Tag Archives: EBITDA

Identifying Operational Opportunities to Improve Pricing During Due Diligence

This is the sixth article in our series on Identifying Opportunities to Improve Operations. We have divided the opportunities to increase the market capitalization of a company into seven value lever buckets. For each area we describe the signs we look for that indicate the company can improve their financial performance. In other words, we are highlighting points you want to know BEFORE you buy the company; things that expose opportunities to increase EBITDA, capacity and asset utilization.

The Seven Value Levers include:

  1. Throughput. Can we increase the output of a plant, office, service location, or other facility?
  2. Variable Costs. Can we reduce the costs directly tied to our volume and revenues?
  3. Fixed Costs. Can we reduce the costs that do not change in the short term, based on customer demand?
  4. Order to Cash Cycle. Can we shrink the time between investment on our part and collection from our customers?
  5. Pricing. Can we collect more revenue for the services we are providing?
  6. Asset Utilization. Can we increase inventory turns, the use of plant equipment, or the use of facilities?
  7. Risk. How can we reduce risks related to running our business?

In this article we share with you the signs we look for that indicate a company may be able to effectively increase their revenues and EBITDA through pricing. From a results perspective, we are looking for indications that our client can:

  • Increase overall pricing levels, often from 1-3% of total revenues
  • Reduce or eliminate “leakage” from designed pricing strategies or plans
  • Identify price elastic and inelastic items
  • Address any issues related to the gap between gross and net sales
  • Collect more revenue in the current market

This is a powerful topic; finding opportunities to get paid more for what you do. Effective pricing strategies and practices lead to designed increases in margins where customers are willing to pay more. The following indicators demonstrate that a company is not consistent in the pricing approach, is leaving money on the table, or is allowing the company to execute policies that are out of alignment with company strategy and direction.

IndicatorWhat it can mean
Does the company
monitor margins by
product and customer
If the management team doesn’t have reports showing trends and variation
in actual transactional prices, then there is opportunity; if they can’t measure
it, they can’t manage it.
The best practice here would be to not only track trends and variation in
margins, but to do so by customer and part / SKU (“stock keeping unit”)
When a price increase
is decided, is the
actual yield
One effective approach we use in performing due diligence is to interview
managers and workers on how they address various functions and duties.
Then, we also look at history, at actual numbers. This allows us to
triangulate people’s perception of how pricing is managed with real history.
Fortunately, if a company keeps their sales history, we can retroactively
track pricing change yield. If, however, management doesn’t have access
to this data and does not monitor performance, then the company is
vulnerable to pricing “leakage”.
Can a sales rep or
inside sales person
change the price for
an item based on their
Sales people only lose a portion of their commission if they reduce the price
of an item. They stand to lose the entire commission, however, if they miss
the sale. This can provide an unbalanced motivation. Proper controls limit
the ability for any sales person or manager to provide a discount or price
reduction outside of designed parameters. If these controls are not formal
and discrete, there is likely a meaningful opportunity to investigate.
Decisions on prices
and near-price
discounts, deductions
and incentives are
made independently
of each other – rather
than in an integrated
When decisions are made based on the total cost of ownership, we often
find that well balanced choices are made. There is no opportunity to
squeeze one end of the balloon and simply move the problem to another
department or budget. When determining how we will treat various
customer segments and sku’s, if we do not address all components (pricing,
discounts, freight, accessorial charges, etc.), then there is a meaningful
potential that one group of customers or products are subsidizing others.
People paid as a
percentage of
revenue or gross
margin dollars (e.g.
salespeople and sales
managers) make
some or all pricing
Whether we are talking about selling standard products off a price list or
complex designed services off a quote, if the people that get paid on making
the sale have a say in the price charged, there is a danger that we are
allowing personal goals and motivations to supersede company strategy
and goals.
Can a price in the
system be changed
by someone not
authorized to make a
pricing decision?
When we conduct our diligence work in the field, we start with the historic
data. We look for any variance in prices charged; we look for actual
compliance with company policies. When we do find a gap or a meaningful
variance, we then look to see who can change a price or discount in the
system. Often, executives and managers are surprised to find that many
people within the system have the ability (even if they are prohibited from
doing so) to change or set pricing levels.
Margins on lower
volume sku’s and
higher volatility sku’s
aren’t differentiated
from high volume or
stable products
Low volumes and high volatility drive higher costs. Providing the desired
quantity of low volume and volatile parts to customers when and where they
want them adds value. Largely speaking, these items should have a higher
margin than products that drive high levels of steady demand. If the
company does not segment their products by volume and volatility and
monitor margins, there is an opportunity.
Margins by sku and
customer segment
are not tracked and
monitored by the
executive team
Similarly, providing goods and services to smaller customers when and
where they want them creates value. Smaller customers do not have the
scale to evaluate other options as larger ones do. A company should have
a designed policy or pricing approach that differentiates how we price
different customer segments. If margins are not tracked by customer and
product segment, then we need to investigate.
Is there a structured
set of rules, controls
and baselines in place
to address one-off or
job shop type
For custom and designed products and services, companies need to
provide specific quotes during the sales process. If the same item would be
quoted differently based on who in the company completes the quote, there
is an opportunity to improve pricing. Even more so, if the same person
might quote an item differently on two different days, there is an opportunity.
There should be pricing tables, consistent component costing, rates, rules
and worksheet tools to support a consistent and designed quoting process.
Are margins on
projects or jobs
tracked and
compared to the
For custom projects and services, we need to provide a quote during the
sales process. High performing companies can show how completed
projects and services compare to the original quote. Further, the company
should be able to show what actions they take to improve the quoting
process based on actual performance. If any of these pieces are missing,
there is an opportunity to improve.
Cost plus pricing If we find evidence that “cost plus” pricing plays a meaningful role in setting
pricing levels, then we see opportunity.
Elastic and inelastic
pricing is not
Retailers have found success in setting low prices on items that drive
consumer behavior. If the grocery store sets a low price for milk, then
customers flock to the store and they never check the price of snack items,
for example. The same relationship holds true for companies selling to
other companies (B2B). If a company does not analyze and track elasticity
by part, then there is opportunity.

Recently, we worked for a company that had hundreds of sales people in a dozen regions. The company retained us to find out what was causing a double digit gap between gross and net sales. While there was a companywide, executive driven mandate to hold firm on pricing, we found that sales people were routinely providing discounts. The sales people had good intentions and wanted to close the sale, but the executive team had developed their pricing strategy on sound principles and needed their mandate to be carried out. The company’s regional controllers were aware of the mandate, but lacked conviction that it was truly in the best interest of the company. After uncovering the issue, we were able to design simple reports that tracked compliance and allowed management to monitor pricing levels. Within a short time management’s strategy was carried out throughout the company and net margins increased by over 3 points. Because this company had a 10% EBITDA margin to start with, this increase generated a 21% increase in EBITDA.

Another client, a consumer packaging company, recognized that low volume and highly volatile sku’s did not carry any premium pricing over high volume and stable items. Correcting this added $500,000 in margin, an increase of 8% in overall EBITDA.

There are many examples like these. Look for these indicators. When you find them, it is time to investigate and take action!

If you have any questions or requests, please feel free to contact me at tvm@proactiongroup.com.

Case Study: Sell Side Q of Ops

Big EBITDA Gains Identified in Overstocked, Underperforming Portfolio Company

Eight years after purchasing a consumer product company, our private equity client found themselves in the frustrating position of spending too much time and attention on one underperforming portfolio company.

The issues were clear: inventory kept increasing, and management was at a loss to explain why. Matters were further complicated by some of the inventory’s limited shelf life. Though demand was very seasonal, at the end of their last busy season the company had the highest inventory levels in its history. These issues resulted in an EBITDA to sales ratio of less than 6.5%: earning less than $6.4 million in EBITDA on about $100 million in sales.

Exiting the underperforming company wasn’t feasible, as it would result in mediocre performance for the client’s fund.


  • Underperforming portfolio company had excess inventory; products with limited shelf life compounded losses.
  • EBITDA performance lagged the industry and fell short of projections.
  • Exiting would drag down overall fund performance.

ProAction performed a Sell Side “QofOps” to identify and quantify their opportunities to create and claim value before their exit. Here are the highlights:

  • Recast Inventory: The company had $28 million in inventory, and we modeled how much they really needed given their supplier lead times, manufacturing capacity and customer locations. They only needed $12 million to run the company assuming solid processes and systems.
  • Segmented the Business: One size does NOT fit all! We segmented the business into 9 segments. We learned where they made money and where they gave it back. This allowed us to develop surgical recommendations to project their position with important customers and their ability to serve other customers in a profitable manner.
  • Targeted Savings: We examined their SG&A spend, their approach to sourcing purchased goods and services, and their DC’s and factories. This allowed us to quantify how much more EBITDA they can generate at the current sales levels.
  • Re-designed Planning Processes: We reviewed the company’s supply and demand planning processes, and isolated opportunities to leverage supplier resources, reduce inventory, and increase order fulfillment levels.
  • Fostered Adoption: By including key members of the management team in the design process, we were able to do more than deliver a report. We generated a detailed implementation plan and laid the foundation for change.

Actions Taken:

  • Optimized processes around the 8% of customers and 22% of SKUs that make up 88%+ of gross margin produced.
  • Built the business case to consolidate 4 facilities into 3.
  • Designed a Lean enterprise and a planning culture, with tracking and monitoring methodology built into all processes.

Quantified Impact of Recommendations:

As part of building a business case for the recommendation, we estimated the net benefits of taking action.  Namely, as a result of the identified changes, the client would realize the following net benefits:

  • Increase EBITDA between 69% and 108%.
  • Pay down up to $16 million in debt.
  • Increase order fulfillment, customer satisfaction levels, flexibility and inventory turns.
  • Reduce customer lead times.
  • Fully leverage recent ERP.

About The ProAction Group

ProAction is an operational consulting firm that works with Private Equity to do three things:

  1. Help you win good deals (and avoid bad ones!) through our pre-close Operational Due Diligence and “Q of Ops” Diagnostic Reports.
  2. Facilitate your management team’s transition from an entrepreneurial to a scalable, process driven leadership path.  We act as their training wheels.
  3. Conduct our Operational Diligence on “stale” portfolio companies.  We quantify any latent value that can be freed up through operational changes.

We focus on three sectors: consumer products, manufacturing and distribution. We have experts in Lean Manufacturing, Six Sigma, Sales and Operations Planning, Inventory Strategy, Sourcing, Logistics and Human Capital Development. We were founded in 1995 and are headquartered in Chicago.

For Further Information:
Timothy Van Mieghem
The ProAction Group, LLC
445 North Wells St. Suite 404
Chicago, IL 60654
Tel: (312) 371-8323

The Competition is Fierce. Change the Rules. ™

Case Study: Lean Transformation Enables Smooth Product Launches and Drives EBITDA Improvement

There would be no “snow days” in the forecast for a leading manufacturer of plowing and spreading equipment. The company was preparing to integrate a new acquisition and to launch two new products. To accommodate this growth, a major layout change and freeing up floor space was required at one of its facilities. Despite a lean effort for over a year, the plant’s performance was lagging behind the company’s other sites.

Lean TransformationThe ProAction Group reinvigorated the Lean transformation effort at the client’s plant with a hands-on application of Lean tools. We employed Value Stream Mapping to assess the opportunity and then began eliminating waste in the facility. The team used 5S, Visual Management, and Takt Time Management to streamline operations. Quick Changeover and Total Productive Maintenance were implemented to minimize downtime. We introduced metrics which allowed the plant to manage for daily improvement in its processes, including first-pass Standards of Work which eliminated costly re-work.

We led the Product & Production Preparation Process which ensured a timely and successful launch of the new products. The team employed a Design for Value approach with a focus on quality. We optimized the arrangement of people, machines, materials, and methods to maximize work flow and minimize waste.

ProAction also supported the client in constructing their strategic plans. We guided the roll-out of Lean practices across the entire enterprise. We conducted organizational capabilities assessments and recommended staffing changes. We also recommended sourcing activities to support the company’s expected growth.

EBITDA ImprovementThe Lean transformation put the plant back on track to meet performance expectations. We reduced the labor cost by 14%. Changing the plant’s layout improved the work flow by 32% and reduced the occupied manufacturing area by 25%, freeing up space for the production of its new products.

Need help with Lean transformation at your company? Contact us today to learn how we can help.


Case Study: “Hidden” Operational Improvements Drive 50% Increase in EBITDA In 6 Months…

Operational ImprovementsThe company, a leading international provider of pharmaceutical packaging solutions, focused on the long term care, retail and nutraceutical markets.

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 tasks:

  • Uncover and quantify any EBITDA improvement opportunities beyond those identified by management and the PE client
  • Identify any hidden risks that would prevent the company from realizing their stated plans

We were successful on both counts.

  • The “Hidden” Improvements in EBITDA and Working Capital Improvements: We quantified just over $1 million in EBITDA improvements, and $1.25 million in inventory reduction.
    • These improvements primarily stemmed from 2 opportunities. The first related to lean manufacturing and scheduling opportunities in the plant. Their current approach to running the plant resulted in a significant past due backlog, high overtime costs, and late deliveries. The second related to their sourcing strategy and supply base. We found that they had no clear sourcing strategy and were laden with long term and untested suppliers.
  • The Risk: The company’s IT system was stable, but not scalable. It was built on a set of 5 connected legacy systems and would likely need to be upgraded or replaced prior to a sale to a financial buyer.
    • Given company plans for organic growth, the system would be fine for 3-5 years. We estimated the cost to implement a new system and the sponsor incorporated this into their financial model.

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.

Operational Due DiligencePost close, the company retained ProAction to work with management to implement the improvements identified during diligence. We led the company through the value stream mapping process and, together, created the road map. Key parts of the implementation phase included:

  • Developing and implementing actionable sourcing strategies for six (6) different commodities.
  • Creating a lean scheduling methodology/process for strategic stocking levels and delivery improvement.
  • Running kaizen and other improvement events, teaching the plant personnel to conduct root cause analysis and take corrective action (we taught the organization how to improve habitually on their own)
  • Providing training on Lean Methods Tools to management and operators.

EBITDA Improvement OpportunitiesAs a result of these actions, annual EBITDA increased by $2 million, or 50%, in six months. The better news, however, is that this financial improvement was accompanied by increased service levels, reduced stress in the plant and a 20% increase in effective capacity. During this period, the top line remained steady.

Within 18 months of acquiring the company, our Private Equity client refinanced and took their money off the table. Within 36 months they monetized the investment and netted a strong return, all without a meaningful increase in the top line of the company.

Lean As An Investment Thesis – Lean Principles

A couple of years ago we worked with a packaging company that had about $6 million in EBITDA. Initially, we projected that the company could increase EBITDA by about $1 million through the application of Lean principles. These opportunities weren’t hidden, just overlooked. There was a lot of work-in-process inventory. Some periods had high overtime, others excess capacity. Poor controls and a loose inventory strategy led to lots of frazzled customers, and the company compensated for these issues with expedited shipping.

By applying Lean principles, the company realized not $1 but $2 million in EBITDA improvements within 6 months. But here’s something that might surprise you: they also saw a 20% increase in capacity. In short, not only did existing business become more profitable, but the company could grow by 20% without adding additional capacity.

And those margins kept growing! Within a year, the management team actually realized $3 million in increased EBITDA and $1 million in reduced inventory. The company manufactured a 50% increase in EBITDA and built $30 million in market capitalization without increasing revenues.

Lean is a Philosophy

This is the difference between treating Lean principles like a one-time implementation plan, and the philosophy they truly are. Those new to the idea sometimes worry that adopting Lean principles will inhibit growth, but as you can see, that’s the furthest thing from the truth. In reality, waste often accounts for a substantial amount of your capacity, and reducing it puts time, money, and infrastructure back in the resources column. Transforming the culture of an organization around Lean principles yields very specific benefits, including increased scalability of operations, reduction in stagnant inventory, and a virtuous cycle of improvement.

Will Lean Impact Your Company?

When estimating the potential impact of implementing a Lean model, there are some key indicators we look for. The most obvious problems involve inventory. We’ve already mentioned work-in-process materials. Excess inventory is another classic marker. The flipside, of course, is back-orders. All of these issues indicate that operations are not balanced correctly with customer demand, which is a problem we can help you fix. Unusually high levels of scrap, rework, and warranty costs are further signs of waste that can be eliminated.

Another indicator we often see is a lack of metrics and post-mortems. In companies that don’t monitor key performance indicators, we typically find opportunities for at least 10-15% improvement, and productivity goes up when KPI’s are reviewed during the shift or work day. After all, the fastest way to identify and resolve a problem is to take a look at actionable metrics while the events of the day are still fresh in your mind.

Another thing we investigate is downtime. We measure companies against the theoretical maximum production their facility could produce, then track down the source of any discrepancies between capacity and actual output. That’s where you have room to transition from cost savings to growth opportunities.

Lean Applies to All Business Models

Many types of companies can apply Lean principles. Obviously, with manufacturing companies we look at WIP inventory that’s languishing. We identify under- or ineffective utilization of existing assets. We quantify the extent to which excess product is tying up capital before there’s actual demand.

But Lean is just as useful for other models. In healthcare, it can be applied to patient care issues, like registration and wait times. Lean can help reallocate resources to address actual patient population and flow. It can streamline revenue cycle management.

Distribution companies can benefit from Lean as well. On time, complete and accurate fulfillment of an order is the distributor’s equivalent of good production. When working with these companies, we focus on pick times and accuracy, slotting methodologies, and manning tables and controls.

With business services companies, we can apply Lean to the processes that directly create the value customers pay for, as well as supporting processes that involve documentation, invoicing, and collection.

Lean Improves Higher Business Functions

The truth is, any company can benefit from applying lean to its support and administrative functions, like accounting, supply and demand planning, and even forecasting. While these areas do not directly add value to customers, they do impact a company’s ability to maintain an environment in which you can add value to customers and get compensated appropriately.

The main thing to remember is that Lean is not something you implement and then walk away from. It’s a philosophy, one which needs to be socialized until it’s a company-wide practice with champions at all levels of management. Fully implemented, it means less hands-on monitoring for your organization’s top leadership, enabling them to be more vision-driven.

Applying lean to your portfolio company will pay for itself in the short term with EBITDA and working capital improvements. In the longer term it will also develop additional capacity and a virtuous cycle of improvement. Make Lean part of your investment thesis and drive it!

Stale Portfolio Companies

There are times when a portfolio company’s potential is simply not being realized, and you’re having trouble getting to the bottom of why. Management struggles to explain the gap.

This presents a couple of problems. The first is that the “stale” company not only drains your time and energy, it also impacts the performance of your fund. Without actionable information, you invest a disproportionate amount of your resources trying to improve the company’s performance without substantial results. But the other edge of that sword is that an unprofitable organization isn’t easy to divest. You can’t seem to move the needle, but you can’t successfully market the company until you do.

Real Numbers

That’s where we come in. It’s our job to take this problem off your plate temporarily while we investigate. We go straight to the heart of how the company is being managed today, providing you with a clear look at how that’s affecting performance levels. We cut through the communication issues that are holding you back, and find the operational changes and opportunities that will close your EBITDA gap. We can normally complete this review in less than a month. Then we go over the results in detail with you, with your management team by our side (we do this WITH your management team).

Expert Counsel

When we sit down with you to do a deep dive into numbers, financials, and our observations on your current processes, our goal is to build a bridge between the company’s performance and your expectations. We’re very frank and open about what’s being done right, both because you need to know, and because acknowledging these successes helps your management team react to constructive criticism in a proactive way. We don’t saddle management with blanket mandates. You’ll know what factors are constraining change, and we’ll recommend countermeasures to remove those obstacles. This focus on the how, rather than just the what, helps eliminate frustration within the management team by giving them a clear course of action.


Once everyone is on the same page, we engage in collaborative problem solving with your team. We’ve found this is crucial to the transformation process. With all parties invested in a positive outcome, we’re able to eliminate wasted effort and recover the evasive earning potential.

Recently, we completed this process for a private equity firm with what they described as “a $5 million portfolio company doing $3 million” in EBITDA. The plan we developed in conjunction with their team has put them on the path to achieve $4.5 million in EBITDA. We worked with another portfolio company 6 months before they entered an exit process. In this case, while we reported on the overall potential for EBITDA improvements, we focused on the equity firm’s short term goal of accruing as much EBITDA as possible before the exit. This ten-week project drove $900K, not in one-time, but in annualized savings.

If you’re feeling handcuffed to a languishing portfolio company, there’s probably plenty of frustration to go around. Bringing in a third party sidesteps any ongoing conflicts and encourages buy-in. Ultimately, it gives you an actionable plan within a workable timeframe. If the idea of an endpoint to your portfolio woes makes you breathe a sigh of relief, reach out to us. We can help.

The ProAction Group’s 9-Box System

Owners and CEOs are constantly working to improve EBITDA and trim waste at portfolio companies. However, no matter how proactive you’ve been in the past, it’s possible to reach a plateau. When you’ve addressed every clear opportunity to reduce waste, but it’s often difficult to identify next steps. This can leave you feeling frustrated, your efforts diluted as you do shallow dives into different aspects of your business looking for places to streamline.

It’s natural to find the process overwhelming, because correcting it requires a deep dive into your company’s data. When your focus is on the day to day running of operations, you may find yourself thinking, “How will I carve out the time?” Your best intentions end up being derailed by more immediate matters. That’s understandable– and that’s why we developed the 9-Box tool. It’s designed to find the dormant potential in your company, through three key ideas:

Triangulation: We begin by looking at your business from multiple vantage points. We’ll draw knowledge and insight from a variety of stakeholders (from the line workers to the C-Suite). In this way, we can provide you with the practical and raw insights you’ve been seeking even if you’ve been trapped under the hood– and we can identify exactly where your hidden, untapped capital might be. Triangulation gives you a sober direction in which to move.

Segmentation: Customers are not equal or the same.  Products are not equal or the same.  Many companies, in fact, treat customers and products the same.  This leads to companies making good money in some segments and actively giving it back in others.  By segmenting your business we expose the patterns and give you clarity.  Clarity that will help you tailor your approach and retain what you earned.

Experience: Theories and models are great, and they can be dangerous.  Decisions about how we treat customers, plan inventory and set pricing should not be left solely to a model.  Experience ensures that practical choices are made and poor decisions are avoided.  During the analysis stage of the 9-Box process, we’ll bring key players in your organization together, combining their expertise with ours to make the bold leaps that will consistently yield the increase in EBITDA you’ve been looking for.

So many companies are draining their own capital without realizing it.  Perhaps their pricing controls need attention, or maybe they’re maintaining the same level of inventory in every item across the board. The company might be giving equal attention to segments of the market that account for very little of its revenue. Somewhere, your company has capital tied up in resources on which you won’t see a return. We can find and free up those resources.

We’ve worked with more than 30 private equity firms, and 170 of their portfolio companies, to tackle this challenge. Let the 9-Box tool be the offensive line that cuts through everyday distractions, and creates room for you to charge forward and make the bold moves that will drive your EBITDA up and working capital needs down.

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