Category Archives: News

Are you Gambling with Your Portco Investments? The Crucial Importance of Addressing Business Risk

Risk is inherent in all business transactions, especially when acquiring a new platform. The PE world has long-standing tools and resources to address legal, environmental, financial, and customer concentration risks. Operational risks (business interruption, unplanned Capex, margin compression, physical safety, fragility, “the rabbit hole” …) are often left to the personal experience of the deal team and the operating partner. Add to that, the buyer has a short and diminishing timeframe to evaluate all these risks; a lot can go sideways, fast (or slow… some risks may not manifest in symptoms until year 2 or 3)!

Cue Kenny Rogers and the popular 1978 country song, “The Gambler” for inspiration on the importance of making wise decisions. The tune emphasizes the idea that in life (and money making), one must be able to assess situations, calculate risks and make informed choices to succeed. The tune’s broader message underlines the importance of timing, intuition, and strategic thinking in navigating uncertainties. That is all great and good, but a lot can boil down to luck without targeted assessments and resources. We can get beyond the Gambler as we become aware of undisclosed risks, gain acceptance that they are indeed real, and then take purposeful action to mitigate, manage and eliminate!

In the context of operational diligence, and navigating the stages of risk awareness, acceptance, and action, you’ll need an expert assessment to reveal what is really going on within the operations of a company, when perhaps the financials don’t indicate trouble. It’s easy to believe that a company with healthy EBITDA, a humming production line, and happy employees will promise big financial returns – until it doesn’t.

The potential for undisclosed risk justifies a comprehensive assessment of an organization. Financial, customer loyalty, environmental, legal, regulatory, IT, and HR diligences are ubiquitous today. These areas may not uncover margin compression, business interruption, unplanned Capex requirements and other operational issues. 

The goal here of course is to identify the undisclosed risks that will impact the future performance and success of the target company. These risks are often hidden in plain sight and are often accepted with an unquestioning IIWII (“It-Is-What-It-Is”) attitude… such as that additional operation that takes place just before the order is shipped because no one has taken the time to identify the root cause and fix the error at its source. Here’s another risk, this one is late-stage, and this is a big one – when a company relies on a single supplier for its primary materials and hasn’t established an alternate supplier… they know their business is exposed to interruption risk, but they contentedly move forward, hoping things will continue to be OK. One recent seller explained how this risk was minor because they owned the drawings… when we asked to see one, they commented that the supplier keeps them.  Wow. Hope is not a valid response, and we need to call this what it really is – denial.    

In over 20 years of completing operational diligences, we have never killed a deal. We identify risks to create awareness, not to cause panic or worry about falling skies. We quantify the risk and estimate the effort and capital that are required to address the situation. While no investment is risk-free, accepting risk without a realistic and professional evaluation is a gamble with high stakes. Here’s a perfect example – the seller has built the business from the ground up and they know everything about the process. They have been involved from the beginning and everything runs smoothly because of their involvement in the daily processes. But what happens when the business is sold without evaluating this particular risk? The new owners will find it difficult or impossible to replicate the previous results because much of that success was due to the daily energy and expertise the previous owner brought to the business. The good news is, if we have 6 months or a year to institutionalize their knowledge, and we actively do so, the solution is inexpensive, non-invasive, and highly effective. In fact, in every case, the process to address the risk produces meaningful performance improvements. In EVERY case. If you wait to address risk – maybe next quarter, or next year, it will be more expensive, more invasive, and only partially effective by comparison. Which highlights the importance of acceptance. How often do people say, “I’ve been telling them about this problem for years, but no one listens to me!” When we accept that the risk as real, we can generate some data and bring clarity to the situation, and we can have years of meaningful improvement rather than years of loss.

The purpose of risk awareness, and recognizing risk acceptance, isn’t to walk away from the deal, but rather to create an action plan to manage, mitigate, or eliminate identified risks… to be well-prepared to handle the risks and challenges associated with the new company. This will involve collaboration with company leadership and management teams, legal advisors, and operational experts to ensure a comprehensive and well-executed risk management strategy.  This may also require interim leadership resources to ensure that risk mitigation is executed properly.

With risk, it doesn’t have to be a gamble. It all boils down to having the wisdom to fully recognize the circumstances and plan an appropriate response. At The ProAction Group, we know where to look for risk. Whether they’re obvious, hidden in plain sight, or those late-stage risks that won’t fully present until Year 2 or 3 of your investment cycle. We find that having knowledge of what can go wrong and having an action plan to address it will ensure the best possible outcomes. 

Leveling Up – Your Deals & Gaming Have a Lot in Common.  What Level are you Operating At?

Dungeons and Dragons was the first game to bring the concept of character leveling to the mainstream market.  When you level up, you gain experience points and advance to higher levels within a game.  Leveling up is the primary way to measure progress and success within the game, and it’s a helpful concept in M&A as well.

Leveling up isn’t just a way to measure progress, it’s also a way for your company to compete where there’s more risk and higher margins – and that translates to better returns when you’re successful.  As experts in Operational Diligence, we have some ideas about leveling up through pre-close and post-close activities. 

Level 1 – Basic Level of Play

This is where all activity starts – with pre-close diligence activities.  The deal team is looking for risks and operational improvements, and may call on industry leaders for additional insight.  Once the deal is won, the Management team is relied upon to develop the value creation plan to realize the investment thesis, and the deal team takes on a new role as the corporate development team.

At this level of engagement, the risk of post-close negative surprises is very high. Had these negative surprises been called-out earlier by Operational Diligence experts, they would have been part of the value creation plan and likely would have lowered the cost of the deal.

The Basic Level of Play leverages the experience of the deal team and any industry leaders they bring in.  It is low cost, but will not consistently uncover undisclosed risks and latent value.

Level 5 – Significant Skill Set of Play

A level 5 is generally achieved by a player who has progressed beyond the beginner stages of the game.  Level 5 may represent a significant milestone, allowing the player to unlock new abilities, access new areas or questlines, or face tougher challenges.  In our work, Level 5 PEGs often have an Operating Partner or an external resource like The ProAction Group for pre-close activities.  The ops leader works alongside the deal team and looks for hidden risks and operational gains to get ahead of plan and to fuel the value creation plan.  We/they may identify dozens of areas for operational improvement, yet provide the one insight that implementing one single improvement post-close could provide significant scores for the team and begin the momentum for extreme value creation.

This elevated level of play brings focused and experienced attention to the process, identifying risks that the seller may not have disclosed (or even known about) as well as providing fodder for the value creation planning process.

Level 10 – Effort, Strategy, and High Scores

Players who reach the higher levels in the game get amazing skills and can fight dragons, take castles, and save the distressed!  For the gamer, this is endlessly interesting and exciting.  They get to explore the potential of their character and take over the world!

In our real world of M&A, achieving this level allows us to go into a deal with our eyes open, our models accurate, and with a value creation plan that is clever, practical and designed to drive a real win.  We are in a position to truly explore and tap the full potential of the platform. 

This level often means using an Operating Partner with subject matter expertise for both pre-close and post-close activities – the “been there done that” for several businesses in the target’s vertical.  High achievers in pre-close Operational Diligence will:

  • Calculate Capacity – as currently run, and with improvements in place.
  • Recast Inventory required to run the business (this is the canary in the coalmine…)
  • Segment SKU/service, Customer, and Inventory profitability.
  • Test for numerous risks that would show up in year 2 or 3 if not addressed early.
  • Recast CAPEX requirements.
  • Benchmark sourcing rates and costs.
  • Develop a detailed financial model integrating the addressed risks and operational improvements.

Operating as a Level 10 pre-close also entitles you to bonus play – and post-close magic:

  • Integrate financial model and budgets into expectations for the leadership team.
  • Develop a full value stream and/or process map to expose any additional opportunities and risks.  Understand how the money is made, how to satisfy demand, and how to operate the company among the sponsor, the leadership team, the management team, and the operator expectations.  (This step might bring you to level 15 on its own!)
  • Conduct a formal value creation working session to address identified risks and opportunities.

Don’t we all want to play at Level 10 and access the magical post-close play?  At The ProAction Group we bring Level 10 from day one.

We can implement changes that will get you ahead of plan in the short term, development containment plans to manage risk, stage, and stagger operational improvements based on ROI, confidence, time required, and bandwidth.  We’ll show you how to leverage your opportunities to address risks and improve performance, while developing new leaders and a problem-solving culture.

 Contact us today to Level Up – right to the bonus round

We have something to share with you…

The ProAction Group is focused on sharing our thought leadership to help organizations improve their operational efficiency and ultimately their bottom line.  In that spirit, we are pleased to provide you with a digital edition of Insider 94, The Midwest Business Journal for entrepreneurs, tailored to the business owner (https://www.insider94.com).  The publication offers relevant, current, and unbiased advice covering issues we all encounter as entrepreneurs and individuals.  We are also featured contributors!

What Your Business and Speed Skaters Have in Common and Why You Need to Up Your Ante With a Good Coach

Timothy Van MieghemThe ProAction Group

The Olympic games are nothing short of inspiring.  The backstories, the challenges and the opportunities for glory all come together on the world’s stage for these athletes. 

I find speed skating especially incredible and relatable to my line of work.  Speed skating is a racing sport with the primary aim to complete each circuit in the fastest time possible. To win a race, the athletes must adopt a particular set of techniques including balance and positioning – and then add speed. 

The technique, process, and analysis to reach this level of magic is analogous to preparing an organization to win at the profit game (which is my Olympic sport). 

Let me explain.

The road to operational excellence requires balance and positioning of a different kind.  All organizations race for results to earn gold for investors by increasing the internal rate of return, meet loan covenants or personal gain.  As in speed skating, organizations must find the right balance and positioning of whatever the opportunity for improvement is.  If you can identify it, it can be quantified.  Once it is quantified, we can plan for it.   Once an organization has identified and quantified the opportunity for improvement – then speed comes into the equation.  How fast and for how long?

At The ProAction Group we call this the ProActive Profit Process — and we’re excellent coaches.  We can help identify and quantify what needs to improve, and then tell you how fast you’ll need to go to achieve success sooner.  Like any great coach, we’ll work the formula with a proven process that lands you on the winner’s podium in your industry’s competitive landscape (and it won’t take four years to prove it).  We’ll map out the implementation at the agreed speed to assure you that you’re covering the distance between where your organization is now and where it needs to go.  Beyond implementation, we’ll be there to institutionalize changes for sustained results.

Balance and positioning at a high rate of speed is challenging for any organization, however with a good coach, with a proven track-record to guide the way, makes the difference.  Let us help.

“The Beverly Hillbillies” Prequel? We are Up to the Task!

As Netflix streaming keeps all of us entertained during the pandemic, we’ve been delighted with reboots and potential reboots of our favorite sitcoms and dramas.  We enjoy characters with a sense of nostalgia.  The Star Wars franchise stays alive with great stories and satiating curiosity for Luke Skywalker’s back story.  It got us thinking, what about a prequel for “The Beverly Hillbillies”?

Continue reading “The Beverly Hillbillies” Prequel? We are Up to the Task!

Tim Van Mieghem Podcast Speaker: The ERP Organization Change Journal, Episode 13 – The Value of Business Intelligence Part 1

We all know too many horror stories of ERP systems gone wrong.  More rampant, however, are ERP systems that simply provide a fraction of their potential value.  They way the company uses the system, it does the basics.  But the company has essentially found a way to convert gold into iron…  Jack and his team present ideas to actually get the value your ERP systems can provide.  Continue reading Tim Van Mieghem Podcast Speaker: The ERP Organization Change Journal, Episode 13 – The Value of Business Intelligence Part 1

Quality Problems, Late Deliveries, Lost Customers

Portfolio companies often run into complex situations that drain resources and stifle performance.  In this case, a packaging company saw scrap levels quadruple, late deliveries skyrocket and good customers leave.  The management team was doing the best they could, but had limited bandwidth and experience with similar situations.  The sponsor could not afford the current level of performance, and the costs and risks of replacing the management team were high.  ProAction became, on a variable cost basis, their operating partner.

Background:

  • $250k negative monthly variances ($1.7m per year in total)
  • 5 GM’s in 5 years
  • Customer Attrition

Actions Taken:

  • 2-day operational assessment found root causes and were immediately transitioned into execution
  • Implemented a tiered management system
  • Conducted quick change over improvements
  • Managed COVID situation

Activities as the interim GM:

  • Started a daily operator autonomous maintenance process for Presses and Converting
  • Started a weekly maintenance PM process for both Press and Converting
  • Implemented a tool crib min/max for critical replacement tooling parts in Converting
  • Set up a converting staging area for all machine lines
  • Started problem solving tools with supervisors and leads in both Print and Converting
  • Relaunched the Safety Committee
    • Added First Responders on each shift
    • Action plans developed for each area from opportunities and tracked weekly on the Tier Board

After operational stabilization was achieved, we began implementing tools and training internal leaders to maintain the new level of performance.

Impact

  • Output improved between 50% and 70% depending on the line
  • Reduced scrap and rework levels by 50% in 8 weeks, demonstrating a 90% decline in 12 weeks
  • Hit customer service target levels and eliminated the backlog

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 Diligence.
  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
Tel: (312) 371-8323
www.proactiongroup.com

The Competition is Fierce. Change the Rules. ™

TEAM SPOTLIGHT: Kathy Wishnew

Kathy WishnewThis month’s Spotlight is on Kathy Wishnew. Kathy joined ProAction in 2015 and immediately brought added depth to our front office lean and engineering process capabilities, particularly as they relate to our customers in the service and complex-engineered products industries. She has also been integral in expanding our proprietary 9-Box inventory optimization and customer pricing tool, an innovative process that has helped many of our clients drive meaningful improvements to their EBITDA. Kathy makes transformative change happen. Her skills in lean manufacturing, global business operations, process improvement, program management, quality assurance, Six Sigma, and goal deployment have helped her significantly improve bottom-line performance for companies. Kathy uses a top-down strategy of aligning systems, processes, and people to help those changes stick.

Kathy has led many projects for our clients and below are a couple that highlight the depth and breadth of the positive results she brings to an organization:

One midsized medical services firm was turning down new business due to its inability to meet current demand and the extensive learning curve for onboarding new employees. Kathy worked with their leadership team to restructure responsibilities by centralizing like-work content, creating standardized processes, and instituting metrics that provided transparency when the process was not going as expected. The company has not only started accepting new clients and marketing the offering, their sales have grown significantly without the need to hire additional manpower.

Another example involved a midsized manufacturer of large material handling platforms. The company was struggling to meet critical multi-phased customer on-time-delivery dates and a growing list of backorders. Once one phase ran behind schedule, the later scheduled deliveries would not only require re-scheduling, but many times would incur fines and penalties by the end-users and / or installers. Kathy worked with the cross-functional technical team, that operated independently of each other, to standardize internal deliverables between departments. Many non-value added steps were eliminated, rework was reduced and flow was created between internal suppliers and customers. The list of backorders was reduced by 60% and the company is back on track to meet annual growth targets.

Prior to ProAction, as Vice President at Jarden Safety & Security, Kathy established a lean and continuous improvement program that reduced costs by nearly $9 million its inaugural year. The program created transparency and linked operations to strategic plan initiatives, leading to a record number of new product launches and a centralized quality management system.

Kathy served in many executive positions in her 17 years at Panduit Corporation. One she is particularly fond of was as a General Manager and turning a chronic loss leader in to a profitable Business Unit.

After receiving her bachelor’s degree in Industrial Systems Engineering from The Ohio State University, where she became a member of the Alpha Pi Mu Industrial Engineering Society, Kathy received several certifications. She is trained as a Six Sigma Black Belt, ASQ Engineer, Lean Leader, and Shainin Red X Problem Solver. Kathy is also certified as a Franklin Covey facilitator in the Great Leaders, Great Teams, Great Results and the 4 Disciplines of Execution.

Ready or Not: ISO 9001:2015

The Deadline

Is your portfolio company ready for the ISO 9001:2015 QMS? We’re less than six months away from the deadline to comply with this revised standard, which was rolled out in 2015. While we’d like to assume that everyone’s preparations are well underway (if not completed), we also know that many companies have put this on the back burner while attending to more pressing tasks. As our Private Equity clients have begun to escalate this issue with management, they’ve encountered a trio of challenges. One or more may sound familiar to you.

The Pain Points

The first and most obvious is deadline stress. At this point, any unexpected monkey wrench while you’re moving toward compliance could lead to missing the deadline. ISO certifications are one of the ways we build trust with clients, so you could risk your position as a market leader, or even damage specific client relationships.

Another common complaint is that the sheer scope of what needs to be done seems overwhelming, especially in light of the resources you’ve already invested in compliance. How is it possible, you may find yourself asking, that we’re not closer to the finish line than this? When you find that quality and efficiency issues still persist, despite your best efforts to have sound processes, the recertification process can leave leadership feeling demoralized and frustrated.

Clients often raise a separate but related concern – the cost of maintaining a quality system can be high. But for many companies there isn’t a single system, there are two. One is the system your quality management team designed, which meets the highest quality standards. The other is the way things are actually done. This is particularly common when a team was rushing to meet a deadline. Rather than doing a deep assessment, then redesigning processes to meet best practices, the team designed a castle in the air that didn’t match the existing foundation. The disconnect between these two realities is often hiding potential EBITDA and a myriad of headaches.

The Possibilities

While the actual compliance process is frequently viewed as a headache, the new standard offers many benefits. Organizations that adopt ISO 9001:2015 will move toward a much leaner, process-based approach. This new quality standard is also designed to be tailored to your specific product or service, doing away with a more one-size-fits-all approach. We’re also very happy to see a push toward data-driven decision making.

If you’ve been paying attention to our blog, hopefully you’re making a connection right now. The key components of ISO 9001:2015 align with the best practices we advocate every day. That’s not an accident. You can see why we’d be natural partners for companies on the path to compliance.

What we typically do for clients who are working on their renewal is perform one of two kinds of analyses, depending on your needs. In some cases, an all-areas Systems Audit is the right starting point. Or, if there are specific areas where you feel exposed, we can do a more targeted Surveillance Audit. At the same time, we’ll do a Gap Analysis to highlight opportunities for cost reduction and profit improvement.

This is what we love about this new revision: it aligns your business with your Quality System, which is exactly what we do already. Instead of hiring a consulting firm to help with compliance, then having another firm in later to find overlooked EBITDA, clients who work with The ProAction Group on this will kill two birds with one stone. As an additional benefit, you’ll be able to count our due diligence as an Internal Audit, which it just so happens is a requirement of your QMS. If you’re ready to turn your ISO certification journey into a victory lap, reach out to us.

For Further Information:
Timothy Van Mieghem
tvm@proactiongroup.com
The ProAction Group, LLC
445 North Wells St. Suite 404
Chicago, IL 60654
Tel: (312) 371-8323
www.proactiongroup.com

The Competition is Fierce. Change the Rules. ™