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Monthly Archives: September 2017

Business Practices, Resources

What is Q of Ops?

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In a “Quality of Earnings” (Q of E) report the accounting firm audits the financial statements to vet EBITDA, to determine what it is.  Their report will also likely assess the risk of maintaining recent performance at a relatively high level (customer concentration, product mix/margins, etc.).   The Q of E has always been a standard component of the diligence process.  But in today’s deal environment, for a PE firm to understand the full potential of a target – and therefore be competitive in the bid process – they need to go deeper.

A buy side Q of Ops diligence (similar to a Q of E but with a focus on Operations instead) looks at how management runs the company today and determines what EBITDA “should be”.  It answers three basic questions.

  1. What is the likelihood that the company can replicate current performance in the future?  What risks exist that endanger the stability of company EBITDA and free cash flow.
  2. What fundamental changes are needed to scale the company?
  3. What is the financial impact of realizing the latent or hidden value within the company?  The impact on EBITDA, working capital, capacity, lead times, retention, employee engagement, sustainability and/or safety.

Why do a Q of Ops?

Our clients that perform a Q of Ops report the following reasons:

  1. They are tired of losing on a deal and then seeing the winning PE firm succeed in growing the value of the company.
  2. They are frustrated when they end up having to “write a check after writing the check”.  They want to know what they will have to do to maintain EBITDA and grow the company before they close.
  3. They are concerned about hitting the ground running post close.  They want management focused on getting ahead of plan early in the hold and on building momentum for sustainable value growth while they are onboarding the portfolio company.

Sell Side Q of Ops

One major accounting firm we work with reported that they did 0 sell side Q of E’s in 2013, 2 in 2014, 54 in 2015 and over 130 in 2017.  It is a real trend and is proving to be a good investment.  This preparation leads to a smoother close and gives the seller a chance to prepare answers to likely questions and objections.

A sell side Q of Ops is most relevant when the PE firm is:

  1. Worried that selling a portfolio company with mediocre performance will drag down fund performance.
  2. Concerned that the portfolio company is, as one client put it, “a $5 million EBITDA company doing $3 million”. 
  3. Exhausted from investing so much personal time into a portfolio company.

The sellside Q of Ops quantifies the latent value hidden beneath current management practices.  It provides the PE firm and the management team a clear data-driven path to realize that value BEFORE entering the exit phase.

First Steps?

If you relate to the any of the symptoms described above, reach out to Tim Van Mieghem to explore whether the Q of Ops would be a good investment.

Timothy Van Mieghem
tvm@proactiongroup.com
The ProAction Group, LLC
150 North Wacker Drive
Suite 2500
Chicago, IL 60606
Tel: (312) 371-8323
www.proactiongroup.com

The Competition is Fierce. Change the Rules. ™

Case Studies

Sell Side Q of Ops

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Our client was looking to seek new investors in a manufacturer of consumer products located in the Southeast Region of the US, and requested that we tour the operation.

Fortunately for everyone involved, we saw immediate opportunities for improvement. The company’s production runs were designed to manufacture 8-12 week supplies of any given SKU. Naturally, this was creating a feast or famine situation. Overproduced SKUs tied up capital, while fulfillment of items still in the queue was delayed and expensive. We believed that implementing Lean Manufacturing principles would result in a 40% increase in production per labor hour. This would dramatically impact the organization’s capacity, throughput and EBITDA.

Background:

  • Identified changes to manufacturing processes could drive a meaningful increase in the company’s market value in less than a quarter.
  • These changes required 8 weeks to implement and a immediately demonstrated a 44% increase in production per labor hour

ProAction illuminated the path forward for our client:

  • Re-designed Processes: The company’s throughput could be greatly increased by employing a one-piece flow manufacturing process instead of batching. This new Lean Manufacturing model is efficient enough to create labor and staffing reductions, and can drive a cycle of continuous improvement. It also substantially decreases lead times.
  • Improved Capacity: During our review we found that one particular product was accounting for 24% of the company’s sales. As we planned for the future state, it was clear to us that implementation of the one-piece flow system would allow the company to realize a 30% capacity improvement for this product with one less line and three fewer people.
  • Facility Layout Improvements: Layout changes dovetailed with the company’s new Lean Manufacturing to accomplish two goals. It made production processes more transparent, making oversight easier and ensuring abnormalities would be spotted quickly. It also reduced wasted travel and motion. The changes enable production rates to be set by product type, leading to more accurate scheduling and increased accountability.
  • Labor Balancing: When considering staffing reductions, we found that continuing the fourth packing line and filling it out with three employees who had become redundant elsewhere would increase capacity improvement from 30% to 38%. Co-locating the company’s two warehouses reduced staffing and expenses.

Actions Taken:

  • Redesigned the factory layout and executed on that design
  • Implemented Lean Manufacturing
  • Streamlined processes to decrease materials handling and improve efficiency
  • Reallocated staffing to realize additional capacity gains and reduced labor spend

Impact:

  • 10% reduction in labor
  • 38% increase in capacity
  • 44% increase in productivity
  • Shorter manufacturing lead times
  • More visible, easier to manage “one piece flow” process
  • Additional savings in receiving, inventory control and shipping

Measurable Results:

  • 44% productivity increase
  • 25x return on dollars spent
  • Full transition in less than 8 weeks

About The ProAction Group

ProAction is an operational consulting firm that works with Private Equity to do three things:

1. Help you win good deals (and avoid bad ones!) through our pre-close “Q of Ops”.

2. Help your management teams as they transition from an entrepreneurial approach to a scalable, process driven leadership path.

3. Help you maximize the value of your portfolio companies through the implementation of operational excellence.

We focus on three sectors: consumer products, manufacturing and distribution. We have experts in Lean Manufacturing, Six Sigma, Sales and Operations Planning, Inventory Strategy, Sourcing, Logistics and Human Capital Development. We were founded in 1995 and are headquartered in Chicago.

For Further Information:
Timothy Van Mieghem
tvm@proactiongroup.com
The ProAction Group, LLC
150 North Wacker Drive
Suite 2500
Chicago, IL 60606
Tel: (312) 371-8323
www.proactiongroup.com

The Competition is Fierce. Change the Rules. ™