Due diligence without any $1000/hour expert calls

original medium article

Say we are helping a private equity client that’s considering buying out a plastic bag company (e.g., something like Poly America) operating in the US market. They want a good estimate for what the demand for plastic bags will be in 5 years. We have 2 weeks to do it. The most naive solution is to look in a market research report for actual estimates. However, something this specific usually can’t be found. We can interview a bunch of the plastic bag company’s customers (i.e., ask for their inventory records), but they may not be willing to give us that information. Finally, we can always reach out to “industry experts” for advice. But who is the best expert, and how helpful will he/she really be? Thinking about this in a more entrepreneurial way, the best way to do this would be to observe how plastic bags are used in real life.


First of all, who uses plastic bags? Here are the top retailers in the world and their revenue numbers (obtained from each company’s 10-K).

top retailers

Walmart has 13% market share, so lets go to Walmart. We’ll stand outside Walmart for a week and get two pieces of data from each customer leaving:

  1. how many bags the customer had
  2. how much money the customer spent

Averaging this out over all customers observed over a week, we simply divide the total amount spent by the number of bags, and we arrive at a metric: dollars per bag. The average person walking out of a Walmart store had 3 bags, and spent $51. Therefore, the average dollars per bag coming out of Walmart is $17.

To figure out how many bags Walmart uses per year, we need to leverage more public information from Walmart’s 10-K from 2016.


Taking a look at Walmart’s 10-K from 2016, we can see that out of 11,695 worldwide retail units, 5,332 retail units are in the USA. As an approximation, we can therefore estimate that Walmart makes 46% of its revenues from the USA. Since 2016 worldwide revenues was $418 B, then 2016 USA revenues was $220 B.

Now, we can estimate how many bags Walmart used in 2016. Taking the $17/bag that we figured out from our observation, we see that the number of bags was $220 B / ($17/bag) = 13 billion bags.

Since Walmart has 13% market share among retailers, we can estimate that roughly 100 billion bags are used in the US per year.

So this private equity acquisition target is going after a market of 100 billion bags, but what does this mean for future cash flows (specifically the next 5 years)? There are many drivers that can change the demand for bags each year, but the main drivers I can see are the following:

  1. GDP growth — this is probably the biggest driver; retail spending goes down during tough economic times and rises during economic booms.
  2. The rise of online shopping — retail stores risk losing sales if customers buy stuff online. Currently about 8% of sales for retail products are made online, but this could potentially rise over the next 5 years. This figure may rise a bit over the next 5 years, but its highly unlikely that online shopping will replace brick and mortar shopping. Online shopping might account for somewhere around 10–11% of total sales in 5 years.
  3. Regulation — in places like California, there’s a (trivial) tax on plastic bags. This doesn’t seem like a big driver for plastic bag demand.
  4. Consumer preferences — the people buying stuff from stores might suddenly stop wanting to use plastic bags. Maybe they will care more about the environment. But most likely not.

GDP growth is about 3% a year, so say 3 billion more bags are used per year. This could potentially bring the demand up to 115 billion bags in 5 years. Online shopping will increase over this time frame, and would probably decrease this number by 2–3%. So that brings down this number to 112 billion bags. It’s possible that tighter regulations on plastic bag usage may be imposed over the next 5 years, but unlikely for something drastic to happen. Let say we take off another 2% from our projection, bringing down the projection to 110 billion bags. Finally, consumer preferences most likely won’t move the needle. So there we have it, a demand of 110 billion bags in 2021, which is a 10% increase from today. This doesn’t seem like massive growth, but retail is a stable market that isn’t going to disappear suddenly. There’s many things that go into a private equity firm’s decision to invest in a company, but if there’s good room to make the company more lean and cut costs for financial improvement, this could be a good buyout opportunity!

So how much did this cost us to do?

  1. 10-K filings: $0
  2. standing outside Walmart for a week: $0. Maybe $500 if we hired some people off of TaskRabbit or Craigslist to help out.

A little creativity goes a long way in the investment due diligence process.