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.