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Who could forget the 1983 comedy drama, “Risky Business” starring Tom Cruise in his breakout role.  Joel, the entrepreneurial title character, is plagued by unforeseen risks as he agrees to a less than transparent business plan to run a temporary brothel out of his parent’s home – all to pay for damage to his dad’s car.  Well intentioned – though fraught with risk!

Tom Cruise may have learned a lesson from his risky behavior.  The car in the lake became the least of his problems!  In business and in real life the risks are often subtle and can even masquerade as harmless or irrelevant facts of life.


Unrecognized risks do not get addressed.  We can have sympathy for people and companies that suffer the consequences of something they truly didn’t know about.  And that highlights an important point.  Intention and ignorance do not protect us from harm.  Sometimes the risk doesn’t show symptoms until late in the process. 

Risks identified early can be mitigated, planned for, and addressed.  On top of that, when addressing risky business early, the cure tends to be non-invasive, low cost and effective.  The secondary, and often overlooked benefit is that eliminating risk will provide collateral benefit in seemingly unrelated areas.

When assessing operational risk, even during a pre-close due diligence, we search for early risk indicators, especially in the following areas:

  • Safety
  • Margin Compression
  • Business Interruption
  • Unbudgeted Capital Expenditures
  • Obstacles to Scalability / fragility
  • Customer Loyalty / Attrition
  • Sensitivity to economic headwinds / black swan events
  • Over / Under Estimated Capacity
  • The Rabbit Hole (resources are being applied energetically in an irrelevant or unactionable area)

If none of the risks above got your heart pumping, you may skip the rest of this post! 

Examining risk is not just an exercise in avoiding pain or bad situations.  A clever and practical assessment of the risks can expose costly surprises before the deal closes.  Go in with your eyes open, your models accurate, and your value creation plan relevant.

And here is the punchline.  In 20 years of conducting operational diligences, we have never killed a deal.  Every risk, especially when identified early, has a solution… modest capital, some appropriate management attention, some one-time resources. 

The second punch line…  When done well, the inoculation to the risk provides its own ROI.  Addressing margin compression leads to increased margins.  Shoring up against business interruption risk will create new stability and increase capacity.  Increasing worker safety will help you scale.

Have you ever gone to bed one night thinking about how you are preparing to exit a deal and wake up to the reality that you have to, essentially, start over?  Margins are falling, quality issues popped up, a customer moved to a competitor.  The trick here is not to avoid unforeseen headwinds, or to avoid change.  The answer is to prepare to handle change.  We know more black swan events will come, and the vaccination is healthy, good, and available.

The ProAction Group has a team of professionals ready to turn on the proverbial flashlight… and venture into the dark spaces to provide knowledge of risks that are actionable and almost always – solvable.


Overall, validating data related to operational efficiency requires a systematic approach to collecting and analyzing data, as well as an understanding of the key drivers of efficiency in the specific industry and company.  By validating data in this way, companies can identify areas for improvement and implement targeted strategies to increase their efficiency and profitability.  This information is valuable to have for a buyer of an organization and invaluable to help steer opportunities for improvement post-close.

Having tools to validate data is important.  Equally important is having a deep talent bench with experience in specific verticals who know how to uncover improvement opportunities, as illustrated by two of our recent engagements:


The ProAction Group was retained by the buyer to conduct an operational diligence on a co-manufacturing company.  The CIM stated the company was operating at 80% capacity, with plans to expand the facility and add additional equipment.  Upon our analysis of the operational data and observations at the facility, we calculated that operating capacity was closer to 40%!  This discovery dramatically influenced our client’s CAPEX plans and shifted their margin projections due to overhead absorption and labor utilization improvements.


Our client was challenged to keep up with their 10X growth in SKU’s.  Although inventory was growing, they were also missing out on sales opportunities.  As a result of our DeepView Turn & Earn analysis, we were able to identify and segment their product demand patterns.  The data and analysis revealed they had two businesses under one roof – a low-mix/high-volume business, as well as a high-mix/low-volume business.  Continuing to operate the company as a one-size fits all process model was the culprit.  Our recommendation to run each of these two businesses differently resulted in dramatic reductions to inventory, elimation of lost sales and an immediate increase in EBITDA of 18%. 

We can assist you in identifying and planning for operational efficiencies, often leading to big gains.

The ProAction Group provides industry leading transparency and clarity around data generation and validation where data may not be available.

Our operational diligences highlight potential negative surprises and provide post-close value creation strategies, with suggested implementation plans, management guidance, and interim leadership as needed.  We bring the plan to eliminate, manage or mitigate the risk.

We help you to say yes to the deal, with your eyes open.

We eliminate the ability for secrets to exist, as we are taking the time to truly understand operationally what is going on.  All this helps our PE clients and management teams in a smooth transition post-close.  

Buying That Business – Negative Surprises

The backbone of surprise is fusing speed with secrecy.

When working to close a deal, there are so many moving parts.  Some parts move faster than others, as the desire to check off a box is strong to move onto the next aspect of a company deserving of validation or scrutiny.

In our operational diligence work, we often find our private equity clients come to us because they have been negatively surprised one too many times.  They go through their traditional due diligence checklists, work through the Quality of Earnings and, because of that report, address any visible operational issues.  During this process, however, the actual constraints are influencing operations and what is really bubbling beneath the surface often fails to show up until after close. 

Operational improvements are largely ignored because they are often considered pedestrian.  Labor is often a small percentage of sales.  Why care about that?  The equipment works, the people are there.  Are operational improvements really going to have a positive impact?  The company is growing, their customers are happy, they are profitable.  Given these positive signs in the financials and customer satisfaction, are there really any risks?


Despite going into a deal with eyes wide open, you will always be limited to what people want to show you, and the speed of dealmaking is often paired with secrecy on the sell-side.  Maybe intentional secrecy, or maybe just undiscovered challenges because the owners may not even be aware, the right questions were not asked, or the speed of the deal masked those challenges.  As a result, the negative surprises could be numerous:

  • The estimate of capacity in operations was grossly overstated or understated
  • There are key people who are not capable of achieving the plan, or there are impediments to the growth of the management team
  • Operations is not making use of the information system that’s available
  • A key piece of equipment is on its last leg and needs replacement
  • Vulnerability to key talent or operators leaving the company post-close 
  • Volatility in the supply chain or reliance on a key supplier
  • The company is reliant on tribal knowledge and/or lacking standard work and process documentation
  • The current management team is fully committed to an ineffective approach to running the business

Negative surprises don’t happen if we can provide insight.

The ProAction group provides DeepViewä Operational Diligence to bring industry leading transparency and clarity around:

  • Business interruption risk (including supply chain)
  • Undisclosed CAPEX requirements
  • Undisclosed investment required to maintain current performance levels
  • Management isn’t prepared to lead the company to realize the investment thesis
  • The company is static and not prepared to act as a platform
  • Evaluation of operational systems to support the investment thesis
  • Real-time insight to the industry’s market and its customers
  • Data generation and validation where data may not be available

Our operational diligences highlight potential negative surprises and provide post-close value creation strategies, with suggested implementation plans, management guidance, and interim leadership as needed.  We bring the plan to eliminate, manage or mitigate the risk.

We help you to say yes to the deal, with your eyes open.

Beyond our valued pre-close operational diligence work, we also serve as an important relationship bridge between the seller and the buyer.  We engage sellers with genuine appreciation for a company’s history and a desire to understand why the company operates the way it does.  We acknowledge the good and plan for where the gains are to be claimed.  We eliminate the ability for secrets to exist, as we are taking the time to truly understand operationally what is going on. All this helps our PE clients and management teams in a smooth transition post-close.  

You are not ready to close your next deal without this…


Quality of Earnings Report Should be Paired with Operations Diligence

The importance of a Quality of Earnings (QoE) report cannot be overstated.  They are ubiquitous.  The report is a key tool in understanding the health of a business, but it is not the only tool.  Beyond the clarity a QoE delivers on the buy-side, it can also provide sellers with a third-party’s view of potential areas for concern – areas that can be targeted to maximize the company’s future market value. 

The QoE report contents are the same regardless of who requests it (or should be!), and that information provides a full picture of the business financials with key insights into aspects of the company’s operations… or does it?

Operations Diligence – It’s not Sexy, but the ROI is

Foreseeing future negative surprises and understanding the true hidden value within an organization’s operations are essential to protecting and unlocking future profits.  Sounds simple, however it’s not sexy work and is best done by functional experts who are deeply versed in the questions to ask and things to look for.  When dealing with operations planning, it’s important to understand WHY something is done the way it is before plans are made to improve it.  It’s important to dive deep into the operations and identify future negative surprises, quantify ops challenges, and qualify whether the challenge is worth solving.  Furthermore, it’s important to identify and quantify hidden value worth claiming – before a single employee is added or piece of equipment or machinery is purchased. 

Enhancing EBITDA through operational improvements, albeit not sexy, is not only a proven way to increase ROI, but is also a critical cash flow lever in today’s environment of lofty purchase price multiples.

The Check you Write and the Check you Get:


Beyond the third-party expertise of a thorough operational review by industry veterans, our process involves great, collaborative communication with both the buyers AND the sellers (and their associated service providers and investment bankers).  We are often viewed as a relationship bridge, helpful to both sides of the deal.  Buyers will sense that we seek a practical understanding and appreciation for all they have achieved with their current operations.  We’re a fan of entrepreneurs, and our passion and enthusiasm for understanding their processes are genuine.  We work to document the “as-is” and seek to claim the “could be” in operational value.   As a result of our work, buyers will have confidence in the check they write, and knowing the potential cost to generating the results they wish to achieve.


We work with sellers to provide support and objective assessments that identify and quantify the impact of implementing operational improvements, which will provide exponential value in the selling process.  We provide a fresh perspective and fine-tuning of operational processes, documentation to expedite the operational diligence process, and a dry run, in anticipation of tough questions that may occur during negotiations.  As a result, we help sellers reveal the value that’s hidden in their business and increase the potential to receive checks with extra zeros on the end.

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.

ProAction’s 2022 December Digest

  • The end of the year brings time for reflection and openness for doing things differently in the new year. Do you have a portfolio company (Portco) that is underperforming and needs help determining the problems and solutions to get earnings back on track?
  • At the ProAction Group we bring the Action. We provide momentum, process, and tools to impact results with our industry leading experts who will work with your existing team to guide companies through operational improvements.
  • Check out the Conferences we will be attending. Hope to see you there.
  • There are no surprises in the deal when we provide “The Knowing” through a DeepView Diligence.

This is Alarming, but not entirely unexpected…

Morgan Stanley reported Monday that jaw-dropping inventory levels are a key risk to retailers, and there is a 19% discrepancy between inventory levels and sales growth.  Additionally, according to Descartes, which aggregates U.S. Custom data, reports that US imports sank in September and posted the steepest drop since 2020 lockdowns.

The headlines are daunting. 

We can chalk this up to skidding demand amid a lot of inventory.  The reverse bullwhip effect that many predicted back in May.   

Companies with high consumer exposure have slashed their ordering — even though this time of year tends to be when retailers are beefing up their warehouses ahead of the holiday season.

According to the Morgan Stanley Shipper Survey, in which some 100 corporations regularly share their transportation needs and macro expectations, net ordering levels have reached the lowest point in the survey’s 12-year history. Ordering levels are down 40% year over year. Net inventory levels are also unusually high.

The report offered guidance, “Faced with a glut of inventory, companies will need to decide whether they want to accept high costs to continue holding inventory, destroy inventory, keep prices high and take a hit on the number of units sold, or slash prices to stimulate demand. We believe many will turn to aggressive discounting to solve their inventory problem which is likely to spark a ‘race to the bottom’ as companies attempt to cut prices faster than peers and move out as much inventory as possible. This dynamic will weigh heavily on margins and fuel the earnings slowdown.

How do you maintain, but ideally grow EBITDA in this challenging environment – make the operations more efficient? That’s where we can help. 

Our team at The ProAction Group works with organizations to identify operational performance improvement processes that get an immediate 22-40% performance gain without adding a single employee or piece of equipment.

We will be honest.  This is a lot of work, and it will require some meaningful changes on your part.  If this truly is a problem worth solving, let’s talk.

Recession Proof Your Portfolio Companies

We’ve got some key insights and questions to ask at your next leadership meeting

Former Chicago Cubs Coach, Joe Maddon famously told his Cubbies “Try Not To Suck” as a light-hearted way to inspire action.  Simple and direct.  His leadership ended the 100-year Cubs World Series drought.

Economists are still dancing around the issue, but the reality is we are likely headed into a recession.  As businesses survived the worst of the pandemic, the murder hornets, civil unrest, supply chain issues and sky-high energy prices – now comes the recession.

What does history tell us?  As you lead a portfolio of companies, “trying not to suck,” is a low bar.  You’ve got pressure to make sure the results are there for a winning exit. 

In their 2010 HBR article “Roaring Out of Recession,” the researchers found that during the recessions of 1980, 1990, and 2000, 17% of the 4,700 public companies they studied fared particularly badly: They went bankrupt, went private, or were acquired. But just as striking, 9% of the companies didn’t simply recover in the three years after a recession—they flourished, outperforming competitors by at least 10% in sales and profits growth.

A more recent analysis by Bain using data from the Great Recession reinforced that finding. The top 10% of companies in Bain’s analysis saw their earnings climb steadily throughout the period and continue to rise afterward. A third study, by McKinsey, found similar results.

The difference maker was preparation and execution. Among the companies that stagnated in the aftermath of the Great Recession, “few made contingency plans or thought through alternative scenarios,” according to the Bain report. “When the downturn hit, they switched to survival mode, making deep cuts and reacting defensively.”   Many of the companies that merely limp through a recession are slower to recover and never really catch up.

How should you guide your portfolio companies in advance of a recession and what moves should it make when one hits?  We’ve got some great tips and questions to challenge your leadership team:


Companies that are even marginally better than their competition can steal market share in good times AND in bad times.  As we face recessionary pressure, it’s good to challenge your leadership team with two key questions:

How will we maintain a consistent flow of supply with tight labor markets and a volatile supply chain?

How will we tighten the belt during a slow period while optimizing our ability to serve customers and protect employees?


Speed of execution is extremely important for business momentum.  The plan to achieve numbers cannot be with big cuts or to pause initiatives due to recessionary fears.  Our advice – proceed with caution and reframe initiatives as an investment with a clear ROI for each initiative.

The sooner a portfolio company can find and mine hidden value, the higher the ROI once it is ready for a sale.  Some challenging questions to pose:

As an organization, do we have self-paced obstacles that slow our pace down to needed improvements or identifying opportunities to create value?

Where can we gain scalability and speed?

In addition to budgeting operational improvements into the budget, can we also allocate “excess availability” within working capital lines of credit to ensure improvements can continue to happen if things get tight during the recession (if cash flow in the ordinary course of business is a problem)?


Coach Maddon told his players there is a healthy tension and balance between art and science, between data and winning strategy.  Sometimes as a leader you must go with your gut and instincts (while also evaluating data and performance). 

As a PE firm with multiple portfolio companies, perhaps 1 or 2 of the companies are hitting grand slams consistently.  Maybe a few companies are always striking out.  Perhaps a few of your companies are hitting singles and doubles, but you feel the potential is there.  We would recommend focusing operational improvements on companies hitting singles and doubles – turn those into triples and home runs.  These companies demonstrating positive performance (but still not quite there) could benefit from focus.


Do you have one company in your portfolio that is already challenging your patience, mental capacity, and time? 

Do you want to get ahead of impending situations before they go from bad to worse? 

At The ProAction Group we do three things:

1. Conduct a Pre-Close Operational Diligence

  • Like a QofE, but with a focus on Operations
  • Quantify “how much more will you make when you run it right?”

2. Implement

  • Drive initiatives to increase EBITDA and to improve your position in the market.
  • Guide your management team to scalability.
  • Get rid of the pain.

3. Revitalize Stale or Stagnate Portfolio Companies

  • Do you have one portfolio company that requires more thought and effort than all the others combined?

Call us today so we can help you ensure your portfolio companies come out of the recession with winning returns.  There is no time to waste!