A Framework for Clean Tech Company and Project Due Diligence

Transcription

1 A Framework for Clean Tech Company and Project Due Diligence July 2011 Author: Jake Jacobi Contact: Chris Vlahoplus

2 Clean Tech Due Diligence Framework ScottMadden s framework for Clean Tech company and project due diligence seeks to answer the questions: Is there a sustainable market demand for the type of products or services produced? Do products or services adequately meet market demand? Is there a management team that can profitably deliver products or services to the market? Will the company or project be adequately capitalized? What are realistic expectations for future performance given uncertainties? ScottMadden uses the following steps to address the questions above: Industry Analysis Market Analysis Strategy & Operations Analysis Financial Model Analysis Final Report 1

3 Step 1. Industry Analysis ScottMadden uses a comprehensive industry analysis framework (bioenergy example that we apply to all industries): Macroeconomic Environment Price volatility of critical materials/components Price volatility of energy e.g., Corn price volatility impacts biofuel prices Supplier Power Number of competitors Size distribution of competitors Price pressures e.g., Farmers control corn production, setting prices Threat of New Entrants Barriers to entry Academic and corporate research pipelines e.g., A university develops a new proprietary catalyst for biofuels production Industry Rivalry M&A activity Industry growth Overcapacity of products Diversity of competitors Barriers to exit Threat of Substitute Products and Services Switching costs Price/performance tradeoffs e.g., Gasoline can readily be substituted for ethanol Buyer Power Number of buyers Size distribution of buyers Price sensitivity of buyers e.g., E85 buyers are relatively fragmented, so buyer power is low Regulatory Environment New laws New subsidies New standards/regulations e.g., Government subsidies create demand for ethanol Purpose of the industry analysis: A thorough industry analysis provides context for later evaluation of the company s: Market Products Corporate strategy Operations Financial model The industry analysis validates the company s own forecasts and assumptions 2

4 Step 2. Market Analysis Within each industry, markets exist where competitors compete for market share. Within the energy industry, for example, competitors may compete in multiple markets petroleum, wind, biofuels, insulation, etc. ScottMadden uses a detailed market analysis to assess the health of the markets in which the company in question competes 1. Market Sizing Determine the total annual revenue within the market Determine the compound annual growth rate of the market 2. Market Trends Identify key trends in the market that will affect near term company performance: economic, social, regulatory, and environmental trends Identify disruptive events in the market: new technology, new manufacturing processes, new regulations, and new entrants 3. Market and Customer Segmentation Identify and size key market segments (e.g., biodiesel versus ethanol) Characterize each market segment Identify and size key customer segments (e.g., chemical companies versus energy companies purchasing ethanol) Characterize each customer segment 4. Competitive Analysis Identify direct and indirect competitors: Direct: compete within a product category Indirect: compete with a substitute product Determine market positions of competitors Assess corporate strategies of competitors Assess strengths and weaknesses of competing products 3

5 Step 3. Strategy and Operations Analysis ScottMadden uses a multi-tiered framework for assessing a company s strategy and operations: 1. Thoroughly review the company s business plan and other related materials Based on the industry and market assessment determine any areas of the business plan that may require a deeper dive Determine where the company has strategic advantages and disadvantages Create interview guides for the company s Management Team and Subject Matter Experts based on questions related to the business plan, financial model, the company s industry/market, etc. 2. Conduct interviews with the company s Management Team and Subject Matter Experts After completing the industry and market analysis and thoroughly assessing the business plan, ScottMadden conducts interviews Interviews are used to determine the capabilities of the Management Team and further assess the company s plans and projections for the future, tour facilities (if applicable), etc. 3. Once ScottMadden has completed the business plan deep-dive review and conducted interviews with the company s Management Team and Subject Matter Experts, ScottMadden assesses the following metrics: Internal Company Metrics Management team Strategic partners, if applicable Off-take agreement and contract analysis Past and projected financial performance New products/services and projects Supply chain for new and existing products Corporate structure Capitalization ScottMadden also often interviews customers, vendors, etc. during this portion of the assessment to fully assess the company External Economic Metrics Industry analysis Market analysis and segmentation Customer analysis and segmentation Size Geography Spend Economic forces affecting customers Competitive analysis Macroeconomic forces affecting supply chain Legal and regulatory analysis 4

6 Step 3. Strategy and Operations Analysis (Cont d) ScottMadden uses a multi-tiered framework for assessing a company s strategy and operations (Cont d): 4. Based on the review of the business plan and interviews, ScottMadden begins to assess the company s strengths, weaknesses, opportunities, and threats (SWOT) Strengths Examples: Strong Management Team Strong product differentiation Intellectual property Industry relationships/ partnerships Opportunities Examples: Positive economic changes Positive regulatory changes Weaknesses Examples: Weak Management Team Limited number of products or product lines No or limited intellectual property Threats Examples: New competitors Negative economic changes Negative regulatory changes SWOT Overview: Strengths and Weaknesses are internal attributes of the company and items which the company can control, to a degree Opportunities and Threats are external attributes of the market and are generally outside of the control of the company 5

7 Step 4. Financial Model Analysis ScottMadden conducts a thorough review of the company s financial model We identify primary model parameters parameters most likely to impact model output We create probability intervals around key parameters for use in our sensitivity analysis ScottMadden runs a number of scenarios on the financial model base case to test the model s robustness We get to the heart of the project finance issues by performing a detailed sensitivity on major project inputs - we also validate the reasonableness of these inputs by comparing to the relative markets or historic projects Our financial model analysis guides informed decisions, helps de-risk potential investment decisions, and increases the chances of a success for a project investment Key Operating Parameters 6

8 Step 5: Final Report Once ScottMadden has thoroughly assessed the industry, market, company strategy and operations, and assessed the financial model, we are ready to complete the assessment report. Below is an example report structure for a manufacturing company assessment Executive Summary Market summary Legal and regulatory considerations Products and competitive analysis Financial analysis Report Introduction Introduction to the project Application summary Corporate structure Evaluation Framework Is there a market? Is there a product? Is there a team that can deliver the product to the market? Will the project be adequately capitalized? Market Evaluation History of the industry Product applications (current and emerging) Domestic market (by region, material type and application) Global market (by region, material type and application) Regulatory structures and drivers Product Line Product and market alignment (historic and projected market share) Product margins Manufacturing process Supply chain assessment Competitive analysis Market participants and relative market share; Market success factors Summary of patents and impact on the market Summary of licenses and permits Business plan analysis Sales and marketing plan Order book analysis Strategic advantages Management team Risk assessment SWOT Business plan analysis conclusions Financial projections Analysis of assumptions Financial projections Sensitivity analysis and ScottMadden cases Project capitalization Liquidity analysis 7

9 Contact Us For more information on Clean Tech Company Due Diligence, please contact us. Chris Vlahoplus Partner and Clean Tech & Sustainability Practice Leader ScottMadden, Inc Glenwood Avenue Suite 480 Raleigh, NC Phone: