Many firms could be stronger in performing Private Equity Operational Due Diligence on their target acquisition’s operations, purchasing, and logistics functions. All private equity firms enter into an acquisition with one of the following three strategies:
- Buy to sell
- Buy to hold
- Buy to transform
The success of the acquisition has less to do with the price at acquisition than it does about the earnings and multiple at some future point in time. Flow’s due diligence team understands the Private Equity firm’s value equation intimately. Our expertise is to help you succeed in gaining the most from your investment.
The Private Equity investment environment is getting more and more competitive. Timetables are usually tight. Expected performance of your team and your fund are always under pressure. Your deal team must quickly identify the price that separates the winners from the losers. Most Private Equity due diligence teams we work with are very strong in the following three areas:
- Financial analysis
- Legal aspects
- Organizational analyses – especially at the leadership level
But we find that many Private Equity firms could be stronger in assessing their target acquisition’s operations, supply chain, and logistics. Is there hidden gold or hidden heartache? The operational assessment is often a PE firm’s soft underbelly, the chink in their armor.
Flow provides critical insight and bench strength to your deal team in the operations arena, including the key business processes that are critical to successful growth. And this includes all the way from initial visit to execution of the first 100 Day Operations Plan and beyond. Flow’s bench of tried and true lean professionals bring a combined 250 plus years of operational excellence into your team to quickly assess potential acquisitions.
Discovery – Early First Visit
Your best scenario is to get us in early for Private Equity Operational Due Diligence. Our quick, one-day operational assessment gets our consulting team enough time to “sniff test” the operational capabilities. Often we catch whiffs of problems lurking behind shiny veneers but many times we find hints of hidden gold. Knowing this early directs your deal team to uncover areas that can easily be overlooked until it’s too late to affect the deal terms.
Flow’s experience in this sensitive and competitive activity allows us to maneuver ourselves and your team into an advantageous negotiation position without “tipping our hat” to either the sellers or the competition. Our early examination and analysis identifies opportunities available through lean transformation as well as risks or weaknesses within the current system. Armed with this added insight, we strengthen your deal team in the following ways:
- Make better decisions on offer price based on uncovered ‘hidden gold’ that can be quickly realized after acquisition
- Negotiate terms from a position of strength if we’ve uncovered risks that will cause issues and a high cost to fix after acquisition
- Be better equipped to rapidly impact the company performance once the deal is closed
Private Equity Operational Due Diligence Assessments
Our Private Equity Operational Due Diligence Assessments include the following questions:
- What is going well?
- Which process areas needs work?
- How much will it cost to quickly wring out hidden efficiency and capacity?
- Are the business processes scalable?
- Have prior acquisitions been integrated well?
- Are the IT systems scalable, secure, effective?
- An outline of a plan to rapidly work on the right things first to deliver the highest EBITDA within the first 6-12 months?
The typical project plan:
- Background and investment thesis discussion
- Access data room, and review financial, business footprint, operations facts, metrics, trends
- Request additional data
- Seller background phone interviews and data clarification
- Determine key business processes of interest with buyer
- Prepare business process maturity interview questions
- Set agenda interview schedule – typically one or two days on site, sometimes across multiple facilities
- Arrive on site, meet leadership, review agenda, and then go to gemba, the place where value is created
- Conduct process owner structured interviews
- Synthesis: scoring, rating, documenting
- Present findings:
- First Impressions
- Business Process Maturity
- Risks Analysis
- Lean Assessment
- Opportunities & Recommendations
- Improvement Roadmap
*The Process Audit – Process and Enterprise Maturity Model, Michael Hammer, Harvard Business Review, April 2007
Diagnosis – Developing the Operations Plan
Once the decision is made to pursue the deal, Flow’s “boots on the ground” approach to quickly turn a new acquisition into a high performance asset can begin to take shape. Working closely with both in-house and acquiring leadership, we develop a clear Private Equity Operational Due Diligence Plan of Action and a new operational baseline. This includes assessing the following:
- Key personnel, both at the leadership level and key people below that level
- Production or output capacity – can the business grow with little capital and manpower using lean concepts
- Infrastructure – is it sound, is it secure, can it scale?
- Distribution channels – often overlooked and usually a large source of upside opportunity
Flow Consulting has helped with many acquisition integrations of new and existing operations as well as accelerating performance of stand-alone operations. We have no one-size-fits-all approach other than crisp application of operational excellence and change management principles. This baseline helps to set up the following:
- Do the right things first to drive financial impact – prioritization
- Agreed upon timing and internal ownership
- Both for the initial 100 Day Operations Plan
- And for the long term 12-24 month operations strategy
- An agreed upon waterfall chart by project that will drive increasing EBITDA and ROI during the ownership cycle
- Agreement upon what projects the internal team can lead by themselves and where Flow Consulting may need to augment the team, with costs and returns determined
Do You Need Help With Due Diligence?
Why not get in touch and see how Flow Consulting can help you with Due Diligence improvements.