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.