Growth-Based Franchise Opportunities: Lessons from the Geico Acquisition

Journal of Private Equity, pp. 6-17, Spring 2011

Posted: 22 Feb 2011

See all articles by Joseph Calandro, Jr.

Joseph Calandro, Jr.

Fordham University - Gabelli Center for Global Security Analysis

Date Written: February 21, 2011

Abstract

Private Equity acquirers often purchase under-performing 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 is 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 as such 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 paper 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.

Keywords: M&A, valuation, franchise/sustainable competitive advantage, value realization, performance management

JEL Classification: G22, G34, L21, M13

Suggested Citation

Calandro, Jr., Joseph, Growth-Based Franchise Opportunities: Lessons from the Geico Acquisition (February 21, 2011). Journal of Private Equity, pp. 6-17, Spring 2011 . Available at SSRN: https://ssrn.com/abstract=1766133

Joseph Calandro, Jr. (Contact Author)

Fordham University - Gabelli Center for Global Security Analysis ( email )

531 Hughes Hall
441 E. Fordham Rd
Bronx, NY 10458
United States

HOME PAGE: http://www.linkedin.com/in/josephcalandro/

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