Trusting your team is paramount, but the privately held companies you acquire typically lack exposure to outside expertise in operational improvement and excellence. They often rely on home-grown manufacturing and management processes, turning companies into something that resembles, but has not truly become, a thriving, functional organization. You’re left with disappointing returns, extended exit timelines, or, in the worst cases, losses.

Find Out What You’re Dealing With

You’ve completed initial due diligence but aren’t seeing expected results in your portfolio’s lifecycle. Customer backlogs are increasing, and the cash conversion cycle is extending. Your operational management team asks for patience, but patience for what? Now is the time to proactively dig deeper.

Review Critical Operations KPIs

A major red flag is a company operating without meaningful KPIs – or worse, KPIs treated merely as factory wall art. Request a thorough KPI review focusing on:

• Overall Equipment Effectiveness (OEE): This quick measure of operational health highlights improvement opportunities. Are targets accurate and benchmarked against industry leaders?
• Throughput: Are production targets being met? If not, why not, and are the targets appropriately calibrated? What’s being done to improve efficiency?
• Downtime: Are lines running as planned, or are equipment and maintenance issues going unresolved? Are changeovers increasing?
• First Pass Yield: Is the rate of defective products rising or stagnant? Have root causes been analyzed and addressed?
• Schedule Attainment: Is production aligning with the planned schedule? What’s causing deviations – poor execution or unrealistic planning?
• On-Time Delivery: The ultimate KPI. Missed deliveries directly translate into lost revenue and eroded customer trust.

If leadership isn’t addressing these issues proactively, implementing corrective actions, or adjusting measurements meaningfully, it’s time to consider outside expertise.

How Did Things Get So Far Off Track?

Loss of Critical Team Members

Losing key personnel during buyouts is common, but sometimes these departures represent the true operational backbone. Frontline managers often informally carry operations in the absence of formal leadership, and their exit can cripple performance. Resist merely rehiring former employees – focus instead on process optimization and standardization that makes operations driven by systems, not individuals.

Speaking of a Hidden Factory… You’ve Got One

Leadership and operations teams may lose focus post-acquisition, neglecting processes that initially led to success. Managers distracted by their next career step contribute to a gradual decline in operational effectiveness, a scenario perfectly suited for operational consulting intervention.

If It Ain’t Broke…

What worked in the past won’t always drive future success. You may have acquired a company at the peak of its production innovation – possibly decades ago. A primary signal of leadership neglect is allowing operations to stagnate rather than pushing for continuous improvement. Home-grown management teams often lack knowledge of current industry practices and resist new approaches with the familiar refrain: “We’ve always done it this way.”

The Future Was Clear, Just Not to You

Initial assessments and operational reviews often appear promising because sellers naturally downplay operational inefficiencies. Engaging operational experts during the LOI phase is critical to uncovering hidden risks and highlighting immediate post-acquisition improvement opportunities to accelerate returns.

Leveraging Industry Experts for Maximum ROI

When management falls short of targets or claims limited improvement potential, external operational experts become indispensable. Choose partners with proven records of on-the-ground execution and lasting process improvements – ensuring changes stick long after consultants have departed.

About Seraph

Seraph is a specialized global strategy and operational excellence consulting firm that partners with business leaders to address complex supply chain, operations, and manufacturing challenges. With extensive experience supporting private-equity, public, and family-held businesses in industries such as automotive, aerospace and defense, medical devices, manufacturing, and distribution, Seraph delivers long-term operational improvements that transform operations.

Our team combines strategic insight with hands-on expertise to ensure successful execution on the plant floor. We don’t just fix problems; we seize opportunities for growth and excellence. Seraph’s services include crisis management, restructuring and turnaround, logistics, due diligence, total cost management, project management, rapid health assessments, relocation and consolidation, and strategic development and implementation.

Maximizing Value in Manufacturing Acquisitions

In private equity and strategic acquisitions, operational due diligence is crucial for maximizing value. Over the last decade, most returns in private equity have come from multiple expansion and revenue growth rather than margin expansion. However, significant value is often overlooked due to the lack of comprehensive operational reviews. By leveraging experienced teams for operational due diligence before closing a deal, acquirers can identify opportunities, mitigate risks, and accelerate post-acquisition growth.

The Power of Operational Due Diligence Insights

Vetting operations with the right people can:

• Uncover hidden value potential often missed by traditional financial due diligence
• Identify operational risks impacting the investment thesis
• Provide a clear roadmap for immediate post-acquisition improvements
• Offer a competitive edge in deal negotiations

Leveraging Expert Teams for Superior Results

It takes many unique skill sets to field a championship team. Opportunities are often missed unless you can bring:

• Industry-specific expertise: Deep knowledge of manufacturing best practices and sector-specific challenges
• Benchmarking capabilities: Accurate comparisons against industry leaders to identify gaps and opportunities
• Advanced analytical tools: Utilizing tools that provide consistent and repeatable assessments
• Objectivity: Unbiased assessments free from internal biases or preconceptions

Maximizing the Pre-Close Period

The 30 days before deal closure are critical for comprehensive operational due diligence. During this time, expert teams can:

• Conduct in-depth analyses of all operational aspects
• Develop detailed improvement plans aligned with the investment thesis
• Identify key personnel and potential change champions
• Set the stage for rapid post-acquisition value creation

Driving Sustainable Value Creation

The right process enables private equity firms and strategic acquirers to:

• Make more informed investment decisions
• Craft targeted strategies for immediate post-acquisition improvements
• Accelerate the implementation of best practices
• Achieve faster and more substantial enhancements in profitability and efficiency

Long-Term Strategic Advantage

The true value of operational due diligence lies in setting the foundation for long-term success. Expert-led due diligence enables:

• Development of multi-year improvement roadmaps
• Alignment of operational enhancements with overall growth strategies
• Identification of strategic investments in technology and automation
• Creation of a data-driven culture for continuous improvement

Conclusion: Unlocking Value Through Operational Due Diligence

Expert operational due diligence is a powerful tool for value creation. It reveals not just risks, but also hidden opportunities. By identifying weaknesses that can be transformed into strengths, it paves the way for significant improvements. This deep insight allows buyers to see the full potential of an acquisition, often spotting value others miss. With a clear roadmap for enhancements from day one, companies can accelerate growth and boost profitability faster. In the competitive world of manufacturing acquisitions, this ability to quickly create and capture value makes all the difference.

“Internally, within our company, we like teammates who not just find problems, but solve problems each and every day and prevent them from reoccurring… The problem solvers always rise to the top. People love to be around other people who can help them solve a problem. Customers love us because we help them solve problems.”

Chris Cummins

President and CEO, Micronics Engineered Filtration Group

In this episode, we’ll discuss:

• Successful acquisition integrations in manufacturing businesses
• Leading through tough choices: transparency and team support
• Lessons from his leadership roles in corporations and PE-backed companies
• Talent acquisition: attracting, recruiting and developing winning teams
• Effective leadership communication
• Navigating differences between COO and CEO roles
• Streamlining sales management to provide better customer service
• Advice for young aspiring executives in manufacturing and private equity

“We’re transparent about the important aspects of our business that help us create value. We openly discuss what makes our business great, focusing on customer service. This includes on-time delivery, lead times, reducing past dues, minimizing warranty costs, and taking care of our customers should something go wrong.

Internally, we talk about the three things that are really important to our business each and every day:

1. Cash flow: You can’t run a business without constant cash flow.
2. Margins: How do we improve, reduce rework, remove quality defects, eliminate scrap and waste to make our company more profitable, enabling continued growth?
3. Sales: How do we grow our business organically? Not just get new customers, but how do we do more for the really good customers we have? How do we take more tasks off their plate to make their lives easier? Can we be a one-stop-shop to make them better?

These areas are an essential part of who we are and ensure that our actions positively impact the three pillars of our business. We emphasize problem-solving and continuous improvement while holding ourselves accountable for doing the right thing.”

“We have an intensive engagement model, and our aim is to work closely with our teams to drive critical initiatives. It’s almost like being a co-pilot; we agree on the game plan, identify three or four key opportunities, and leverage each other’s capabilities to get the job done. As the saying goes, we’re changing the wheels on the car while it’s still moving. We’re still running the business, serving our customers, and managing employees. The key is to create the capacity and bring in the skill sets to make it happen.”

Doug McCormick

Managing Partner & Chief Investment Officer, HCI Equity

In this episode, we’ll discuss:

• HCI Equity Partners’ innovative investment strategy and its impact on business growth
• The importance of leveraging the operations team to improve the portfolio
• Doug McCormick’s military background and the differences between leading in the service and business
• How owners considering selling should vet their private equity partner
• HCI’s three-pronged approach for transforming companies into industry leaders
• Short-term and long-term trends accelerated by the pandemic and their implications for businesses
• Applicable lessons learned from Doug’s career
• His personal finance book Family Inc. 

Operational due diligence is the process of evaluating the operational capabilities, efficiency, and effectiveness of a company as part of a potential investment or acquisition. It involves a thorough review of a company’s business operations, including its organizational structure, management team, business model, financial performance, systems and controls, and regulatory compliance. 

Operational due diligence is important in the private equity deal process because it helps investors understand the target company’s ability to generate profits and cash flow and identify any potential operational risks or issues that could impact the value of the investment. By conducting operational due diligence, private equity firms can make more informed decisions about whether to proceed with an investment and, if so, how to structure the deal in a way that minimizes operational risks and maximizes value creation. 

Gathering Information 

Before beginning the operational due diligence process, it is important to identify the key areas of focus that will inform the review. This may include the target company’s organizational structure and management team, business model and revenue streams, financial performance and projections, and legal and regulatory compliance. 

Gathering information is a crucial part of the operational due diligence process. It allows investors to gain a deep understanding of the target company’s operations and identify any potential risks or issues that could impact the investment’s downstream value. By thoroughly reviewing the company’s business model, financial performance, systems and controls, and regulatory compliance, investors can make more informed decisions about whether to proceed with an investment and, if so, how to structure the deal in a way that minimizes operational risks and maximizes value creation. Additionally, gathering information from a variety of sources, including the target company’s management team, employees, customers, and suppliers, helps to provide a more holistic view of the company’s operations and enables investors to identify potential areas for improvement or value creation. 

There are several sources of information that can be used to gather information for operational due diligence. These may include the target company’s financial statements, management presentations and materials, customer and supplier contracts, and internal documents such as policies and procedures. It may also be helpful to speak with the target company’s management team, employees, customers, and suppliers to gather additional insights into the company’s operations. In some cases, it may be necessary to engage third-party experts, such as consultants or legal advisors, to provide additional analysis or guidance. 

Assessing the Target Company’s Operations 

As part of the operational due diligence process, it is important to assess the target company’s operations in order to understand its capabilities, efficiency, and effectiveness. This includes examining the target company’s organizational structure and management team, as well as analyzing its business model and revenue streams. 

Examining the target company’s organizational structure can provide insight into how the company is structured and how decisions are made. It is important to assess the effectiveness of the management team and their ability to lead the company. This may involve reviewing the team’s experience, track record, and succession plans. Analyzing the target company’s business model and revenue streams is also critical for understanding the company’s operations. This includes understanding the company’s products or services, its customers, and its distribution channels. It is important to assess the sustainability and potential for growth of the company’s revenue streams. 

Finally, evaluating the target company’s financial performance and projections is another key aspect of operational due diligence. This may involve reviewing the company’s financial statements and projections, as well as analyzing key financial metrics such as revenue growth, profitability, and cash flow. It is important to understand the company’s financial health and identify any potential financial risks or issues that could impact the value of the investment. 

Identifying Risks and Potential Issues 

Identifying risks and potential issues is an important part of the operational due diligence process, as it allows investors to understand the potential challenges or liabilities that could impact the value of the investment. There are several key areas to focus on when identifying risks and potential issues, including: 

1. Reviewing the target company’s legal and regulatory compliance: It is important to assess the target company’s compliance with relevant laws and regulations, as non-compliance can create significant risks for the company and the investors. This may involve reviewing the company’s policies and procedures, as well as its record of compliance with relevant laws and regulations. 
2. Examining the target company’s financial and operational systems and controls: It is important to understand the target company’s financial and operational systems and controls, as these can impact the company’s efficiency and effectiveness. This may involve reviewing the company’s internal controls, financial reporting processes, and risk management systems. 
3. Assessing the target company’s environmental, social, and governance (ESG) performance: ESG issues are increasingly important to investors, as they can impact the long-term viability and reputation of a company. It is important to assess the target company’s ESG performance, including its impact on the environment, its relationships with stakeholders, and its governance practices. 

By identifying risks and potential issues, investors can better understand the potential challenges and liabilities that could impact the value of the investment and take steps to mitigate or address them. 

Communicating Findings and Recommendations 

After completing the operational due diligence process, it is important to communicate the findings and recommendations to the private equity firm’s investment committee. This typically involves preparing a report on the findings of the operational due diligence review, which should detail the key areas of focus, the sources of information used, and the key findings and recommendations. The report should be structured in a clear and concise manner, with the key findings and recommendations highlighted for easy reference. It is important to provide a thorough and objective analysis of the target company’s operations, including both the strengths and weaknesses identified during the review. 

In addition to the report, it may be helpful to present the findings and recommendations to the investment committee in person. This can provide an opportunity to discuss the report in more detail and answer any questions the committee may have. It is important to be prepared to clearly articulate the key findings and recommendations and to provide supporting evidence for the conclusions reached. Effectively communicating the findings and recommendations of operational due diligence is critical for helping the private equity firm make informed decisions about whether to proceed with an investment and, if so, how to structure the deal in a way that minimizes operational risks and maximizes value creation. 

Conclusion 

Operational due diligence is an essential part of the private equity deal process, as it helps investors understand the target company’s ability to generate profits and cash flow and identify any potential operational risks or issues that could impact the value of the investment. However, conducting operational due diligence can be a complex and time-consuming process, and it is important to have expert third parties, like Seraph, assist in the review to ensure that it is thorough and objective.  

Thanks to our team of specialized operational consultants, Seraph can come alongside a new company and act as a support structure and begin adding value from day one. Our advisors are former management at many suppliers and OEMs and are experts in performing operational due diligence. Contact us today to schedule a discovery call, or see our case studies for more information.

Waste or unnecessary effort that occurs within a business or organization can cost a business millions of dollars in added overhead. These inefficiencies can arise from a variety of sources, such as outdated processes, inadequate technology, poor communication, or misaligned organizational structures. Operational inefficiencies can have a significant impact on a company’s bottom line, as they can lead to higher costs, lower productivity, and decreased competitiveness. 

Consequently, identifying and addressing operational inefficiencies at portfolio companies is crucial for the success and growth of these businesses. By identifying and addressing these inefficiencies, portfolio companies can improve their efficiency and effectiveness, leading to increased profitability and competitiveness. It is important for parent companies to regularly assess the operational performance of their portfolio companies and work with them to identify and address any inefficiencies that may be hindering their success. By doing so, parent companies can not only improve the performance of their portfolio companies, but also enhance the overall value of their investment. 

Identify Areas of Operational Inefficiencies  

When identifying key areas where operational inefficiencies are hindering performance, it is important to use a variety of methods such as key performance indicators (KPIs), benchmarking against industry standards, root cause analysis, and employee feedback and suggestions. These methods can help to identify areas such as bottlenecks in production, outdated equipment and processes, and lack of standardization. 

Once the inefficiencies have been identified, they should be prioritized based on the potential cost savings or revenue enhancement that could result from addressing them. For example, an inefficiency that is causing a significant loss of revenue due to production downtime should be given a higher priority than an inefficiency that only results in small cost savings. A list of all identified inefficiencies should be made, and their potential impact can also be assessed. 

When considering the feasibility and difficulty of implementing a solution for each inefficiency, it is important to consider factors such as the cost of the solution, the level of difficulty of implementation, and the potential benefits. Based on these factors, opportunities for operational improvement can be prioritized. For example, a solution that is relatively inexpensive and easy to implement may be given a higher priority than a solution that is more expensive and difficult to implement, even if the potential benefits of the latter are greater. It’s also important to consider the time frame for the solution’s implementation, as some solutions may bring short-term benefits, others may require long-term vision and investment. Prioritizing the inefficiencies and identifying the best solution would then bring the most value to the given time frame and budget. 

Collaborate and Create a Plan 

Working closely with the management team to develop and implement solutions that effectively address the identified issues is also crucial. The management team is best placed to understand the day-to-day operations of the company and can provide valuable insights into the processes and systems that need to be changed. 

Once a plan has been developed, it is important to implement changes to processes and systems, training, or organizational restructuring as needed. This may involve updating equipment or software, standardizing procedures, and providing training to employees to ensure that they are equipped to operate the new processes and systems effectively. It is also important to pilot the solutions and test them before rolling them out to the whole company. This allows for fine-tuning and adjustments to be made before the solutions are implemented company wide. 

Measure and Track 

Once solutions have been implemented to address operational inefficiencies, it is important to establish performance metrics to track progress and measure the success of the solutions. These metrics should be directly related to the identified inefficiencies, and they can help to provide a clear picture of the company’s performance before and after the implementation of the solutions. 

To track the performance of the company, data should be collected regularly on the identified metrics. This data can be used to determine the impact of the solutions on operational efficiency and compare the performance of the company before and after the implementation of the solutions. Data should be collected over a sufficient period of time to ensure that any improvements or changes are statistically significant and accurate. 

The collected data should be analyzed to gain insights into the impact of solutions on operational efficiency. This can help identify areas where additional improvement may be needed and help determine which solutions were effective and which were not. By analyzing data regularly, it is possible to identify if performance is improving over time and adjust the solution as needed. 

If additional improvement is needed solutions should be developed and implemented. By identifying areas where more improvement is needed and acting, portfolio companies can continue to drive operational efficiency and improve overall performance. 

Communicate Clearly 

Clear communication channels between the parent company and the portfolio company are essential to effectively addressing operational inefficiencies. This includes regularly updating all stakeholders on the identified operational inefficiencies and steps being taken to address them. This helps ensure that everyone is aware of the issues and is clear on the progress being made. It also helps to build support and buy-in for the efforts to address the inefficiencies. 

Clear communication up and down the chain of command can make a substantial difference when it comes to employee adherence to the policies or SOPs. Every effort should be made to clearly communicate what the problem is, how the solution will address that problem, and how this affects the company and the individual employees. Additionally, encouraging feedback and input from all relevant parties is essential to ensure buy-in and support for the efforts to address the inefficiencies. This can include feedback from employees, customers, partners, and other stakeholders. By incorporating feedback and input, the efforts to address the inefficiencies can be adapted to better meet the needs of the company and its stakeholders. 

Finally, it is important to communicate the progress and outcome of the efforts to address the inefficiencies to all stakeholders. This can include regular updates on the efforts’ status and any considerable progress or outcomes. Communicating progress and outcome helps ensure stakeholders are informed and can help build support and buy-in for the efforts to address the inefficiencies. 

Conclusion 

Operational inefficiencies can significantly impact the success and growth of portfolio companies. Identifying and addressing these inefficiencies is crucial for improving efficiency, increasing profitability, and enhancing competitiveness. When exploring strategies for identifying and addressing operational inefficiencies, it can be helpful to seek the assistance of specialized consultants who can provide valuable insights and guidance. By proactively managing and continuously improving operations, it is possible to drive long-term success and value for portfolio companies. Thanks to our team of specialized operational consultants, Seraph can work alongside a manufacturing operation and act as support structure to add value from day one. Our advisors are former management at many suppliers and OEMs and are experts in production and operational efficiency. Contact us today to schedule a discovery call, or see our case studies for more information.