“Hidden” EBITDA found in Due Diligence

Yields $4.5 million improvement in EBITDA and $3.5 million in Working Capital in Year 1



“Hidden” opportunities Identified during Diligence:

  • Sub-optimize labor staffing causing 20+% non- conformance in “on- time” order fulfillment.
  • Inventory $4 million higher than needed
  • Inefficient warehouse “footprint”. Too much space; inefficiently laid out.
  • Inefficient Warehouse management. Improvements could increase capacity 30% and reduce labor costs by over 20%
  • Freight and Sourcing negotiations would reduce inventory further and increase EBITDA by $1 million or more

The company, a leading national paint distributor, had expanded to 8 distribution centers in recent years. ProAction conducted the operational due diligence pre-close for its Private Equity client who was engaged in a competitive bidding process for the business.

Our client asked us to uncover and quantify any EBITDA improvement opportunities beyond those identified by management and the PE client. We found the following:

  • Current warehouse management and staffing issues limited the number of orders that could be filled on a daily basis, driving up overtime and staffing, and reducing on time delivery.
  • Inventory planning and sourcing inefficiencies further drove down order fulfillment and customer service levels.
  • With improvements in warehouse management, the company could close 2 facilities and shave over 140,000 square feet in a 3rd.
  • The current sourcing and freight strategies were developed much earlier in the company history and did not take advantage of current leverage and available resources.
  • In total, we identified $3 million in EBITDA improvements, $4 million in working capital reductions, and opportunities to increase customer service levels from 80% to over 95%. Our client used our information to update their model and our presentation to educate the lenders on the assumptions and evidence of the opportunities. With these enhancements incorporated into their offer, our client won the auction and acquired the company.

Actions Taken

  • Eliminated 2 DC’s and reduced a 3rd by 140,000 sq feet with improved service levels
  • Implemented Lean approaches in warehouse operations
  • Negotiated new contracts

Post close, the company retained ProAction to work with management to implement the improvements identified during diligence over a 6 month period. Key parts of the implementation phase included:

  • Implemented inventory planning and system improvements.
  • Implemented lean manufacturing process improvements in picking, material handling and quality control.
  • Led the process to consolidate 4 locations into 2, and to reduce space in a 3rd location by 140,000 square feet
  • Designed and implemented key metrics and taught plant personnel to perform root cause analysis and to take corrective action. This enabled management to implement a continuous improvement culture led by those directly involved in running the plant day to day.

Measurable Results

  • $4.5 million increase in EBITDA
  • On Time Delivery increased from 80% to over 95%
  • Reduced space utilized and leased by 250,000 sq feet

As a result of these actions, annual EBITDA increased at a $4.5 million run rate within 6 months ($1.5 million more than projected). These results emanated primarily from:

  • Facility and space consolidation
  • Lean manufacturing process improvements
  • New freight agreements and suppliers
  • Improved planning and inventory strategy
  • During this same period, inventory was reduced by $3.5 million Just as important, they also realized a dramatic increase in on time delivery, reaching 95% within 6 months of taking action.

About The ProAction Group

The ProAction Group helps private equity firms increase investment returns by providing variable operating resources. Pre-acquisition, we quantify risks and opportunities, helping clients refine valuations, avoid bad deals, and prepare post-deal value creation plans. For portfolio companies, we work with management to identify and implement high-impact revenue growth and profit improvement initiatives. We focus on four sectors: consumer products, manufacturing, distribution, and business services. We have experts in marketing, sales, manufacturing, supply chain, and human capital development. We were founded in 1995 and are headquartered in Chicago.

For Further Information

Timothy Van Mieghem tvm@proactiongroup.com 312.371.8323

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