Growth potential and exit strategies for 'locally focused' businesses

by a searcher from Harvard University - Harvard Business School

4 years ago

Curious how do you guys view this matter and I appreciate any insights,

As I'm progressing in my search I'm looking at a lot of businesses that I believe have limited growth potential.
Most of the businesses I've seen are very geographically focused and don't necessarily have an offering that can expand beyond their area. Their addressable market size varies but ultimately my models show that even if their cash flows are decent, their exit potentials are low.

Ideally, the business would have the potential to offer its products/services elsewhere with no significant additional costs, but most of the time that's not realistic e,g: high-end cabinet makers/ most real-estate related businesses, local services, dealerships etc.

Outside of software, online services, e-commerce and manufacturing, how do you guys think about locally focused businesses, what weight does that have in your decision making and valuations etc?

Thanks.

3 likes
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6 comments

searcher from Michigan State University - The Eli Broad College of Business

Like others have said, I would personally value them lower, but the biggest factor is how much potential it does have to expand to greater scale outside of its current focus. The hurdles to expand may be much greater and a reason for why they focused in their region, so I wouldn't consider unless I could make a clear plan for increasing the footprint to a more national level.

4 years ago | like reply | 0 likes

searcher from University of Pennsylvania - The Wharton School

I feel like the key operative for any local or regional focussed business is getting the EBITDA up over $5MM+ with a solid corp governance structure. At that point, you have an asset that you can exit to any number of PE firms for. They could be employing a roll up strategy, hoping for a strategic exit, or just simply deploying capital to hit hurdles aided by positive leverage. The kiss of death for most regional businesses is lack of governance and management talent which would make them a viable PE target.

4 years ago | like reply | 0 likes

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