As The ProAction Group approaches its 25th anniversary, we asked Partner Tim Van Mieghem to reflect on the change he has seen in their clients’ needs. Over 80% of The ProAction Group’s business comes from Private Equity firms and their portfolio companies, so it comes as no surprise that change in the PE industry is top of mind for Tim. “PE firms have to pay more today for businesses than they did 10 years ago because there is so much competition for the deals. It is more important than ever that PE firms truly understand both the risks and opportunities of each potential deal.”  

Continue reading Private Equity Firms Need Manufacturing Operations Expertise More than Ever Before →

Smart businesses are always looking for ways to increase operational efficiency and maximize company value. After performing hundreds of operational assessments over the past two decades, The ProAction Group has become adept at identifying hidden EBITDA opportunities for our clients. We all know every business is unique. Some of these indicators may pique your interest and others may represent areas where your business is strong.  Still, reviewing this list can help you consider where some meaningful improvements may be made.

Signs Hidden EBITDA May Exist

• The Sourcing Strategy is undocumented, poorly defined or under-utilized.

When companies do not have thorough, documented sourcing strategies, they may be missing opportunities to improve costs on goods purchased. Spend may be set-up or managed by untrained buyers who without defined strategies and training may lack skill in negotiating with suppliers. Is the strategy for frequency of competitive supply bidding well defined? Is supplier performance measured? Are individual sourcing agreements documented?

• Inbound freight fees are “included” in product costs.

“Freight is Free” is a signal to dive deeper. Often suppliers build profit into freight charges. Companies not unbundling freight fees from product costs should investigate to see if cost efficiencies may be gained here.

• Manufacturing variations aren’t measured or addressed.

Measuring plant performance is critical. Tracking performance – and variations in performance – can highlight problem areas. Management should be tracking things like safety, quality, cycle times, scrap, schedule attainment and on-time delivery. Businesses that identify and measure variation in these can make strategic decisions about changes to employ. When variation is reduced, costs go down.

• Sales forecast is not effectively managed.

Sales organizations that do not forecast well put unnecessary burden on operations in the form of downtime, expediting costs, overtime, E&O inventory (see below) and more. Do sales forecasts regularly align with actual closed business?

• Excess and Obsolete inventory is growing.

Companies often do not pay close attention to E&O soon enough, yet avoiding E&O can bring significant cost savings to an organization. Is E&O tracked and measured? Is E&O root-cause analysis performed with corrective action identified? Does aging of inventory show balances that exceed the amount held for reserves?

• Invoice accuracy, denials and chargebacks are not measured or tracked.

Inaccurate invoices, denied claims, chargebacks and credit memos all indicate potential opportunities for improvement. When these items are not actively tracked and measured, it is unlikely that they are well-managed.

Many manufacturing businesses have operational blind spots (some more than others) that negatively impact enterprise value. This article shares some signs for potential hidden EBITDA, but the list above is far from exhaustive. We hope it gets you thinking about areas for improvement in your manufacturing operations.

Contact us if you’d like to further explore your business’ best opportunities for uncovering hidden EBITDA. We can share with you how The ProAction Group 9-Box Framework leverages your operational data to identify the efficiencies that will make the greatest EBITDA impact on your business. For further reading, see “Leveraging 9-Box Insights” to Find Hidden EBITDA: Turning Data Into Insight.

In today’s fast-paced deal making environment, diligence efforts focused on operations may fall by the wayside or become less rigorous.  After all, “operational diligence” hasn’t traditionally been one of the core “checklist” items. But there are compelling financial reasons for Private Equity firms to make operational diligence a primary focus BEFORE acquiring any new asset. With a thorough understanding of a target company’s operations, PE firms can eliminate costly surprises after the close and can maximize latent EBITDA opportunities. 

Quality of Earnings (Q of E) reports are helpful, but in today’s deal environment, PE firms need to go deeper to fully understand the potential of a target and improve their competitiveness in the bid process. A Quality of Company Operations report looks at how management runs the company today and determines what EBITDA should be.

A Quality of Company Operations report answers four basic questions:

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

PE firms that gain a deep understanding of each target company’s operations have the information they need to refine valuations for competitive bidding and walk away from bad deals. Knowledge is Power – and thorough operational diligence helps ensure that PE purchases are sound investments.

Ways to Leverage Operations Experts Prior to an Acquisition

There are different ways a PE firm might utilize operations consultants prior to closing on an acquisition. Each brings different levels of engagement and insight. 

Confidential Information Memo (CIM) Review: The PE firm sends the operations consultancy the CIM presentation. Upon review of the provided materials (and often more importantly, what isn’t included), the operations consultancy delivers salient insights that provide a guide for areas of opportunity and risk that need to be explored prior to closing a deal. Because of the consultancy’s deep operational expertise, they can suggest to PE firms specific areas of inquiry or concern that can help them better understand the prospective investment. This document can also provide scope for a deeper Quality of Company Operations diligence assessment. 

Quality of Company Operations Report: This report provides deep and granular operational information for the PE diligence team. Typically, the operations consultancy participates with the PE firm in document review and management presentations and has additional access to target company employees and data. Operations experts determine the validity of management assumptions on areas such as revenue gains, productivity, capacity, capital expenditures, ability to serve customers, and more. They also provide insight on the operations capability of the management team and personnel. Upon delivery of the Quality of Company Operations report, PE firms walk away with the thorough operational insights necessary for making investment decisions. 

Planning and Implementation: A change of ownership is a natural time to assess the company and implement change. Findings of the Quality of Company Operations report form the basis for development of a 100-day quick-start plan. Operations consultancies can partner with the management team early (sometimes even before the close) to implement sourcing, lean manufacturing or other operating “quick kills” to hit the ground running and accelerate the pace of change. A strong partnership between the consultancy and management early on increases the likelihood of success. 

The ProAction Group Partners with Leading PE Firms to Provide Pre-Close Operational Diligence 

The ProAction Group specializes in providing operational expertise for Private Equity firms. The company has deep experience in the acquisition and implementation environment and knows how to interact with deal teams, lenders and other advisors in a time-efficient and productive manner. The ProAction Group is also highly skilled at working constructively with target company management and knows how to build trust with boards, management teams and employees alike. The ProAction Group helps ensure sound investment decisions and enables a smoother sale and faster results after the close. 

What you can do today to turn things around in 2020

Stale portfolio companies not only impact fund performance, they also drain valuable time and resources. While it may be clear that a portfolio company’s potential is not being realized, PE execs often have trouble getting to the bottom of “why”.  And, management struggles to explain and fix the problems.

So, for each underperforming company in your portfolio, ask yourself: 

1. Has this company been lagging behind expectations for 3 or more quarters in a row?
2. Rather than utilizing internal resources to continue propping up this company, might our time be better spent elsewhere? 

If you answered “yes” to both questions for any companies within your portfolio, then it’s time to bring in outside resources. Third-party operations consultants bring focused attention and unbiased expertise to the core problems facing the company. Effective consultants sidestep any ongoing conflicts, identify achievable solutions and provide the evidence and clarity to gain buy-in across all segments of the organization. 

In fewer than 4 weeks, you should expect to receive an unbiased assessment including: 

• What is affecting performance levels? 
• What are the hidden EBITDA opportunities? 
• What is working well? 
• What operational changes are necessary? 
• What personnel adjustments are needed to set the company on a path of sustained growth?  

Operations consultants should integrate closely WITH your portfolio company’s management team and build organizational buy-in to any proposed changes. And, following the initial assessment, they should have the capabilities to work alongside your management team to effectively implement identified strategies, and ultimately build the bridge between the company’s performance and your expectations.  

As you head into the new year, don’t let operational challenges linger at any of your underperforming portfolio companies. Contact us today to find out how The ProAction Group can help you take the first steps to making 2020 a home run year.

9-Box in Action: Examples of Successful Implementations

Enough theory already, let’s bring it into the real world.  Here are two “headlines” from recent projects that used the 9-Box framework:

“Mid-market Manufacturer of High-end Auto Parts Reduces Inventory by 30%, Increases Fill Rates and Improves Customer Satisfaction in less than 60 Days” 

“Private Equity Firm Finds $2M in Easy-to-Achieve Inventory Reductions During Pre-close Diligence”

This third part in our series, “Leveraging “9-Box Insights” to Find Hidden EBITDA”, punctuates our discussion by showing specific examples of how Private Equity Firms and their middle market portfolio companies leverage the 9-Box methodology to gain strategic insight and increase enterprise value.

By the way, if you missed either of the first two posts in this series, you can find them here: 

Strategic Decision Making in the Era of Abundant Data 

Turning Data into Insight

Turning Data into Insight

When was the last time your CEO sought board approval for additional capital investment in inventory? Our guess is never. Inventory is not typically thought of as a capital expenditure. Despite that, mid-level production managers will regularly make decisions to spend millions in inventory without executive review, approval or evaluation of the business case. These decisions are “under the radar” and not given the same scrutiny as purchasing new equipment, making an acquisition, or launching a new product line.   

But excess capital tied up in inventory can be deployed to other purposes that drive greater enterprise value. Shouldn’t inventory investments rise to the level of executive / board visibility? Shouldn’t inventory investments be viewed as highly strategic and analyzed to make sure they are delivering strong ROI? 

Inventory is just one example where mid-market manufacturing firms have operational blind spots that can severely impact EBITDA and Enterprise Value. In Part 2 of our series on Leveraging “9-Box Insights” to Find Hidden EBITDA, we focus on how the 9-Box framework can turn your data into new insight and remove blind spots from strategic decision making.