Mergers and Acquisitions Case Walkthrough: McKinsey Style- Restaurant Acquisition

When you think about case interview prep, you must be ready for all types of cases. Generally there are 6 types of case interviews. They are: profitability cases, mergers & acquisitions cases, brain teaser cases, consulting math cases, market sizing cases, and market study cases. Going through case walkthroughs can be helpful as they allow you to glean learnings from the feedback that the case presenter gives to the candidate. Today’s case interview walkthrough is a merger and acquisition case. It’s also in the McKinsey interview style. Read through or listen to the case below, and work alongside our candidate!

If you’d like to volunteer to practice a case on a webinar, in front of a live audience, write to us. We’ll reach out if you’re selected for further consideration!

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Mergers and Acquisitions Case Walkthrough Video

Mergers and Acquisitions Case Walkthrough: Transcription

Jenny Rae:

So I’m ready to introduce our special guest for today. Yuan Cai is joining us. She has done a number of cases. She asked us for a case that was a non-traditional, like a hard McKinsey case. So that just should let you know from the very beginning what kind of courageous, wild person she is. I’m going to give her a chance in just a second to give her introduction, and to share a little bit about her background, about how she got to where she is now, and what she is currently in the process of prepping for. And then I will introduce the case.

Yuan:

Great. I think I will just take over. Thank you, Jenny Rae. So I’m Yuan. I’m a second year masters student at MIT and I’m currently in the process of preparing for consulting interviews, mostly for summer internships as I will be graduating one semester later than expected timeframe. But yeah, I’m currently in the process of applying to summer internship positions for most MBB firms.

And in terms of the like how many cases I’ve practiced through, I believe I’ve currently done like 40 cases-ish with both the case partners at MIT and also the case partners in Management Consulted. And with Lisa, who was my – who was my, how do you say, like the consultant that I worked with. Yeah. The reason why I want to join, like volunteer for a live case walk-through is because I really appreciate the chance to work with Jenny Rae and hear back from her, especially for the feedback that she could give me in terms of the performance in the position currently I’m in as to like how far I’m in the process and how proficient or how good I am at casing, especially for McKinsey.

I know like I’ve done a bunch of McKinsey cases, but I’m still not quite confident, especially for some non-traditional wild cases. So that’s why I asked for a favor for introducing a non-traditional McKinsey style case in our casing session. But I know this is like quite a challenge for me, but I’m really excited to, you know, to go through the case with Jenny Rae.

About the Case

Jenny Rae:

Awesome. So I am excited to introduce the case. The case today is – it’s based on a concept from another McKinsey case, but I actually rewrote it to fulfill Yuan’s specific request. She wanted a hard McKinsey case that was a little bit wild. I also made it COVID relevant, so there is an element to this that is quite timely for right now. Many of you that are doing cases in the moment will have a blend between historical performance that’s old, and COVID performance that’s new that you have to think about.

And so some of the things that we’ll need to think about inside the case are financial, but also operational, practical, and some of those other questions. I also hope that this case is really fun. The final thing that I want to say is that the case’s name is Margaritaville, and I am not in any way specifically affiliated with Margaritaville, the brand, or the song. And so as I am doing the case, I just wanted to make sure that that’s super clear. This is a semi-fictional case based on real and tangible events, but it is any public information, or any relationship that I have with the firms. So Yuan, if you’re ready, will get started.

Yuan:

Yeah.

Jenny Rae:

I’m also going to start my timer.

Yuan:

Yeah, great.

Jenny Rae:

Yep, go ahead.

Yuan:

I think one more thing that I want to point out, I don’t know if it’s because like there are many participants that are limiting the internet span, but I sometimes cannot hear you very well. Like maybe in the case I will just ask a bunch of questions may be just due to the signal.

Jenny Rae:

Exactly. So, well that will be part of the regular process for what we’re potentially going to be going through. You can always ask me to clarify if you miss something that I say. Just make sure that if you do it, you kind of let me know what you didn’t hear, not just asking me to repeat entirely.

Yuan:

Awesome.

Jenny Rae:

So as you guys know, I won’t be sharing the case today, but I will be seeing it on my side. I will also be timing us so that as we go through the case, you’re going to at the end, Yuan, I’ll give you a perspective on what the timeline looks like. My focus today is to give you this case as though I’m a partner in a second round at McKinsey.

Yuan:

Okay.

Mergers and Acquisitions Case Prompt

Jenny Rae:

Great. So let’s get started. Welcome to Margaritaville. Here’s the background of the case. We’re sitting in Miami on vacation. Florida has taken a don’t worry, be happy approach to COVID. And while there, you’ve enjoyed a few different unique restaurants. Cuban American fusion, chill Latin, and a fantastic Asian sushi place. It’s been great to eat out with a sense of normalcy. Now you’re looking to mix it up. The weather is post-thunderstorm mild, a perfect fall evening. You decide to mix it up by adding a new dimension to your dining repertoire and head over to one of Florida’s finest establishments: Margaritaville.

Amid the neon lights, you have an epiphany. What if you pitched the restaurant chain of Margaritaville diamond restaurants as an acquisition to a friend who works for a midmarket private equity company. The restaurant sells three things: food, merchandise, and, of course, margaritas and other alcoholic beverages. There are 22 Margaritaville’s, all currently in the southeastern United States. What would make this an interesting acquisition for a PE firm, and should you follow through with recommending it to your friend. Do you have any questions about the background?

Yuan:

Yes. I think one general question is can you just briefly describe a little bit about the Margaritaville to me because I’m not so familiar with this restaurant.

Jenny Rae:

Sure. It’s a restaurant that serves sit down food, so it would be kind of similar to a restaurant where you have a waiter, an Outback Steakhouse, for example. And they have, of course like I mentioned, margaritas as well, lots of those on the menu. So a standard menu, sit down themed restaurant.

Case Prompt Recap

Yuan:

Great. I think, yeah. I’ll just go ahead and I’ll recap the case so that we are on the same page. So our client, I’m assuming that is Margaritaville which is a restaurant, and currently it’s considering having this or considering selling itself to the private equity firm. I think the major confusion here is like is our client Margaritaville, or the private equity firm?

Jenny Rae:

We don’t have a client. It’s just you having dinner, and at the end of the day the client would be the PE firm if you think that they would be of interest. But they might not even pay for it. This is just something that we are thinking about as kind of a fun strategic exercise.

Yuan:

Okay, great. So basically the Margaritaville currently offers in Miami and then it offers where we have different like types of restaurants around, and Margaritaville is currently thinking of selling the – their firm to a private equity firm. Yeah. And then the business model, or the operations model is Margaritaville currently sells three products or services. The first is food, and second is merchandise, and the third one is like Margaritaville related products. How do you like – can you describe a little bit about the Margaritaville?

Jenny Rae:

Yeah, totally. It’s just merchandise, right? T-shirts, cups, plaques and signs that are funny that have silly signs on them. And so it’s kind of like hokey, folksy types of merchandise in the gift shop.

Yuan:

So Margaritaville is actually a singer, or like a people?

Jenny Rae:

Yeah, there is actually a song, there is a song, “Wasting Away Again in Margaritaville” that it’s based on from a theme. But it’s a totally separate enterprise. It’s just based on that theme from the song.

Yuan:

Okay.

Jenny Rae:

However, if you go, it’s guaranteed that you will hear that song.

Yuan:

Okay, great. Awesome, good to know. Because I was like who is Margaritaville, or what is Margaritaville. And you mentioned some numbers here. Like currently it has like Margaritaville has 22 restaurants or operations in the southeastern US.

Jenny Rae:

Yes. 22 different restaurants, all the same theme.

Yuan:

Okay. Good to know. And our target is to understand whether or not this is – or how we should sell this business to a private equity firm, or what should we do, or is that correct?

Jenny Rae:

That’s right.

Yuan:

Okay, great.

Jenny Rae:

Just what should we do? What should they do, right? What would you – you are trying to maybe think about it just as a thought exercise and then connect the dots if you think it makes sense. Yeah, the ultimate strategic question is would you make the call. Would you call a friend and say you should buy this company?

Yuan:

Great. Basically is this firm worth investing.

Jenny Rae:

Yep.

Yuan:

Okay, great. Awesome. So yeah. I think I’ve got all the questions I’ve answered. Can I have one minute or two to gather my thoughts?

Jenny Rae:

Yeah, take your time.

Mergers and Acquisitions Case Structure

Yuan:

Great. So in order to identify if, you know, this is an attractive business or worth investing in, I would want to have a look at three major buckets. The first one is the overall attractiveness of such margarita-based food restaurants, like how people are willing to, or how people are interested in such theme restaurants, with this restaurant. And a second is basically our – the target, which is the restaurant itself.

How, like what is its financial status and how profitable it is performing in this current situation. And then the third one is definitely the clients, like the people that are willing to acquire this business. How experienced or how experienced they are in acquiring this food like the restaurants. And do they have a culture that is compatible with margarita, which is the target.

So within the first bucket, I want to look at the first like how attractive the market is based on the historical trend or growth of this luxury food – food restaurants in general. For example, how – how, like how people are willing to purchase the food, how attractive it is among the customers, and then who are the major customers. We know that it is – it has a theme like a major theme of how people are feeling about this theme, and second is we know it is operating mostly in the southeastern US.

We might want to identify the potential opportunities in other locations as well. And then fourth, the third question would be like do we have any competitions within this current area, or the area with the future expansion. Do we have competitors that have a similar theme, like restaurant chains that are similar to us. And that’s basically what I want to consider in the market bucket.

And then in the second bucket which is the margarita restaurant itself, I want to look at the financial status of the company to see how much of a prophet it is making in terms of, you know, from concerning the different revenue streams that we talked about in the introduction. Basically how much money we make from the food itself, or how much money we make from the merchandise and other associated products.

And then what is the cost structure of this giant food restaurant chain. And from the third bucket, which is a client, as I mentioned a little bit previously, does our client, the potential client who wants to purchase this company have the experience in running a food, like a restaurant with a specific theme. Does it have a culture that is compatible with the margarita’s culture?

And with its own operations, like is there any synergy that we can achieve if the company is acquired. Yeah, that’s basically the three major buckets that I want to discuss. If you don’t have any preference, I might want to look at the first bucket which is the market. If we have more information about how welcome people feel about this specific theme restaurant in the southeastern US.

Jenny Rae:

I do have a preference, but more than anything what I want to know right now is what you think. Is this going to be a yes or a no? Are you going to make the call or not?

Yuan:

You mean how – how do people feel about this restaurant?

Jenny Rae:

No, what you recommend – like will you make the call to your friend who works for the private equity firm and say you guys should think about buying this. Do you think it would be a good investment, or do you think it would not be a bad investment.

Yuan:

Yeah, I think – I think based on my like thoughts, I would say that this is probably an attractive business given that this restaurant has a specialty, like it has a theme related to margarita, which is a song, which is really special, and it’s different from the other restaurants like the luxury restaurants that probably don’t have any specific, you know, merchandise products or specific affiliation with other songs or themes. So that might be like a potential interest to a lot of, you know, people who listen to the song and who’s been a fan of the song, or something like that.

Jenny Rae:

So is that a yes or no?

Yuan:

Yeah, I would say it’s yes.

The Covid Case Twist

Jenny Rae:

Okay. Just double checking, okay. Awesome. So you said that you wanted to look at the attractiveness of the business. I actually have really one deeper dive question that I want to look at first before we go into some of that information. Specifically, in light of COVID and general restaurant industry dynamics, I don’t know where you’re sitting right now, but there – my guess is one of the first questions that a PE firm would ask you is why a restaurant, why now. What would you say to that?

Yuan:

Yes, that’s a good question. If we’re sitting in the situation of a COVID, I believe that I’ve sort of previously discussed why the restaurants, right? So this restaurant has a specific theme and it has a specific target customer and then can be expanded in the future. So that’s sort of the reason why I want to – I would like to, or this restaurant has a high potential to be acquired, or has a high attractiveness to the client – to the client.

However, in terms of the actual timing of the acquisition, I would see currently COVID has imposed a huge stress or burden on the restaurants, or other retail services. And a lot of people just – restaurants just close down due to the COVID situation. So it might be a difficult time for this restaurant to dig into a normal operating operation mode.

However, we can definitely come up with some strategies in light of the COVID situation. We know there’s a lot of different types of services that restaurants are currently offering to the customers, not just limited to the food itself. And we just noticed that a lot of restaurants are opening up like for take-out food or for other services, and especially for this specific margarita firm we are not only offering food, but also the merchandise and other associated products.

So I would say that this restaurant would be a traditional restaurant. And that we can definitely develop some strategies to provide different levels of services in light of COVID that is attractive to the customers.

Jenny Rae:

So let me ask just one more time. Why this restaurant, why now. Can you just summarize what you think?

Candidate Recommendation / Summary

Yuan:

Yes. I think the reason why I would recommend my hypothesis is that our client should purchase this company is because the margarita firm, the margarita restaurant has a special theme that is really attractive to the customers. So we have a large customer base and then why now is because you know even if we are facing the COVID situation, we can definitely develop some strategies that provides not only the food services, but also the different types of services like the merchandise that we mentioned, and other related – like margarita related products to the clients, or to the customers so that they are still going to be attracted to the restaurant itself.

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Financial Data

Jenny Rae:

Okay, awesome. Okay, right now I’ve got revenues on a per store basis and I want to estimate it as we’re sitting here about to order our drinks and our food. So I’ve got some data for you, and let me know if this is sufficient for you to calculate the revenue.

Yuan:

Okay.

Jenny Rae:

First of all, the average cost of a menu item is $18, and the average cost of a drink for those who order one is $12. The two main items are signature margarita glasses and T-shirts in the merchandise sure. Store. The average price for those who buy those is $20. The capacity of this restaurant that we’re sitting in is 200 people. The average turn time per table is one hour. The restaurant is open for operation to seven days a week from 11 AM until 11 PM and is open 350 days a year. Can you calculate the revenue per year of one store for Margaritaville.

Yuan:

Great. So since you’ve described a lot of data to me I would just recap all of the data so we’re on the same page. So the average cost or average price for each item on their menu is $18, and then the drink is $12. And I would assume that the average purchase of the people. Is that correct?

Jenny Rae:

Exactly. So $18 for the menu item, $12 – 12 is for the average cost of a drink, but just for those who order them.

Yuan:

Okay, so that’s for the, okay, great. And then the average purchase for merchandise is $20.

Jenny Rae:

Yes, again for those who buy them.

Yuan:

Great. So the restaurant has a capacity of 200 people at a time, and then a turn time – turnaround time is one hour, and assuming that each group of people who will stay in a restaurant for an average for an hour, and then they will leave, and then the next people would come in.

Jenny Rae:

Correct.

Yuan:

And operating hours are seven days within a week, and 11 AM to 11 PM, and that the restaurant operates for 350 days. So you want to calculate the revenue of the – the annual revenue with this specific restaurant.

Jenny Rae:

Correct.

Yuan:

And then I noticed that when I was recapping the case, the numbers coming you stressed the point that the cost for per menu item and per drink, and then the merchandise is actually describing the average cost for those who bought them. So I’m actually curious like do we have the number or the percentage of the customers who actually ordered a drink or ordered the merchandise?

Jenny Rae:

We do, yeah. 10% of the patrons purchase merchandise, and 25% have a drink.

Yuan:

Okay. Great. And then for the menu, for the products or the others on the main menu, we’re assuming that every single person would order.

Jenny Rae:

Correct.

Yuan:

$18.

Jenny Rae:

Yes. Everybody would order, some order an appetizer, but some ordered three things. The average food per person would be $18.

Yuan:

Yes. And you – we also described the capacity but, you know, the actual plate, like how many people are present in the restaurant might be different from the capacity. Do we have the specific information on how the different capacity, or what is the present rate for the customers from 11 AM to 11 PM in those seven days.

Jenny Rae:

We do. Absolutely. So yeah, there are sometimes when we’re not as busy, other times we have a line out the door. Our average utilization on the balance of the year is 80% on average.

Yuan:

80%. Okay.

Jenny Rae:

80. 8-0.

Yuan:

Okay. Great. So I think I’ve got all the information I would like to know to proceed to the revenue calculation. Yeah, can I just have maybe a few seconds to lay out my structure?

Jenny Rae:

Sure. Just make sure you come back and walk me through it again.

Yuan:

Yes, great.

Jenny Rae:

All right, you ready?

Financial Data Recap

Yuan:

Yes, yes. I’m ready. So since we’re going to calculate the annual revenue from – for this company, what I want to do is I will first proceed to calculate the daily revenue, and then multiply the number of like 350 days in a year. So in order to calculate the daily revenue, I would like to break down the revenue into three categories.

The first one is the revenue that we received from the main – like the food from the main menu. And the second is the drink, and the third is the merchandise. So accordingly I will also calculate the volume of consumptions in each category, sorry, and I multiplied the volumes by the price to get the total revenue for each category.

Yeah. So now I will proceed to calculate each term, yeah, within this revenue list. So for the food, we are seeing that the average price for food is $18, and within the day, the occupancy rate is 80% and then capacity is at 200, which means on average we have 160 people coming into the room, coming into the place.

And then we have – we run 12 hours within a day. So that gives us a total of people coming into our restaurant for food ordering. So this gives us 160 multiplied by 12, this gives us roughly 1,920 people coming into – into our restaurant.

And then for each person on average they pay $18 for food. So I will be able to calculate the revenue we receive from the food. That’s going to give us roughly $334.6k. That’s the revenue received from the food on a daily basis. And then we basically do the same thing to drink and then to the merchandise.

So we know that 12 – sorry. One quarter of the people would actually order the drink, so that’s going to give us nine, 19, 20, 20 multiplied by one quarter, one fourth which is 480 people would actually order the drink. And then each drink costs $12. Which gives us a total revenue roughly equal to $5.76K.

And then for merchandise, we know only 10% purchase the merchandise, so this gives us 192 people in a day that is purchasing merchandise, and then each merchandise costs – costs $20. That would give us roughly 3.84K. So I will add the three numbers that I calculate from food, drink and merchandise together to get the total revenue that we receive daily. Do you mind if I do some roundup?

Jenny Rae:

Yeah, get me close.

Yuan:

Okay. I would say the total revenue for the daily basis would be 44.2 K, and then if we multiply by 350 days, I just rounded up to 44. 44 multiplied by 350, that’s going to give us around – I’m sorry. That’s going to give us a total of $15.4 million on a yearly basis for the revenue. Yeah.

Jenny Rae:

Great. What do you think about that?

Assessing Operating Costs

Yuan:

Yeah, so I think it’s really hard to comment on the exact revenue without considering the cost of the operation of business. So I would say currently it seems okay to me, but as I don’t have like – I don’t have a specific knowledge about what the annual revenue that one restaurant should gain, but I would suggest that we look into the cost structure to see how much profit that this company is currently making.

Jenny Rae:

Awesome. So I think we should. Let’s look at the cost. I’ve got them for you. You ready?

Yuan:

Yes.

Jenny Rae:

Good. So are variable costs, the food and merge costs are 30% of revenues. For staff, we have 10 bartenders, 10 cooks, 40 waitstaff, and a manager. Each member of the staff has a seven hour shift. They either work from 10 to 5, or from 5 to 12. The staff cost per location is $3.5 million a year. Additional costs, including marketing and insurance and facilities costs are $650,000 a year. So what are our – what’s our annual profit?

Yuan:

Great. So I actually lost the connection a bit. I couldn’t catch most of the numbers. So I know it’s that the variable cost for food is on average 30%. So I would assume that includes the variable cost for food, for drink and for merchandise, if that’s correct.

Jenny Rae:

Yep.

Yuan:

And then for the labor cost, I cannot quite recall how many people do we have currently within the restaurant.

Jenny Rae:

Sure. 10 bartenders, 10 cooks, 40 waitstaff, and a manager.

Yuan:

And a manager, okay.

Jenny Rae:

As well as a manager.

Yuan:

Okay. So that’s going to give us, you know, 40 – actually 60 workers and one manager in total. Okay. And on average I’m assuming that’s the manager and then the workers who have the same working hours, which is seven hours of work, and then they have the rotation from – from 10 till five and then 5-12. Okay. And you mentioned there are some relocation costs, which is $3.5 million if I understand correctly. What is that for?

Jenny Rae:

Yeah, that’s the staff costs.

Yuan:

Staff costs. So that staff cost is different from the – the labor cost that we just mentioned? Or is it the same?

Jenny Rae:

I didn’t mention labor costs. That is the labor cost.

Yuan:

Okay, that is the labor cost. Okay. And then there’s costs associated with marketing and administration, or operations. But I missed that number.

Jenny Rae:

Great. $650,000.

Yuan:

Sorry, 650,000.

Jenny Rae:

Yes. 6-5-0.

Yuan:

6-5-0. $650,000. Okay, great. So yeah. I think with this number, with this information I should be able to calculate the profit. So that’s a marketing cost that is actually annual costs, annual fixed cost.

Jenny Rae:

That’s right.

Yuan:

Okay. So-

Jenny Rae:

So walk me through this part of the process.

Yuan:

Yes, yes, yes. So for the variable cost, which is 30% of I’m assuming that’s the – 30% of the revenue, and that the revenue I just calculated is 15.4 million. So the total revenue costs would be 30% of that number, which is going to give us roughly 40 – sorry, $4.62 million as the variable cost. And then for the staffing costs, we have the staffing number which is $3.5 million. And then for the marketing we have $.65 million. So if we add these three numbers together, we should be able to get the total cost, which is around $8.8 million.

And then we know the revenue is 15.4 million, and the cost is $8.8 million. That gives us the profit of $6.6 million. And then also we are going to – we are making a profit margin of, you know, roughly I would say 40%. So I would say like a profit margin of 40% is actually a big deal for a food or restaurant – restaurant services. And I would say just by looking at the profit margin, I would say this is a really promising business that we should probably go for, but there’s definitely also some other considerations that we need to take into account, as you mentioned, currently we’re in this – like in the COVID situation, and I believe that the business model, or business structure would probably need to be changed. And the consumption rate, or the type of services that we are able to provide might change as well. So these are all the factors that we need to consider, aside from just the profit margin number.

Valuation

Jenny Rae:

Good. Okay. So now we want to get a valuation so we can pitch how much capital the company would need. How do we value it?

Yuan:

So yeah, can I just maybe take a couple of seconds to think about it?

Jenny Rae:

Go ahead and tell me what you’re thinking about here.

Yuan:

Yeah, sure. So I think this – since we are considering the acquisition in the special time of COVID, I think normally we would just say consider the valuation based on the previous revenue, or previous profit, and then evaluate how promising, or how profitable that business can bring us to. But since we’re considering this acquisition currently, I think, it is important to see how – what is the projected revenue we are able to earn after, or during this COVID period. And then how much – how much change that we are going to make so that the company, or the restaurant should be able to obtain itself in this new situation.

Specifically we want to look at what some of the, or how flexible this restaurant is able to adapt to the situation, and what other products or services that they are offering that they are going to offer to the customers in addition to just the food, or their traditional services. And we also want to look at the customer response. Basically are people willing to still go outside and consume, or go to the restaurants to experience this luxury experience in person, or if they want to stay at home and then do whatever they want to without going to this luxury like restaurant. So that’s more towards the marketing.

And yeah, so I think the three major categories I want to look into is definitely what are the projected financial conditions that Margarita restaurant chain is able to make in the future, and then what is the market – the customer’s response in the COVID situation. And then the third one is what type of new services or products that this company is able to carry out in the situation in light of the changes in customer behaviors and change of other practices.

Jenny Rae:

So Yuan, we did a valuation, we think it’s about $1.2 billion. How is the owner of the private equity firm, how would they make money back? How would they make a return on their investment?

Yuan:

$1.2 billion, sorry.

Jenny Rae:

Yep.

Yuan:

Is that 1.2 billion? Okay. So that’s, $1.2 billion is for the total 22 firms, 22 restaurants?

Jenny Rae:

Yes.

Yuan:

Okay, that makes sense to me now. So assuming that we all – all the 22 restaurants have the same structure and expected profits, or revenue, we are seeing that –

Jenny Rae:

Do you remember the question?

Yuan:

Yes. Like how should our client or the private equity firm actually make money.

Jenny Rae:

Make a return. Yeah. How do they get a return back for what they spend?

Return On Investment

Yuan:

Yeah, that’s a good question. So we – I just calculated back at the profit that each firm, or each restaurant is making is $6.6 million. And if we multiply by 22, we get the total profit for all these 22 chains, right. And I was just concerned about or estimating the net profit that we are able to gain from these 22 firms. But it seems that this is a – there is still like even with 22 restaurants, there is still a big gap between the amount of money that we invest and the amount of profit that we are able to gain in the next few years. So yeah, I would say, so the total profit for these 22 firms is around $130 million.

And then the investment is $1.2 million sorry, $1.2 billion. So if we want to have – well, if we want to have a return on the investment, that would actually take us like six or like, sorry, it’s actually like nine years, or eight years to have the – to have the return on investment, which is quite long. So the question is how should we make – I’m assuming that how should we make this period shorter, less than eight years if I understand correctly.

Jenny Rae:

Yep. But more importantly, just right – understanding that a private equity firm usually has a five or sometimes under year timeline. How do they generate a return so that their valuation is going to be higher at sale?

Yuan:

That’s – that’s a good question. Because I’m not so familiar with how this private equity firm actually works. Like, you know, they want to purchase the firm and then sell it within five years, if I understand correctly.

Jenny Rae:

Five is usually a target. They want to sell it when they can sell it for more, if it’s one year, they’ll sell it for more in a year. If it’s five, they’ll sell it for more then.

Yuan:

Yeah. So currently, yeah, some strategies.

Jenny Rae:

How do you make it more valuable?

Yuan:

I would say to evaluate the profitability of the business we can look into several major buckets. The first one is how attractive, or how attractive or how many, or how much or how big is the customer base that this business can attract. For example, how people are attractive, attracted to this, to this restaurant with this specific theme. So basically, if we want to expand its customer base, then we can potentially have more chain stores in other locations other than the southeastern US. So that we can have a larger impact across the nation.

And then second is about the products and the services that we offer. Currently we are offering the food, and the merchandise, and the other margarita theme related products. So I was wondering if we can have our restaurants launch different sorts of products. For example, organizing events, like with music, songs, you know, invites – invite singers to play live events so that people with like who are the fans of this song could actually enjoy more music related themes at this specific place.

And then the third one is actually to increase its profitability from the financial standpoints. So if for example we would want to have a higher profit margin by increasing their product, or the price of the products and the services that we offer, and then reducing the cost at some point, then the total profit margin we are going to make is going to increase, which would further attract, or which would further increase the evaluation of this target firm.

Jenny Rae:

Great. We’re almost out of time, and the CEO of the PE firm, your friend just called you. So you decided to just let them know what you’re thinking either way. What do you think? Should you tell them about the deal, or should you just tell them where you’re sitting and you’re having a good margarita. Which way are you going to go, and why?

Candidate Final Recommendation

Yuan:

So I would recommend our client, or my friend actually purchase or acquire this margarita chain restaurant for the following reasons. Firstly, based on the financial analysis, we are seeing that the firm or the margarita restaurants is making on average 40% of the profit margin, which is a really promising number in the restaurant chains.

And, and this and the second reason is because the margarita restaurant is not only a traditional restaurant that only offers food services, but it also has this specific theme that is attractive to a specific group of customers. That said, this restaurant itself has a specialty in it, and it’s different from the other restaurants like other luxury restaurants that we are aware of.

And a third one is even if with this COVID, current COVID situation that’s have created a lot of burden on retail services or the restaurant services, I believe that if we are able to launch different products and launch different services to remote consumers, we are able to maintain this profit margin around 40%, which is really promising. And at the same time, we can offer design different strategies to encounter the COVID situation.

So however we do have to consider some risks. For example, the COVID situation is definitely a risk, like at the level of flexibility that the company is able to, you know, is able to adapt to the situation would be the key issue in our consideration. And the level of services that we are going to offer and then change it that we are going to make in this organization is definitely the key consideration.

For the future, for the future I would suggest that if our client, or if my friend wants to pursue the acquisition, then I would suggest that you look into the possible like consumer changes – like changes in consumer behaviors in a COVID situation. For example, if no people want to go dine out in a luxury restaurant anymore, or if they still want to do that. And some of the products and services that this – that our friend can design for this margarita restaurant to encounter this COVID situation.

Jenny Rae:

Amazing. Okay Yuan, thank you so much. You can relax. How is that? Was that what you wanted? Was that hard enough, and was it interesting enough?

Yuan:

That was interesting in that I was not totally sure about, you know, like what the restaurants were. Or actually margarita, what is that. So I was a little bit stuck at first, like I don’t know what’s that for and then I don’t know how it is really to do the case.

Jenny Rae:

Yeah. Absolutely.

Yuan:

Yeah. And when I –

Jenny Rae:

And when you go home after the case, you should definitely look up Margaritaville. You’ll see it – you’ll see it. And I don’t know how many people on the call, do you guys want to just throw up your hands if you’ve ever been to a Margaritaville? The last time I went to one was maybe like 15 years ago. So as you can tell I was feeling a little spicy this morning when I was writing this case, making it super fun.

Yuan:

Yeah, yeah.

Feedback For Candidate

Jenny Rae:

So Yuan, I want to give you some feedback, but you know what, I thought that from a mechanic’s standpoint, you are so strong. So I actually pushed you into the nuance pretty quickly inside the case. And if I had to bifurcate the performance, I would say strong mechanics, nuance missing. And I really wanted to talk about how to add that nuance. I also just have some tactical pieces that I think could be really helpful. You asked at the beginning in our pre-call conversation, you want to be a little faster, you want to make sure that you’re moving through things quickly. And I have two ideas for how you can do that. So I just want to go to the case and give you some of that feedback, and then you can ask me afterwards if there’s anything in particular you want me to elaborate on a little bit more.

Yuan:

Great.

Jenny Rae:

So first of all, in your opening, you took 5 ½ minutes to open the case, and I think part of that was that you didn’t want to ask, but you did want to ask like what is Margaritaville, right? And so here’s the way that you ask a question like that. I, you know, you mentioned that it was a restaurant. When I think of restaurants, there are a couple of different kinds, right? There’s fast food, there’s fast casual, and then there is full service dine-in, and I’m thinking that this is – and just pick one, even if it’s the wrong one. But I want you to kind of right away try to get to the point at the beginning of the case. Sometimes you guys are going to know exactly what it is. And some of you are like Margaritaville, got it. And some of you were probably like no idea what she’s talking about. And so depending on the case situation, that’s going to be you. So just, you know, right away ask that question.

However, the other thing that you did is you started asking me questions before you recapped for me, and I felt like that it didn’t get you into the flow enough, where you could just tell me what you heard, and give yourself a little more time. So just reorder that, right? Recap first, even when you’ve got to this big looming fact question, and then come back to me afterwards and ask me all the questions. Okay?

Yuan:

Yeah.

Jenny Rae:

So that needs – that timing needs to be I a max of four minutes, and that 5 ½ minutes just started eating into your time right there at the beginning of the case, which made me uncertain about you, and made me feel like I wasn’t sure what was going to happen next. In your structuring, you nailed it. Two minutes to build the structure. I thought your structure was really good. I think we could make it from a B+ to an A with just two small tweaks.

Number one, I think your first category was too large. You had overall attractiveness in that category. I kind of regrouped it into like demographics and competition. I honestly think that competition for restaurants is kind of a weird thing because it’s a very, very highly fragmented market. Competition also includes at home cooking, and a lot of other things. So I didn’t love that section. If I was going to eliminate one piece of it entirely, I would’ve done that. So I think you could’ve presented me less, first of all, or presented that in a bigger chunk at the beginning – or sorry, smaller chunks from the bigger chunk at the beginning.

The second thing is that I felt like you lost your communication of the structure after the beginning. And so in a virtual environment, I need an incredible amount of detail where you’re saying like in the first category, I have three things that I want to look at. The first thing is, the second thing is, the third thing is. And so you just kind of start listing out and explaining. I wasn’t sure where the list was starting and the explanation was beginning. And so it came across, even though at the beginning you told me you had three categories, I had actually – I didn’t even know when we were moving from category to category. And that took you 5 ½ minutes. So that should be two. So I need a much more direct communication of your structure right at the very beginning, especially for McKinsey, okay?

Yuan:

Yes.

Jenny Rae:

So those were two places where right at the beginning where I felt like gosh, we could have gotten 4 to 5 minutes back, and also gave – sorry, given a stronger impression right at the very beginning. Okay. Then the first question I asked you was a creative question. That is your weakest part of the case. Those are the places where you need to practice. Thinking on your feet and talking through the thinking on your feet.

So what you did is you kind of rambled for a while, barely came back in a structured way. And then I had to ask you actually in both situations, that one and at the end of the case, like okay, what are we doing. What is even on your paper right now what’s happening at the moment. And so I really, really wanted a lot more clarity from you. So the question I asked you at the beginning was why this restaurant, why now. And you – like and I get it, but that’s not an immediate easy question to ask. But what I’m asking for is I’m looking for your strong gut instinct, right? And that is why I asked you at the end of the structure yes or no. Which way do we go?

And by the way, in a yes or no case, in a market entry case, profit scenarios case, or and mergers and acquisitions case, you always would want to have it ready to go. And state that at the beginning. But yeah, I think that part, and the last part, my recommendation for those would just be to start out by categorizing like what you would think about, and then go back and fill out your categories. And write while you’re talking. So give yourself the pause of the time when you’re writing to collect your thoughts a little bit. Because you came up with good ideas. You said special theme and timing at the beginning.

In the end, I actually wasn’t sure exactly when you were moving from one thing to another, but it was like increased profitability, open new stores. There was a – like you kind of got to where I was wanting her to go, but again, it wasn’t just communicated super clearly. So I would go through reps on those creative questions. Like just have somebody ask you hey, what’s your gut feel. Why should we do this, what are three things we should be thinking about. Like really pushing you. And do an hour of those kinds of questions and I think you’ll breakthrough that really quickly because the substance of what you came to is fine. It was just the structure got lost in the process.

Yuan:

Yeah, I think I – I think – I think in the beginning I missed the part that you want to consider acquiring this business at this moment. So that’s why I said yes. But you said at this moment I said no. At this moment I probably should say no.

Jenny Rae:

No, no, I liked the yes. Actually, most mergers and acquisitions cases bias yes so if you’re ever not sure just pick yes. It’s a great way to start. So that wasn’t a bad choice. It was more that I – what I was pushing you for there and throughout the case was just more clarity, right? Yes, no. I was looking for that kind of like I know you have a gut feeling here and I don’t want to go through all of the mechanics of the math right now.

Speaking of math, wow. Well done. You were flawless in terms of your calculations, and you gathered all the data, you caught everything that I was trying to hide away from you. And so I thought the math was really a strong suit. You do have a speed thing though when you’re collecting the data. So when you’re doing the math, there were one or two shortcuts that you could have taken to make them a little bit simpler.

Anytime you are repeating like multiplying three things by something, just add those things up in the beginning, or weight them whatever you need to weight them by and then get those calculations summed together. But that wasn’t – that for me wouldn’t have made the difference. But if you at the beginning had just kind of gotten to the point a little bit more quickly, and also – I’ll just give you one emphasis point here. Like give me an interpretation as you’re repeating the data.

So for example, I told you after you asked, right, 10% of people purchase an item of merchandise. Tell me whether you think that’s low or high, right? Immediately this data is giving you the opportunity for the next thing, increasing the chance for the future. So one of the options is to get more people to buy merch, right? Get more people to buy drinks. Get more people to buy multiple drinks. And so I have like a very long idea list of the way things they said they could drive some of that kind of behavior. And the data at the beginning gives you that. So if you can make the connection between the data and insight before you even start the math, that’s kind of it. A candidate tactic there. Throughout the math, again, I really felt like you were in control and understood it, thought the profit was good, gave me good reasoning.

The final thing on the math is just I felt like your insights could’ve gone a little bit deeper. Like this looks amazing. You even mentioned that I feel like the profit is really good. It is, it’s great for restaurants. You know, there are a lot of things that I felt like you kind of did but could have just gone a little bit deeper on in terms of insight. But we already talked a little bit about the second creative question, and then your last – the closing of the case was about two minutes and 40 seconds. Too long at the end of the case.

And here’s where I felt like the nuance was missing the most, right? It was your friend calling. I think you could’ve been structured but shorter and made it a little more informal. And that was like a complete – this is the CEO situation, and I was actually intentionally in the case looking to break you out of that and try to see you in a more natural sense how you would communicate. So the risks and the other things at the end, like they are nice to haves, but in this case I probably would have truncated those. Okay, what questions do you have for me?

Yuan:

I – I think, yeah. So initially you probably need to draw my hypothesis on – on my intuition, whether or not I would suggest my friend to acquire. But what if like in the end, initially I thought it was yes, or it was no. Like at the end, I would just realize it’s no. So does it matter like I just turn around my answer?

Jenny Rae:

You change your mind?

Yuan:

Yeah.

Jenny Rae:

No. But you – you’ll need to just defend it, right? There’s three parts at the end. It’s the recap and the recommendation, as well as the next steps. So your recap in your recommendation you can put together. You can’t be like we found out that it was a great profit, and there was a lot of upside, and then I say no. Right? Like that would really come out of left field. So you would need to explain that. I think there’s – part of why I make cases like this is I do think there’s an interesting case for this being a no.

One of the things that you’ll find that’s actually nuanced about Margaritaville that you may or may not know is that it’s a very tourist-centric kind of – you know, it’s at Universal Studios, and on Miami Beach, and like in places that are very heavily tourist affiliated. They don’t have a lot of repeat business. Right now tourism is really slammed in COVID. What does that mean? So, you know, I would just want you to justify whatever you said. And the stronger you are, the more I’ll push back on you. So if you had been a little stronger throughout the case, I would have pushed back even more to really understand why you thought about what you were thinking. So I kind of – I backed off a little bit because I didn’t want to throw you into too much of a tailspin. And when you feel the interviewer doing that, you know that you’re – you actually need to ramp up your clarity, ramp up the directness of it.

Yuan:

Yeah, correct. Yeah. I think I was – while I was doing the case as soon as you pointed out that we want to do this, or my friend wants to do this business at this current time, then all of a sudden I feel like I probably should say no, and then even at the very end of the case, I was like yeah, even if we have this – even if we have this good profit margin and historical like good numbers, I still wouldn’t say that I would recommend a friends to buy this business. This is too risky, and especially if it’s my friend, then I probably don’t. So I was a little bit hesitant about doing it like speaking out my gut, yeah.

Jenny Rae:

Well, I actually – I think it’s a great business. I really like it. I’m not a big restaurant fan, but I was – when I was doing some of the research for the case, restaurants get about a 10X multiple. I actually haircut it because of COVID to an 8X multiple. You know, money is really cheap right now and one of the big strategies here would be opening more stores. So if you can get that, you know, 6.5, I think $6.5 million per store and just opened 10 more stores, your evaluation goes up 1.5 times. What does it cost you to open up a store? I don’t know. That would be another part of the evaluation that you need to think about.

If you can drive more merch, if you can do – there was, by the way, I don’t know if you are watching it, but there was a flurry of interest that was coming in through the chat bar of people that were coming up with cool ideas. One of them was why don’t you sell Margaritaville stuff inside grocery stores. Like give people a sense of like the beach at home, and there were a lot of really cool ideas that I think are actually outside opportunities for an organization that, you know, what they do is like they take cheap money and they – they do something. They take the leverage out. They take the money and they pour it into the growth of the business, and in a situation like this, opening new stores could be great. Opening new stores where other restaurants may have closed because of COVID challenges would also be great. You know, there are some opportunities. But again, you can say yes or no. I just think that there were some things to talk about there.

The final things I just want to say is I did actually have a valuation number for you if you had said that. So I had an EBITDA multiple if you said that you wanted to do a multiples valuation, which should always ask for inside cases because it’s a very simple multiplication. You just take the number that you already had, and then you multiply it times the multiple that I give you. And so that multiple in this case was eight, which is how I got that $1.2 billion number. I also had a cash flow discount rate model for this, and my rate of – of the, sorry, the discount rate was 10%, and the growth rate was 2%. So the net of that was .08. And so you would’ve had to divide the cash flow or what we proxy was the EBITDA by .08 which gives you $1.1 billion as the estimate. And so I was actually in that situation looking for something a little bit more tactical but just in case people that are listening or watching if you wanted that information inside the case, that’s what I did.

Yuan:

Great.

Jenny Rae:

All right, so let me – do you have any other questions, otherwise I’ll open it up to the rest of the audience.

Yuan:

I think just one last question. In terms of delivering a clear structure or a structured answer, what suggestions would you – yeah, what suggestions would you have for me.

Jenny Rae:

Structured at the beginning, or structured at the end?

Yuan:

I would say like structure in the creative question.

Jenny Rae:

Oh yeah. So for the first one, the first question was just like why – why a Margaritaville, why now, right? So I would start with saying yes. So I’m to go off of that and say what makes this yes now. And that’s what we’re going to test for inside the case. And then I would’ve gone specifically into, right, what kind of locations are we in. But it would have just been the first three things out of the brain. When I think about what’s being hampered for, you know, can we do take out, what is our utilization now, what kind of locations are we in? Are they – are tourists there? Are people still going to restaurants, do we have to reduce our capacity?

Like there are a lot of questions that we could’ve asked, but the way that I just asked them isn’t how I want you to ask them. What I’d want you to do is come with one, write it down, right? Think about it. Come up with the two, write it down. And then recap for me however many you come up with. Usually three is the target for something like that. And then in the end, same thing. Okay. So how do we make a return? Gosh, I’ve never thought about that before. But if I were an investor, how do I – how do I make a return. I create more value for the company. Which means more profit.

So let’s just talk through how we would make more profit for the company. First, you went to the top line. Great. So here’s how it would grow the revenues of the company. And then here’s how I would address the costs of the company, and then there’s kind of another which is just like same store openings, right? So opening new stores in new places. But yeah, just the same thing. Write down one thing, think about it for a second, and then go on to the next thing so that it appears a little bit more organized.

Yuan:

Okay, sounds good. Yeah, I think these are all the questions I have. I really appreciate this time. Like your time.

Jenny Rae:

Amazing. So you are more than welcome to stay, but I know that people might have questions either about the case, or about my feedback, or about your performance. But the last thing I just want to say is thank you so much. I really enjoyed that. I think that with a couple of these tweaks, like I mentioned I thought your process was super solid, you remained controlled and optimistic throughout the case. It seemed like you were having fun solving it. All of those things are a really big deal to me as an interviewer. And so just keep that enthusiasm as you are working on refining your final process.

Yuan:

Great, thank you.

Jenny Rae:

Good luck.

Concluding Thoughts

This mergers and acquisitions case was a little tricky, with the effect of Covid on the business. You should be ready for a similar twist if you’re going in for a case interview. Consulting firms want to see that you can respond to a real life situation. What did you notice about this mergers and acquisitions case? How did you feel that the candidate did? One of the big points of feedback that Jenny Rae gave, was on structure. Candidates, especially in a McKinsey case, have to be very clear in their structure. Throw in the added challenge of a virtual/online interview, and you have to be even more clear!

Additionally, look for those secondary, or deeper insights. Firms absolutely expect you to get the obvious insights. But if you want to make an impression, did into the “why”, and draw an insight from that. Come up with something beyond the first layer. Set yourself apart!

If you want help preparing for your case interview, please reach out to us at [email protected]. We’re here to help you land that dream consulting role!

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