Category Archives: News

Do you have FOMT? (Fear of Missing Targets?)

It’s already May and we’re halfway through second quarter…almost half the year is over.

How is it going? 

Will you hit your EBITDA goals? Your growth goals?

If you are a PE firm considering an exit, will you hit the multiple you want?

Fear of Missing Targets (FOMT) is real, but here’s the good news – it doesn’t have to become a self-fulfilling prophecy. There’s still time to affect your demonstrated results…heck, even your third quarter results, and The ProAction Group can help!

And the news gets better — we often discover that with a few tweaks, we can have a massive impact on EBITDA and valuation.  However, the time to act is now!  We can assist by:

  • Identifying operational opportunities that will increase EBITDA, capacity, and performance.  Incremental improvements that add up to big results.  Many of these improvements show up in EBITDA within 8 weeks.  Some take 3-6 months.
  • Performing the “Home Inspection” before the buyers do.  We will identify the issues and risks an informed buyer will integrate into their decision on how much to invest.  Then we can fix the issue before it even comes up.
  • Providing your team with the bandwidth they need to realize the investment thesis

No one wants to be the person that didn’t act soon enough to achieve the targets, nor is it healthy to experience sleepless nights trying to wrap your arms around what to do differently. 

The ProAction Group comes with the people, process, and tools to get the job done.  We’ll help you hit the targets, generate the value, and achieve your investment thesis.  Let us help.

To learn more, contact us today.

Successful Acquisitions Include Navigating Risks and Understanding its Nuances 

Acquisitions can be both lucrative opportunities and potential minefields of risks. Understanding and effectively managing these risks is crucial for success. Among the myriad of risks, it’s essential to differentiate between controllable and uncontrollable risks, as well as early and late-stage risks. This nuanced understanding can make or break an acquisition deal. At The ProAction Group, we specialize in helping private equity companies navigate these complexities, ensuring informed decisions and managed risks.

Controllable Risks: Taking Charge of Operational Safety

Controllable risks are those directly influenced by behavior and operational decisions within the acquired company. For instance, safety hazards such as bypassing safety measures pose significant controllable risks. These risks stem from failures in appropriate setup and maintenance protocols. Addressing controllable risks requires proactive measures, such as reinforcing safety protocols, implementing robust training programs, and ensuring diligent maintenance practices. By identifying and addressing controllable risks, private equity firms can enhance operational safety and mitigate potential liabilities.  Addressing controllable risk normally requires minimal capex.  It requires attention.

Uncontrollable Risks: Managing External Factors

In contrast, uncontrollable risks are external factors beyond direct operational control, such as political instability or natural disasters. While these risks cannot be prevented, their impact can be mitigated through proper planning and preparation. Establishing response plans and training teams to handle unforeseen events, such as chemical spills or extreme weather incidents, is essential. By preparing for disruptions, companies can minimize the adverse effects of uncontrollable risks and maintain business continuity.

Early-Stage Risks: Preventing Potential Dangers

Early-stage risks represent latent hazards that have yet to manifest into tangible problems. These risks often exhibit subtle signs, such as disorganized workspaces or inadequate safety protocols. Addressing early-stage risks is cost-effective and relatively straightforward, requiring proactive measures such as training initiatives and infrastructure improvements. By identifying and rectifying early-stage risks, companies can prevent potential harm and avoid costly consequences down the line.

Late-Stage Risks: Dealing with Immediate Threats

Conversely, late-stage risks are imminent threats that have already materialized, posing immediate danger to employees and operations. These risks are characterized by visible deficiencies and complacency, such as ignored safety protocols or neglected maintenance issues. Rectifying late-stage risks is significantly more challenging, time-consuming, and costly, often necessitating extensive corrective measures and rehabilitation efforts. By addressing late-stage risks promptly, companies can mitigate harm and prevent possible damage to personnel and assets.

OpWise with The ProAction Group – Informed Decision-Making for Successful Acquisitions

At The ProAction Group, we recognize the critical importance of understanding and managing risks throughout the acquisition process. Our expertise lies in identifying controllable and uncontrollable risks, as well as distinguishing between early and late-stage risks. By leveraging our insights and methodologies, private equity can feel confident about their acquisitions with clear understanding of their target’s risk dynamics.

Gary Spoerre Promoted to Director – Sales Enablement!

We are thrilled to announce the promotion of Gary Spoerre to the role of Director, Sales Enablement. Gary brings 29 years of invaluable experience in process engineering and management across diverse sectors such as manufacturing, electronics, software, education, and aerospace.

In his previous roles, Gary has demonstrated an impressive ability to lead teams, establish standards, and train personnel, resulting in enhanced production, reduced defects, and improved safety. Notably, during his tenure at General Dynamics, he successfully managed their learning management systems and the ongoing training of 400+ site personnel. His dedication to creating comprehensive documentation and providing effective training contributed significantly to a safer work environment and improved product quality. At Whirlpool/Maytag, he trained and counseled employees on product quality improvement, workstation safety, and continuous process improvement. Gary’s role in redesigning the production training program resulted in a significant reduction in rework, lowered injury risks, and increased employee cross-training.

Gary’s multifaceted expertise extends into the aerospace and software fields, where he coordinated complex electronics assembly projects, managed software installation and customer service teams, and developed procedures to ensure consistent customer satisfaction.

Gary holds a Master’s in Education from Southern Illinois University and a BS in Industrial Engineering. His military service as Petty Officer, 2nd Class (E-5) for the U.S. Navy and Sergeant (E-5) for the USARNG showcases his commitment to excellence and discipline.

Additionally, Gary is a Lean Six Sigma Green Belt and holds certifications in the Society for HR Management, Foundations of Project Management and Lean Systems Design.

Please join me in congratulating Gary Spoerre on his well-earned promotion! His wealth of experience and dedication will undoubtedly continue to drive success in his new role as Director, Sales Enablement. 

Audie Penn now Vice President, Business Development and Service Delivery

Congratulations to Audie Penn on his promotion to Vice President, Business Development and Service Delivery at The ProAction Group! With 38 years of extensive experience in various manufacturing environments, Audie brings a wealth of knowledge to his new role.

In his capacity as Vice President, Audie will play a crucial role in collaborating with clients to identify risk and implement value creation initiatives, ensuring that companies reach their strategic, organizational, and financial goals.

Audie’s diverse background, encompassing both consulting and industry roles, spans across industries such as furniture, food, heavy equipment, municipal functions, energy, and building materials. His previous role as managing partner for a consulting firm focusing on operational excellence showcases his ability to drive significant improvements, exemplified by the impressive EBITDA growth achieved for his clients.

Notably, Audie’s contributions as Group Manager for a global heavy equipment manufacturer led to surpassing performance expectations and a substantial reduction in variable costs within the first five months of his tenure. His expertise extends to supply chain management and global production system deployment, particularly in implementing Lean methodologies for performance enhancement globally.

Audie holds degrees in accounting and business management, along with an MBA from St. Ambrose University. He is also Master Black Belt Certified and holds certifications at the Gold, Silver, and Bronze levels through the Lean Certification Alliance. Currently serving as the chair of the SME Certification Oversight and Appeals Committee within the alliance, Audie continues to contribute significantly to the field.

The ProAction Group is fortunate to have Audie Penn in this leadership role, and his extensive experience and expertise will undoubtedly contribute to continued success and growth for our clients.

MAXIMIZING RETURNS: OUR TOP 5 TIPS TO PREPARING PORTFOLIO COMPANIES FOR SCALABILITY

Private Equity (PE) firms are no strangers to the fast-paced world of business, where every decision can have a profound impact on the bottom line. When it comes to investing in and growing portfolio companies, the adage “measure twice, cut once” holds particularly true.

In addition to the financial verification provided by a QofE, an operational diligence provides full visibility of any potential risk factors before the deal closes. We’d like to make a compelling case for why preparation before deal closure is critical for confident operational planning and scalability.  Our 5 best tips:

1. Do the Operational Diligence

Operational diligence is the compass that helps PE firms navigate the uncertain waters of acquisitions. It’s the comprehensive assessment of a target company’s operations, financials, and risk factors. But this diligence isn’t just about ticking boxes; it’s about unearthing hidden value and uncovering potential pitfalls. Understanding all the variables is immensely helpful when balancing all the factors versus the investment decisions.  When you know what you’re getting into, you can plan for success more effectively.

2. Identify the full risk profile

Imagine investing in a company only to discover post-acquisition that there are significant undisclosed risks. This scenario can be costly and damage both the PE firm’s reputation and the portfolio company’s stability. Full visibility into risk factors during operations diligence mitigates such surprises and enables PE firms to negotiate terms and allocate resources more intelligently.  The risk profile is a full array of categories, including the safety and physical security of a business, business interruption, unbudgeted CAPEX requirements, misdirected corrective actions and so much more.  Identifying and assessing these risks is crucial for making informed decisions and planning to confidently scale for growth.

3. Build a strong foundation

Preparation before closing the deal sets the stage for everything that follows. It’s akin to building a house on a solid foundation. PE firms that take the time to thoroughly understand the risks and hidden value in a target acquisition can develop robust plans that add real value and eliminates obstacles. The diligence also helps you create relationships with the management team and employees, and chemistry that will help immensely during the post-close activities of stabilizing, adding value, and scaling the business.

4. Make a confident capacity change

Confidence is a game-changer. When you have full visibility into potential risks, you make decisions based on data, not guesswork. This confidence permeates every aspect of post-acquisition operations, from strategic pivots and resource allocation to open and transparent communication with the employees of the acquisition. Scaling the operation is no longer a distant goal, it’s the next goal. You built a solid foundation, removed the obstacles, and designed the process to perform. Now it’s time to scale the company, increase the velocity, and expand to your new capacity for the remainder of the investment cycle.  Invest in the right areas, optimize operations, and scale the business with precision.

5. Learn from others who have done it successfully

Some of the most successful PE firms are relentless in their pursuit of operational diligence. They understand that preparation is the key to prosperity. By studying their practices, one can see how thorough risk assessment transforms their portfolio companies into industry leaders.  As operational efficiency consultants we have worked with hundreds of companies and enjoy sharing benchmark data that is specific to an industry, industry adjacent or where there are similar operational challenges.  Outside-in expertise is invaluable to charting successful scalability.

The ProAction Group, and its Operational Diligence, provides a proven process for achieving exponential value for companies in a wide range of industries and sectors, including manufacturing, distribution, and business services.

We invite you to reach out to our team anytime to start a conversation about the benefits an Operational Diligence can bring to your company, as well as any related services we may provide, to help buyers buy and sellers sell.

The Illusion of a Seemingly Stable Business

Gauging the stability of a business can be tricky.  Strong financial performance, high profit margins, and healthy balance sheets can create the illusion of stability, but these indicators alone may be masking underlying risks and vulnerabilities.  Believing your business is stable based only on these indicators can provide a false sense of security among business leadership and can lead to complacency on the shop floor.  Success can hide risk.

Stability is the foundation of practically every production metric… cycle time, lead-time, OEE, fulfillment rate – all depend upon stability.  A lack of basic stability prevents improvements from either taking place or being sustained – continuous improvement is impossible without a stable process.  Add to that, the fact that we tend to tolerate poor performance in the absence of a squeaky wheel, and you find that no squeaky wheel is a signal worth investigating.

How should a business gauge stability?  Many people (and lots of engineers) tend to mistakenly connect stability with a high quality rating or fulfillment rate, but stability is so much more than that.  You first need to recognize that stability has three separate components – predictability, sustainable outcomes, and consistent processes, and you need to realize that stability requires all three.

Predictability: Let’s say a manufacturer can’t or doesn’t measure OEE for their processes – without it, no prediction can be made for the output and the process is unstable.  Here’s another example – you talk with the CFO on the 25th of the month and they share that the company is on course to hit their plan for the month, but five days later you find they have missed the plan by 20%.  Not predictable, not stable.

Sustainable Outcomes: A sustainable outcome is one that continues to meet customer demands – quality is high enough, fulfillment rates meet demand, and cost is low enough.  If lead times for a company are growing, they may eventually start losing orders because of it, at which point it becomes an unsustainable outcome.  Sustainable outcomes are the result of robust systems that can respond to ever-changing market, supply chain, and employment needs, to name a few.

Consistent Processes: Consider this – at the end of an operation, employees conduct a final visual inspection and box up the items.  Each employee chooses the process they wish to use, and no employee has the same output as the others.  But there’s one employee who was clearly inspecting and packaging twice as much product as anyone else, but because everyone could choose to do it their own way, the impact of any good work was negligible.  If everyone were to follow the process used by the best operator, productivity would increase and production costs would be reduced.

If we’re all in agreement that predictability, sustainability, and consistency are the core requirements for stability, how does instability manifest itself in operations?  Here are a few indicators of instability:

Efficiency and Productivity: An operation isn’t stable if the output changes each time there’s a change in employees, shift, production line, supervisor, or facility.

Quality Control: An operation isn’t stable if you have to sort the outcome, inspect quality into the product, or if you’re not tracking rework and scrap. 

Cost Control: An operation isn’t stable if lead times are growing, parts are unavailable, or if absenteeism continues to be a problem.

Compliance and Regulation: An operation isn’t stable if a product (like a safety harness) fails to perform to specification, or if employees are at risk of injury. 

Risk management: An operation isn’t stable if any of the following risk conditions go unaddressed –

  • If your company is growing but your margins start to decrease when new products are added, or if you have anyone in management who doesn’t take off more than a day at a time, your operation is not stable (tribal knowledge risk)
  • If you don’t have a thoughtful hedging strategy or a history of passing on pricing increases to customers, your operation is not stable (margin compression risk)
  • If you don’t have alternate sources for your materials, or a secondary port of entry negotiated in your supply chain, or a disaster recovery plan, your operation is not stable (business interruption risk)
  • If your Emod rate (or EMR) is above 1.00 or if you don’t know what your Emod rate is, your operation is not stable (safety risk)
  • If your maintenance department spends more than 15% of their time on reactive maintenance, your operation is not stable (CAPEX risk)
  • If you don’t know your churn/loss rate, or which of your customers are vulnerable, your operation is not stable (customer loyalty risk)

Perhaps the greatest benefit of stability (predictable processes) is the ability to scale and grow your business.  When businesses have established and repeatable processes, they can more easily replicate and scale their operations.  This is particularly important when expanding into new markets, introducing new products or services, or onboarding new employees.

At The ProAction Group, we help businesses create reliable processes.  We work with leadership, management, and the employees on the floor to raise awareness for business stability and its connection to predictability, sustainable outcomes, and consistent processes.  Verifying the presence of these components in your processes is the key to true business stability.

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