Pre-Close Operational Diligence

Operational Diligence

We’ve discovered that there are two key triggers for a private equity firm to reach out to us. One is before their investment in a new company and the other is when they encounter an operational issue after the deal closes. We’re happy to help you either way, but there are compelling reasons to perform an operational diligence before the deal is closed.

A Smoother Sale

When Private Equity firms consider the acquisition of a new asset, the phrase “forewarned is forearmed” often comes to mind. That’s certainly true, especially as it relates to potential risk. But an operational diligence is just as likely to uncover good news as bad — perhaps even more so. Even profitable companies can underperform if their owners don’t realize what they have. Without these insights, you may be doubling down on fine points that shouldn’t be allowed to make or break a deal. When you know ahead of time that a few key changes can greatly increase the value of the company, it’s easier to avoid having a minor issue kill the deal.

Added Value

Just how much improvement are we talking about here? After all, companies don’t leave money lying around. Well, actually some of them do – in the form of inefficient workflows and excess inventory. One of our diligence projects was on a company that was already earning 30% margins. With profits like that, you’d think there was nothing to fix! But our client has made a routine of performing an operational diligence on all of their deals. In this one, we found we could improve their bottom line by 6%. In another case, our recommendations helped a company implement Lean workflows– and eliminate 140,000 square feet of warehouse space. They increased their EBITDA by $3 million a year while reducing working capital by $4 million.


When a company changes hands, it’s often easiest to stick with the existing management team. But that shouldn’t mean maintaining the operational status quo. A change of ownership is a natural time to assess the company and re-envision its workflows. In doing so, you can quantify the value of potential changes, get ahead of plan, and start playing with house money from day one. While you’re still in the transition phase, change is already accepted as a given. If you miss that window, you lose the natural impetus a change of ownership creates.

If we’re called in post-close, it’s typically only after our client has experienced real pain – usually after the first full quarter or even later. They may find they can’t fill orders fast enough and have developed a backlog…yet they often have too much inventory on the shelves! Then again, there are times when the opposite happens. Sales are lagging, and management provides many excuses, but no solutions. Both issues are exacerbated when products have a limited shelf life. These problems benefit from a process-oriented management approach, and because the optimal moment to make that change has passed, inertia has set in. The management team has often retreated to a position of entrenchment and dislodging them, once a preventable task, is now an essential one.

Increased EBITDA From Day One

The crux of the issue is this: when we are brought in pre-close, we can help a good company become a better company. When you blend an operational diligence team into the diligence work you’re already doing, you close the deal with a plan in hand to access unrealized profits. Your value creation plan represents an EBITDA increase that begins the moment the company changes hands.

If you’d like to get a running start with your next investment company, reach out to Tim Van Mieghem to explore whether a pre-sale consultation is the right investment for you.

Timothy Van Mieghem
The ProAction Group, LLC
445 North Wells Street
, Suite 404
Chicago, IL 60654
Tel: (312) 371-8323

The Competition is Fierce. Change the Rules. ™

Lean – Process Improvement Project

Our client was struggling with problems on their manufacturing plant floor that were driving their costs up and creating customer issues. Defect rates were far too high– as much as 22% on some lines. They also had excessive scrap. And frequent line shutdowns resulted in workers migrating to other lines – creating unnecessary buildups in WIP. Because most of the parts produced could be retooled, the material cost losses were minimal, but the labor cost of the rework hours were significant. Things were so out of control that all lines even had built-in rework processes, essentially normalizing the problem! Because none of this was accurately tracked, management didn’t have a clear sense of the size or cause of the problems.

We conducted a brief review of their operations and determined that the problems could be resolved by implementing Lean manufacturing principles. During our review we identified specific process and equipment deficiencies that needed to be addressed.


  • “Fighting fires” was a way of life for our client.
  • Lean processes would realize over $350,000 in annual labor savings, while at the same time creating 25% additional capacity.

As a result of the resulting implementation project, our client was able to:

  • Reduced Team Sizes: During our review we discovered that disconnected processes and a lack of monitoring had resulted in crew overages of anywhere from 13 to 47%. We employed Lean principles to streamline operations, and recommended capital improvements such as investing in dual-head processes. Crew sizes were reduced by 25% on average, with an equivalent gain in productivity.
  • Improved Use of Metrics: Many of the inefficiencies we uncovered had become ingrained processes due to a lack of actionable, OEE-based metrics. In short, no one had the data to illuminate how much EBITDA was being squandered. We implemented ongoing tracking for both training hours and offline rework labor hours. As we streamlined processes, we created clearly defined roles and responsibilities. We transitioned daily line monitoring to a Day-By-Hour model to create a line culture that is responsive to problems and keenly focused on schedule attainment. We trained management to draw maximum insight from the data they were accruing, empowered line personnel with problem-solving strategies, and developed and documented a streamlined change management process to hardwire oversight into future innovations.
  • Setup Reductions: We introduced a “pit crew” approach to doing changeovers. By creating clearly defined roles and cross-training operators from other lines to assist in setup activities, we were able to cut time lost to no more than 3 hours (it used to take a full 8 hour shift to complete a changeover). We redirected kitting and prep from “what now?” tasks to proactive, “what’s next?” activities. And we created forward-facing training and troubleshooting models.

Actions Taken:

  • Analysis of all processes
  • Balanced line operations
  • Built clearly defined roles
  • Rolled packaging construction into process (one-piece flow vs. batching)
  • Integrated training and metrics-gathering into operations


  • Labor utilization savings $220,000/year
  • Cost avoidance of 4 planned new hires: $166,000/year
  • Reduced Burdened Labor Rate from $64/hr. to $49/hr.
  • Dual Head rework reduced from 500+ units/shift to less than 60
  • Reduced Rigid Line 4 defects from a high of 220,000 ppm to 0

Measurable Results:

  • 22% crew size reduction overall
  • $386,000/year in labor savings
  • 25% capacity increase with current workforce

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
The ProAction Group, LLC
445 North Wells Street
Suite 404
Chicago, IL 60654
Tel: (312) 371-8323

The Competition is Fierce. Change the Rules. ™

The Confidential Information Memo (CIM) Request

When acquiring a company, more information is typically better. But without the right analysis, some of that data won’t be actionable. A key aspect of our work is helping our PE clients identify and quantify the risks and opportunities that can be mined from the data received during the diligence process.

There are several concerns clients tend to raise during the acquisition process. To begin with, they want to ensure they have correctly assessed their offering price. Naturally, they want their bid to be competitive enough to close the deal – but there is a balance to be struck. Fierce deal competition is much easier to justify when you have confidence that there is a latent benefit to capture after the sale is complete. This is closely linked to worries about costly issues that can crop up after a sale, such as capacity constraints, aging equipment or needed top-grading. No one wants to “write the check” only to turn around and immediately cut another one.

In most cases, a business seller will compile a Confidential Information Memo (CIM) to share with prospective buyers. This document typically provides a detailed overview of the company – including its products/services, geographic footprint, markets, growth plans, management team, and financials. From our experience, often times there are salient operational insights that can be gleaned from the CIM that provide a roadmap for areas of risk or opportunity that need to be explored – before a deal is closed!

There are many reasons to share this document with a trusted expert in order to gain additional insights pre-close. We provide an additional aspect of review to identify value factors that can be built into the bid, as well as to help identify risks to allow you to walk away from bad deals or avoid over-bidding on a company. Because we specialize in Operations, we can suggest specific areas of concern that might not be on your radar. With us as your partner, you’ll be able to ask questions about operations that can help bring critical issues to the forefront – many times these are related to things left unaddressed in the CIM.

Here’s how the process typically works. After signing an NDA, we are sent the CIM / management presentation. We review the documents and debrief our thoughts with the deal team – usually in a 30-minute conference call. If there are areas of opportunity or risk that you feel need a deeper understanding, we will work with you to define a diligence scope to meet those needs. This Q of Ops diagnostic can provide a deep and granular operational focus for the diligence team. Depending on the deal thesis, some of the key areas we delve into include the scalability of the operation, manufacturing strengths/weaknesses, the capability of the management team, supply chain structure/fitness, and the overall impact of risks/opportunities identified on EBITDA and working capital. This helps ensure that your purchase is a sound investment.

This process generates benefits after the sale as well. Armed with the findings identified during diligence, we function post-close as a resource extension, engaging with your management team to accelerate the pace of change. We implement lean manufacturing principles, global and strategic sourcing, quality systems, sales and operations planning (S&OP), and other operations and supply chain solutions as needed. This proactive approach drives the improvements identified in the diligence and creates an environment of continuous improvement with the existing management team.

We also partner with Private Equity clients by performing this same process on their stale portfolio companies. Think of it as a “sell-side Q of Ops.” Clients are typically hoping to address the gap between their expectations and the company’s performance. Our analysis can shift a languishing portfolio company away from being a time and resource drain, to being a productive asset in the portfolio and/or ready it for sale.

If these scenarios sound familiar and you are ready to take the next step, reach out to Tim Van Mieghem to explore whether a pre-sale diligence is the right investment for you.

Timothy Van Mieghem
The ProAction Group, LLC
445 North Wells Street, Suite 404
Chicago, IL 60606
Tel: (312) 371-8323

The Competition is Fierce. Change the Rules. ™

The ProAction Group promotes Doug Blanchard to Partner

Doug BlanchardThe ProAction Group is pleased to announce the continued growth of its team with the promotion of Doug Blanchard to Partner. Since joining the firm in 2003, Doug has had a significant impact on client service, team leadership, process and tool development, and overall growth of the firm.  In particular, Doug has led the firm’s Lean, Quality, Sales and Operations Planning, and New Product Development work for our clients across many industries.  With his extensive background, commitment to client satisfaction, and overall leadership capabilities, Doug has had a major impact on the firm and its clients.  We are honored to welcome him to the Partner team and look forward to his continued influence in the firm while he continues to deliver clients the exceptional service they have come to expect.

Prior to joining ProAction, Doug worked for Lexington Home Brands as COO/Executive Vice President of Operations, where he was responsible for a $450 million division with 15 plant locations. Prior to that, Doug worked for Emerson Electric, where he had P&L responsibility for a $300 million division. Doug also has experience at Darling Store Fixtures, Tenneco Automotive, and Goodyear Tire and Rubber. Doug has a BS in Industrial Engineering and Management from the University of Akron. 

Case Study: Unified Processes Free Up Resources

For our client, putting out fires had become a way of life. Their cycle times were long enough to cause customer complaints and there were multiple culprits, including long lead times, stoppages/bottlenecks during the manufacturing process, and inefficient labor management. These issues were also driving up per unit costs. The result was an operation that was constrained in terms of both physical space and capacity. Two core products manufactured by our client are sold as matched sets, so inefficiencies in the materials sourcing and manufacturing of one product inevitably impacts the other. Resolving the problem meant envisioning the process for both products as one unified, interactive system. The ideal future state would pave the way toward a substantial impact on EBITDA.


  • Long manufacturing and component lead times
  • Constrained capacity and floor space
  • Underutilized labor

ProAction improved operations flow by realigning relationships:

  • Lean Implementation. Using Value Stream Mapping tools, we were able to identify cycle-times and then dig deeply into processes. We made it our mission to weed out activities that weren’t adding value. As often happens when there are process inefficiencies, we discovered “hidden factories,” workflows that generally developed over time to compensate for existing problems. We also determined where waste and sourcing constraints were impacting the manufacturing process.
  • Layout Changes. We implemented one-piece flow on the manufacturing floor, and Takt-time metrics to ensure that output expectations created a steady rhythm on the line.
  • Possible Futures. Our client wanted a clear path forward, so we identified several potential future state scenarios, including an ideal future state that would increase product velocity, balance line operations, introduce takt and one-piece flow concepts, and reduce labor costs and work in progress.
  • Elbow Room. Our Lean Process evaluation included future state plant layouts for our client’s current facility to accommodate our recommended improvements. This included layouts compatible with expansion and even new facilities.
  • Insourcing/Outsourcing Redistribution. We identified outsourcing opportunities that reduced cost of components, lead times, and in-house component inspections by almost $3,100/unit. We also discovered that insourcing one major component would reduce lead time by over 360 hours.

Actions Taken:

  • Implementation of Lean Manufacturing principles
  • Restructuring of manufacturing lines and materials sourcing
  • Development of an actionable plan to reach the ideal future state


  • Manufacturing lead time for both products dropped by 50-66%
  • 12-39% reduction in labor hours ($3,300-$3,800 per unit savings)
  • Elimination of overtime needed to meet current demand
  • Reallocated overtime creates 33% capacity increase
  • More visible, easier to manage “one-piece flow” process
  • 5% to 15% additional savings in receiving, inventory control and shipping
  • Both product areas can now accommodate 100% more assemblies than before within the same footprint

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

  • The first is during due diligence.  We complete a Q of Ops pre-close (similar to a Q of E but with a focus on Operations instead).  We bring a deep and granular operational focus to the diligence team; we evaluate the scalability of an operation and quantify “hidden” opportunities to increase EBITDA and reduce Working Capital beyond management’s plans.
  • The second is post close.  After you acquire a company we act as a resource extension working with your management team to accelerate the path to realizing your investment thesis.  We implement lean manufacturing, global & strategic sourcing, quality systems, sales and operations planning, and inventory planning as needed.
  • Finally, we conduct an operational diligence on “stale” portfolio companies (sort of a sell-side Q of Ops).  The PE firms that hire us to complete this review are most often frustrated with the gap between their expectations and company performance.  In some cases, the PE firm is tired of the additional attention the portfolio company requires.

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
The ProAction Group, LLC
445 North Wells Street Suite 404
Chicago, IL 606546
Tel: (312) 371-8323

The Competition is Fierce. Change the Rules. ™

What is Q of Ops?

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
The ProAction Group, LLC
150 North Wacker Drive
Suite 2500
Chicago, IL 60606
Tel: (312) 371-8323

The Competition is Fierce. Change the Rules. ™

Sell Side Q of Ops

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.


  • 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


  • 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
The ProAction Group, LLC
150 North Wacker Drive
Suite 2500
Chicago, IL 60606
Tel: (312) 371-8323

The Competition is Fierce. Change the Rules. ™

Identifying Operational Opportunities to Improve Pricing During Due Diligence

This is the sixth article in our series on Identifying Opportunities to Improve Operations. We have divided the opportunities to increase the market capitalization of a company into seven value lever buckets. For each area we describe the signs we look for that indicate the company can improve their financial performance. In other words, we are highlighting points you want to know BEFORE you buy the company; things that expose opportunities to increase EBITDA, capacity and asset utilization.

The Seven Value Levers include:

  1. Throughput. Can we increase the output of a plant, office, service location, or other facility?
  2. Variable Costs. Can we reduce the costs directly tied to our volume and revenues?
  3. Fixed Costs. Can we reduce the costs that do not change in the short term, based on customer demand?
  4. Order to Cash Cycle. Can we shrink the time between investment on our part and collection from our customers?
  5. Pricing. Can we collect more revenue for the services we are providing?
  6. Asset Utilization. Can we increase inventory turns, the use of plant equipment, or the use of facilities?
  7. Risk. How can we reduce risks related to running our business?

In this article we share with you the signs we look for that indicate a company may be able to effectively increase their revenues and EBITDA through pricing. From a results perspective, we are looking for indications that our client can:

  • Increase overall pricing levels, often from 1-3% of total revenues
  • Reduce or eliminate “leakage” from designed pricing strategies or plans
  • Identify price elastic and inelastic items
  • Address any issues related to the gap between gross and net sales
  • Collect more revenue in the current market

This is a powerful topic; finding opportunities to get paid more for what you do. Effective pricing strategies and practices lead to designed increases in margins where customers are willing to pay more. The following indicators demonstrate that a company is not consistent in the pricing approach, is leaving money on the table, or is allowing the company to execute policies that are out of alignment with company strategy and direction.

IndicatorWhat it can mean
Does the company
monitor margins by
product and customer
If the management team doesn’t have reports showing trends and variation
in actual transactional prices, then there is opportunity; if they can’t measure
it, they can’t manage it.
The best practice here would be to not only track trends and variation in
margins, but to do so by customer and part / SKU (“stock keeping unit”)
When a price increase
is decided, is the
actual yield
One effective approach we use in performing due diligence is to interview
managers and workers on how they address various functions and duties.
Then, we also look at history, at actual numbers. This allows us to
triangulate people’s perception of how pricing is managed with real history.
Fortunately, if a company keeps their sales history, we can retroactively
track pricing change yield. If, however, management doesn’t have access
to this data and does not monitor performance, then the company is
vulnerable to pricing “leakage”.
Can a sales rep or
inside sales person
change the price for
an item based on their
Sales people only lose a portion of their commission if they reduce the price
of an item. They stand to lose the entire commission, however, if they miss
the sale. This can provide an unbalanced motivation. Proper controls limit
the ability for any sales person or manager to provide a discount or price
reduction outside of designed parameters. If these controls are not formal
and discrete, there is likely a meaningful opportunity to investigate.
Decisions on prices
and near-price
discounts, deductions
and incentives are
made independently
of each other – rather
than in an integrated
When decisions are made based on the total cost of ownership, we often
find that well balanced choices are made. There is no opportunity to
squeeze one end of the balloon and simply move the problem to another
department or budget. When determining how we will treat various
customer segments and sku’s, if we do not address all components (pricing,
discounts, freight, accessorial charges, etc.), then there is a meaningful
potential that one group of customers or products are subsidizing others.
People paid as a
percentage of
revenue or gross
margin dollars (e.g.
salespeople and sales
managers) make
some or all pricing
Whether we are talking about selling standard products off a price list or
complex designed services off a quote, if the people that get paid on making
the sale have a say in the price charged, there is a danger that we are
allowing personal goals and motivations to supersede company strategy
and goals.
Can a price in the
system be changed
by someone not
authorized to make a
pricing decision?
When we conduct our diligence work in the field, we start with the historic
data. We look for any variance in prices charged; we look for actual
compliance with company policies. When we do find a gap or a meaningful
variance, we then look to see who can change a price or discount in the
system. Often, executives and managers are surprised to find that many
people within the system have the ability (even if they are prohibited from
doing so) to change or set pricing levels.
Margins on lower
volume sku’s and
higher volatility sku’s
aren’t differentiated
from high volume or
stable products
Low volumes and high volatility drive higher costs. Providing the desired
quantity of low volume and volatile parts to customers when and where they
want them adds value. Largely speaking, these items should have a higher
margin than products that drive high levels of steady demand. If the
company does not segment their products by volume and volatility and
monitor margins, there is an opportunity.
Margins by sku and
customer segment
are not tracked and
monitored by the
executive team
Similarly, providing goods and services to smaller customers when and
where they want them creates value. Smaller customers do not have the
scale to evaluate other options as larger ones do. A company should have
a designed policy or pricing approach that differentiates how we price
different customer segments. If margins are not tracked by customer and
product segment, then we need to investigate.
Is there a structured
set of rules, controls
and baselines in place
to address one-off or
job shop type
For custom and designed products and services, companies need to
provide specific quotes during the sales process. If the same item would be
quoted differently based on who in the company completes the quote, there
is an opportunity to improve pricing. Even more so, if the same person
might quote an item differently on two different days, there is an opportunity.
There should be pricing tables, consistent component costing, rates, rules
and worksheet tools to support a consistent and designed quoting process.
Are margins on
projects or jobs
tracked and
compared to the
For custom projects and services, we need to provide a quote during the
sales process. High performing companies can show how completed
projects and services compare to the original quote. Further, the company
should be able to show what actions they take to improve the quoting
process based on actual performance. If any of these pieces are missing,
there is an opportunity to improve.
Cost plus pricing If we find evidence that “cost plus” pricing plays a meaningful role in setting
pricing levels, then we see opportunity.
Elastic and inelastic
pricing is not
Retailers have found success in setting low prices on items that drive
consumer behavior. If the grocery store sets a low price for milk, then
customers flock to the store and they never check the price of snack items,
for example. The same relationship holds true for companies selling to
other companies (B2B). If a company does not analyze and track elasticity
by part, then there is opportunity.

Recently, we worked for a company that had hundreds of sales people in a dozen regions. The company retained us to find out what was causing a double digit gap between gross and net sales. While there was a companywide, executive driven mandate to hold firm on pricing, we found that sales people were routinely providing discounts. The sales people had good intentions and wanted to close the sale, but the executive team had developed their pricing strategy on sound principles and needed their mandate to be carried out. The company’s regional controllers were aware of the mandate, but lacked conviction that it was truly in the best interest of the company. After uncovering the issue, we were able to design simple reports that tracked compliance and allowed management to monitor pricing levels. Within a short time management’s strategy was carried out throughout the company and net margins increased by over 3 points. Because this company had a 10% EBITDA margin to start with, this increase generated a 21% increase in EBITDA.

Another client, a consumer packaging company, recognized that low volume and highly volatile sku’s did not carry any premium pricing over high volume and stable items. Correcting this added $500,000 in margin, an increase of 8% in overall EBITDA.

There are many examples like these. Look for these indicators. When you find them, it is time to investigate and take action!

If you have any questions or requests, please feel free to contact me at

Case Study: Sell Side Q of Ops

Big EBITDA Gains Identified in Overstocked, Underperforming Portfolio Company

Eight years after purchasing a consumer product company, our private equity client found themselves in the frustrating position of spending too much time and attention on one underperforming portfolio company.

The issues were clear: inventory kept increasing, and management was at a loss to explain why. Matters were further complicated by some of the inventory’s limited shelf life. Though demand was very seasonal, at the end of their last busy season the company had the highest inventory levels in its history. These issues resulted in an EBITDA to sales ratio of less than 6.5%: earning less than $6.4 million in EBITDA on about $100 million in sales.

Exiting the underperforming company wasn’t feasible, as it would result in mediocre performance for the client’s fund.


  • Underperforming portfolio company had excess inventory; products with limited shelf life compounded losses.
  • EBITDA performance lagged the industry and fell short of projections.
  • Exiting would drag down overall fund performance.

ProAction performed a Sell Side “QofOps” to identify and quantify their opportunities to create and claim value before their exit. Here are the highlights:

  • Recast Inventory: The company had $28 million in inventory, and we modeled how much they really needed given their supplier lead times, manufacturing capacity and customer locations. They only needed $12 million to run the company assuming solid processes and systems.
  • Segmented the Business: One size does NOT fit all! We segmented the business into 9 segments. We learned where they made money and where they gave it back. This allowed us to develop surgical recommendations to project their position with important customers and their ability to serve other customers in a profitable manner.
  • Targeted Savings: We examined their SG&A spend, their approach to sourcing purchased goods and services, and their DC’s and factories. This allowed us to quantify how much more EBITDA they can generate at the current sales levels.
  • Re-designed Planning Processes: We reviewed the company’s supply and demand planning processes, and isolated opportunities to leverage supplier resources, reduce inventory, and increase order fulfillment levels.
  • Fostered Adoption: By including key members of the management team in the design process, we were able to do more than deliver a report. We generated a detailed implementation plan and laid the foundation for change.

Actions Taken:

  • Optimized processes around the 8% of customers and 22% of SKUs that make up 88%+ of gross margin produced.
  • Built the business case to consolidate 4 facilities into 3.
  • Designed a Lean enterprise and a planning culture, with tracking and monitoring methodology built into all processes.

Quantified Impact of Recommendations:

As part of building a business case for the recommendation, we estimated the net benefits of taking action.  Namely, as a result of the identified changes, the client would realize the following net benefits:

  • Increase EBITDA between 69% and 108%.
  • Pay down up to $16 million in debt.
  • Increase order fulfillment, customer satisfaction levels, flexibility and inventory turns.
  • Reduce customer lead times.
  • Fully leverage recent ERP.

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 Operational Due Diligence and “Q of Ops” Diagnostic Reports.
  2. Facilitate your management team’s transition from an entrepreneurial to a scalable, process driven leadership path.  We act as their training wheels.
  3. Conduct our Operational Diligence on “stale” portfolio companies.  We quantify any latent value that can be freed up through operational changes.

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
The ProAction Group, LLC
445 North Wells St. Suite 404
Chicago, IL 60654
Tel: (312) 371-8323

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Employee Engagement in a Pre-Close Q of Ops

Have you ever been to a party that was full of conversation, stories, and real fellowship?  Maybe cigars by the grill, good friends watching a game or even a book club where you really get to share your ideas and opinions.  A place where you feel safe, part of the group and where you can just be yourself.  Time flies, you feel rejuvenated and you develop real bonds.  Have you ever been in such a group and then a new person comes in and everything changes?  You have to watch what you say, there is drama at every get-together and the spirit goes out.

When this happens at work it can distract the company and drain the energy that should go into serving customers, each other and the collective mission.  The concept that measures the level of employee commitment to an organization is Employee Engagement.  According to Frank Heegaard, an employee engagement expert, there are 3 basic buckets for employee engagement:

  • Bucket 1:  Actively engaged employees.  This describes the people that bounce into work in the morning with a clear mission, the tools to complete that mission and they drive successful customer and coworker interactions.  Up to 1/3rd of workers normally fall into this category in relatively healthy companies.
  • Bucket 2: Dis-engaged employees.  These are the people that show up, they do what they are told and not much more.  As many as half the employees fall into this category.  It is not that these are bad people, but they often just don’t see how they can make a difference, and they don’t feel empowered or motivated.  Many do not respond well to how they are managed.
  • Bucket 3: Actively Dis-engaged Employees.  Depending on the year and the region this group ranges from 15% to 30% of the workforce.  These people are angry, resentful or hurt.  They feel impotent.  They feel stifled and they often blame management.  And they undo much of the good done by the engaged employees. 

Why Focus on Employee Engagement?

The concept has been around for a long time, but recently it is gaining more traction as progressive companies have demonstrated substantial improvements in all metrics.  The real question is, how is this concept relevant and actionable when working to acquire a company?  Here are some points to consider:

  1. Employee engagement is measurable.  It is measurable, pre-close, even if the company does not currently measure it. 
  2. The company’s current performance is an outcome of, among other things, the current actual level of employee engagement.
  3. Steps can be taken to improve employee engagement (post close). 
  4. Addressing employee engagement requires real work and change.   The benefits start to take shape immediately, quickly develop momentum (within months), and build on prior levels. 

I had the good fortune to visit Tasty Catering, a privately held catering company in Elk Grove Village, IL.  Tom Walter, the co-founder and “Chief Culture Officer” and his partners have nurtured an atmosphere in which 94% of employees are actively engaged in the business.  Their EBITDA % is DOUBLE their industry average. 

Studies consistently show similar patterns.  A UK study (, shows that the companies in the top quartile in employee engagement in their industry have double the EBITDA vs. their lower performing counterparts.  As you might expect, employee engagement affects more than just EBITDA.  Lead times, customer satisfaction, turnover, quality and safety follow the same pattern.

Below are some of the top reasons Private Equity firms have said led them to invest in measuring and improving their Employee Engagement.  If any of these ring true to you, this might be an actionable area for your firm to  pursue as well.

  1. They were concerned because a portfolio company was experiencing high levels of voluntary turnover in management and skilled positions.
  2. They were frustrated over consistently high injury rates and poor safety.  One barometer we use for evaluating operational excellence in a company is their performance around Environmental, Health and Safety (EH&S).  If the company doesn’t pay close attention and lead their team to excellence in this core area, they are also leaving other opportunities untapped.
  3. They were nervous because they just didn’t know how they were doing.  Today, we measure net promoter scores and other metrics to understand how customers see us.  We can do the same thing with our employees.

Additionally, if you are looking at a deal/company where either employee engagement is critical or there are signs of employee disengagement, we can add this to our diligence work.  We have teamed with a group that can quickly assess current levels of engagement and guide you through the process of creating an engaged team that will set you apart from your competitors, increase EBITDA and grow the value of your portfolio.