Growth-Based Franchise Opportunities: Lessons from the GEICO Acquisition

Abstract

Private equity acquirers often purchase underperforming businesses and then cut costs and otherwise turn those businesses around for later sale. This approach has worked incredibly well, so much so that it has attracted a great deal of competition thereby making similar deals increasingly scarce. A potentially lucrative alternative to such deals are growth-based franchise opportunities. A “franchise” is Graham and Dodd nomenclature for a firm operating with a sustainable competitive advantage. A growth-based franchise opportunity arises when a franchise has unrecognized growth potential and thus can be purchased at a reasonable “margin of safety,” or discount from estimated value. The classic example of such an opportunity is Warren Buffett’s 1995 GEICO acquisition. This article presents an approach for identifying, evaluating, and tracking the value realization of growth-based franchise deals in the context of the GEICO case. The approach integrates strategic, financial, and performance management concepts in a way that, it is hoped, will prove useful to future acquirers and researchers alike. <b>TOPICS:</b>Private equity, fundamental equity analysis, portfolio construction, performance measurement