts and a fragmented field make Nirvik a sound business, but the decision sits in the returns box: Rs 216 crore of equity at 11x becomes about Rs 582 crore, 2.7x, in the base case and 2.0x in the downside.
Step 2What do the market and company boxes say?

Market: 12% growth, driven by hygiene standards in food plants and warehouses that do not go away in a slowdown, and fragmented, so a larger operator can buy rivals. Company: 70% of revenue, Rs 105 crore, comes from annual contracts, which makes the business predictable enough to carry debt. An 18% margin is respectable for a service business that is mainly technicians and vans. Ask what the renewal rate is; a contract that is renewed 90% of the time is very different from one renewed 70% of the time.

Step 3Does the return clear the hurdle?

Base case: revenue grows with the market to Rs 264 crore in year 5, and margin rises to 20% with route density and price, so EBITDA is Rs 52.9 crore. At the same 11x that is Rs 582 crore. Assume the Rs 81 crore of debt is repaid from five years of cash flow. Rs 582 crore on Rs 216 crore is 2.69x, an IRR of 21.9%, just over the 2.5x hurdle.

Rs croreEntryBase, year 5Downside, year 5
Revenue150264.4264.4
EBITDA margin18%20%18%
EBITDA27.052.947.6
Multiple11x11x9x
Net debt8100
Equity216582428
MOIC and IRR2.69x, 21.9%1.98x, 14.7%
With revenue growing at the market's 12% and margin rising to 20%, Rs 216 crore of equity becomes Rs 582 crore, 2.69x; with no margin gain and a 9x exit it becomes Rs 428 crore, 1.98x, below the fund's 2.5x hurdle.
Step 4What is the view, and what would change it?

Invest, subject to diligence, with the margin plan as the item to prove. The return clears the hurdle only if margin rises two points; on flat margin and a lower exit multiple it falls to 2.0x. The risks box gives the diligence list: renewal rates on the contract book, any coming change to rules on pest control chemicals, and technician turnover. Bolt-on acquisitions at lower multiples than 11x are the upside the base case leaves out.

Where candidates lose it

The usual loss is a framework that ends at market attractiveness: growing, fragmented, recurring, so yes. The interviewer is waiting for the price, and a structure without a returns box never reaches it.

The second miss is reciting a generic framework with no numbers in it. Fill each box with the case figures as you go; the structure exists to organise the numbers, not to replace them.

What the interviewer asks next

  • The renewal rate turns out to be 75%. What happens to the case?
  • How would bolt-ons at 6x change the return?
  • What would make you pay 13x for this business?

Asked at Advent International, Private Equity, New York, 2021 (Wall Street Oasis): They are 2 30 minute interviews one is another behavioral and the other is a consulting like case study.

Company names and figures are illustrative.