Businesses that are the targets of private equity investors won’t command the value they believe they deserve because of lost revenue opportunities. Often times, lost revenue is due to inefficiencies in a company’s operations. Our guest on this edition of “Deal Talk’ makes it his business to help business owners uncovering operational inefficiencies in order to increase productivity, resulting in substantial revenue growth and greater EBITDA. Tim Van Mieghem is a partner at The ProAction Group, which works with private equity firms to perform buy-side operations due diligence and post-close assistance to help business owners maintain operational excellence.
Just give the management team whatever they want. They're doing everything that you would do in a highly performing organization.
- Timothy Van Mieghem
Jeff: I'd like to talk to you a little bit first of all before we get started about what ProAction Group is and does, if you could kind of give us that 35,000-foot bird's eye view talk about what you guys do.
Tim: Yeah, I would be glad to. We're an operational consulting firm that serves private equity. We have three services, it's really simple in this way. We do a pre-close, let's call it a quality of operations or Q of O diligence, before our private equity clients might buy a company before close to help them understand how much more value is there in the company than the current owners are seeing and bringing out. Then post close we help them realize that value. Our favorite type of client, Jeff, is a private equity firm who buys an entrepreneurial company. Private equity firm wants to then make that company scalable and as profitable as they can. What we really fit in the best and what we enjoy doing is helping them take the current management team and help them develop into a process-oriented, scalable management team. And then finally we have a third product or service which is before you sell. We can do the due diligence that we might do for a buyer when you're in the sale process. And of course that's a good thing to do before you enter the sale process so you can try to capture as much of that latent value as possible.
Jeff: There we go, very good. Now we're starting to work toward where we want to go today in the conversation. How critical is this for business owners to understand why it is that you're coming in for the PE firm to take a look at that business from an operational-only perspective?
Tim: Sure. What the real value is today, why private equity firms are looking at this is because there's a ton of competition for deals today. There's so much money out there chasing a relatively few number of deals that the valuations are going up. Private equity firms are having to pay more or bid more than they're comfortable bidding, or traditionally comfortable bidding, to win a deal. Here's what can happen from an operational perspective and this is the real key to our service. I'm going to use a metaphor. Let's say that there's a farmer who's selling his farm and there's 10 other people who want to buy this farm and they're all looking at it, and they're very aggressive and bidding for it because this is valuable land. But one of those buyers, one of those bidders for the land has actually done some additional research and has found out that there's oil underneath that farmland. So nine of the ten buyers are bidding on it like it's farmland, one's bidding at it like it's an oil field. This is what is happening, and clearly that guy's going to end up winning the deal because he knows what the true value of that land is. And what we find is that today, relatively speaking few private equity firms are digging in on the operations. What we find is there is significant value under the surface that's hidden that you have to dig in and learn about it. And in some cases this is as much as 50 percent we've seen examples where it says 50 percent of their total earnings are EBITDA is available if you know how to find it and dig for it.
There's so much money out there chasing a relatively few number of deals that the valuations are going up. Private equity firms are having to pay more or bid more than they're comfortable bidding, or traditionally comfortable bidding, to win a deal.
Jeff: And this of course is huge for the business owners, for the sellers in this particular case because in effect what you're saying is that there is perhaps some hidden value there that you simply go in. It's your job to kind of uncover that. So not only will it be of tremendous value and importance to the investors for the PE firm, but also to the sellers on the sell side of the business, the business owner.
Tim: I think that's very true, Jeff, in two ways. It's true in once sense because if you're working with the right private equity firm that private equity firm is working to do more than just flip the company and make their money. They actually want to make the company better. And I'll tell you, this is what brings me and my team joy in doing this work is that we get to go in and actually help make this stuff happen. The company, they're firing on eight cylinders and it's fun to see. So from that perspective I think the seller will be excited especially if they value their legacy, or as they value their legacy. And depending on their ongoing role with the company it can be very exciting to explore these areas and make them happen.
Jeff: How often when you go into this situation and you're performing your operation's due diligence on the target company, will you find this uncovered value? Or will you uncover the hidden value I think is what you called it earlier?
Tim: Yes. I will share with you, Jeff, that we have done well over 100 different operational diligence projects. And there was one time that we went back to the potential buyers and said, "Just give the management team whatever they want. They're doing everything that you would do in a highly performing organization." The rest of the time what I'll say is this, there's kind of a bell curve. In the middle you have the bulk of the companies and we find in there between 10 percent and 20 percent growth EBITDA. And I would say 70 percent of the time that's what we find. Maybe 15 percent to 20 percent of the time we're finding opportunities that relate to things like lean manufacturing, sourcing of direct and indirect materials, how they manage their inventory and sales and operations planning process, how they schedule their plants and their distribution centers that lead to a 30 percent to 40 percent and even 50 percent increase in earnings.
In the middle you have the bulk of the companies and we find in there between 10 percent and 20 percent growth EBITDA. And I would say 70 percent of the time that's what we find.
Jeff: We're talking about the vast majority of businesses you're going to see, you said that there's maybe only one out of those 100 where they were doing everything right and there was really nothing more that you could add to the mix or to extract additional value out of. So that is really phenomenal. We're talking with Tim Van Mieghem. He is partner at the ProAction Group. Where do you start to look, in the process, where do you start your investigation and your research in order to uncover this hidden value?
Tim: There's three places that we start Jeff. The first one is they'll always talk about going to, when you talk to people who are looking at continuous improvement and ways to take the company to the next level. You have to go to where the work is done. We like to go and take a tour of the company and see the people in action, whether it's a factory, a distribution center, call center, service technicians, whatever it might be we go and actually watch them, watch the operation and look and ask questions about how do you schedule, how do you know what to work on. And like Yogi Bear once said, "It's amazing what you can observe when you watch, when you look.” And that's the first thing that we like to do. The second piece of it, it's just as important and so valuable, is that we talk to people. Depending on the relationship between the buyer and the seller that'll change who we get to talk to but sometimes we talk to the CEO, sometimes we're able to talk to the VP of operations and sometimes we're allowed to talk to people on the operating floor and to supervisors and that's great. But by talking to people and asking them what they think, and talking about what they see and what they struggle with every day. We learn so much, and we really learn about what's on their mind and what opportunities do they see.
By talking to people and asking them what they think, and talking about what they see and what they struggle with every day. We learn so much, and we really learn about what's on their mind and what opportunities do they see.
Jeff: How much of the time that you go in the value can be attributed to just kind of a streamlining the way that a company operates and making it more efficient?
Tim: The people who are running a business, in any business, their tasked every day with getting product out the door, or providing the service to their customers, or shipping product or whatever it is. And they're working everyday on that. They don't get that chance, it's almost a luxury what we get to do by stepping back. We don't actually have to ship product. We get to step back, observe, watch, ask questions, and do analysis. Oftentimes we do find things that are relatively, just like you said opportunities for efficiency and it's true everywhere. The way I think about this is you have a company when it starts. The first time it starts up they have a few customers, they have a few products, and they have their approach and their process and their system whether it's QuickBooks, Excel, or back of a piece of paper. And then they add a new customer, then they add a new product, and they have a new supplier, and all these things change. And pretty soon you have a process and a system that nobody would've ever designed but it grew one piece at a time.
And that's what happens. And then we get to step back and take a look at the company and basically say, "Forget about what we're doing today. How should we do it?" I'll give you one example. We had a client that processes seafood. They bring in frozen salmon and they ship out portion packaged salmon to companies like grocery stories and big box retailers, and so on. In one year they landed Costco and Sam's Club. They doubled their volume and they could not keep up. And they were in danger of losing one or both accounts because they couldn't ship and they were shorting them. Of course Sam's Club and Costco doesn't tolerate that for long. They were in an extreme painful situation. And since we had a chance to come in and look at their operation, and what we had agreed to do was spend three weeks studying every operation and doing the capacity analysis and seeing if it would be possible to fit enough equipment in the existing plant to fulfill the demand that their new customers gave them. We started on a Monday and on Tuesday we said, "Forget the study. Give us two months and we'll get you the capacity.” Jeff, what we found was it was just a series of decisions and things that they had done because they did it this way for 30 years. That as we made these changes they were able to get essentially over 50 percent increase in output per hour. No additional people, no additional equipment.
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Jeff: Per hour you said?
Tim: Per hour.
Jeff: Oh, it's phenomenal.
Tim: It changed the company in fundamental way. If we were to take the time to go through every change it's all very simple. One of my favorite ones was they had a little machine that packaged the salmon and then put it on a belt that went into a freezer. We noticed that they had a back-up machine that did this that they used if the primary one went down. We also noticed that there was a lot of open space on the conveyor belt going into the freezer. And so what we ended up doing was let's run both machines all the time and double up what we're putting into the freezer, and it worked.
Jeff: Let me ask you this, that just sounds so simple that someone didn't come up with that idea themselves. What was the reaction that you got from the client when you instituted this? Was it something they were willing to do? Is it something they were concerned about? How did they respond?
Tim: It's always a stressful situation to go through change. What helps is when you have someone who's been through it before holding your hand and walking you through the process. When we describe the opportunity, and we just said, "You know what, we don't have to commit to doing this all the time, let's just test it. Let's come in on a Saturday, let's run both machines, and let's see what comes out the other end, is it still frozen, did it work, did the world blow up or not?" And so we did that. When you take a data-based approach combined with a helping hand that's been through it before, someone who knows what they're doing and can lead without authority in a kind way, and the ability to test things, you have to have leadership that is supporting this process. And I think the team needs to understand that this is something that we can't just dismiss, we have to try it. When you have those things put together, it works.
It's always a stressful situation to go through change. What helps is when you have someone who's been through it before holding your hand and walking you through the process.
Jeff: Tim we need to take a short break, my name is Jeff Allen. I'm going to be back with Tim Van Mieghem, partner at the ProAction Group in Chicago when Deal Talk continues after this.
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Jeff: My name is Jeff Allen, I'm here with my guest Tim Van Mieghem at the ProAction Group in Chicago. Tim, let's continue our conversation on how you work with private equity firms and how you work with these target businesses to find and uncover this hidden value to tell... It really kind of elevates the value of the company and you've got two sides that win, you've got the business owner and you've got the acquiring company or the private equity firm that's investing in this company. And so you've got people who are happy all across the board, and of course the investors down the line who invest in the portfolios of these PE firms. As far as input that you receive from these PE firms do they sit down with you to help you determine what an ideal performance metric would be, or performance milestones should be before they make that key decision that, "Yeah, this is the company that we want to be a part of. We want to invest our client's money in this company."
Tim: Sure. Most of the time Jeff, we are ... I will venture to say educating the private equity firm and professionals on what's possible in the company. But I will say this, we do start by asking them what's their investment thesis? What is your vision for this company? And then with management, this is such a critical piece, to the extent that we're allowed to work with management based on the process they're going through. But we work with their data and with our experience. We work to do the following. We look at the opportunities to improve. And then you have to look at it in these terms, "What's the impact on EBITDA?" Every company, Jeff, can improve. That's not the relevant question. The relevant question is if we do become a high performing organization in all the key areas, how much more money will we make? That's the real question that we start up by helping them to answer. If you look at it on the income saving side and the balance sheet side what's the impact on working capital.
There's a third element here that I think is absolutely critical. These are not cost savings opportunities. These are not tactics to kind of come in, chop up a company. and make a bunch of money. The third part here to make this truly a better company is in lock step with improving earnings and working capital. You have to look at what's the impact on lead time, on quality levels, on our capacity to provide our service or product, and safety, the safety of our people. And their safety on the job and when they're serving our customer, on delivery times, how well are we delivering our product on a timely basis. Finally too, it's on the voice of the customer. It is not sustainable to make a cost-reduction that doesn't improve or maintain all of those metrics. You asked me before about things that we're able to see that other people didn't see. And it seems simple when we explain it after the fact. Here's the reality Jeff, there's a very few number of principles that drive successful business. All we're doing is looking at how to apply those principles in this specific company. And at the end of the day if somebody comes back and says, "I know how to fix this company or how to make it better" and what they tell you is complicated, I'm telling you they do not understand. It is always simple. Once you get past the vocabulary the principles that work are straightforward and simple.
Jeff: That makes me feel good because I'm about as simple minded as they come when you get right down to it. And so any simple process ...
Tim: Get in line.
Jeff: That's good to know, because seriously, and we've talked about it before we mentioned it on this program a little bit ago. We are so close to our own businesses we are working in them, we are working on them oftentimes. Sometimes it seems like you're just doing what you have to do in order to pay the bills at times, and this could be due to economic cycles, or it could be due to the seasonality of your business perhaps. But sometimes we are not able to have a vision or a view of what is going on behind the scenes or underneath all of what we're doing here because we're too close to it. It's not being able to see the forest for the trees, and like you said sometimes you tend to end up bringing somebody out or consulting with somebody who wants you to spend a lot of money on their company just so that you can go out and you can throw a bunch of technical jargon at them and come at them with a 300 or 400-page instruction manual on how you can do this and improve your business. Just some parting words really as we wrap up this edition of Deal Talk, Tim Van Mieghem, to those business owners who they finally decide, "I don't know if there's truth in the numbers here. Am I underperforming?" What would you say to those business owners regardless of industry about how they might be able to start looking for or uncovering their own hidden value in their own companies whether or not they're planning on selling or presenting themselves to a private equity investor somewhere down the line either in the short or long term?
Tim: Sure. I think there's a couple of areas, Jeff, that would make a lot of sense. Here's the most basic one. If you have a company that is in your industry in the top quartile of profitability and the top quartile of inventory returns, or return on assets, then you're doing pretty well. What I can tell you, and here's the basic idea, oftentimes we find that companies, if they are inefficient they are not going to be at the highest end of the earnings chart in their industry. Other companies and what we find too is that inventory can overcome a lot of inefficiencies. And so if you're turning your inventory frequently and you're earning a lot of money, earning a good return for your industry, you're probably doing pretty good. If you're not at the top quartile in both of those then just know there's opportunity. Someone else has figured it out and you can too. And then you can dig in from there to look at each of the different areas of your company to look for the indicators of opportunity. We look for things like work-in-process inventory, we look for where do we see just a large number of people especially gathered. There's a lot of opportunity there to help get more value from their time and their work. We look at inventory levels and how accurate their systems are.
Here's the next one, where is their pain? Do you have customers that are not completely pleased? And what that will show you oftentimes is where especially for relying on good, hardworking people to get good product and services out the door, not processes, then there's an opportunity there to dig and find opportunities to reach new level.
If you have a company that is in your industry in the top quartile of profitability and the top quartile of inventory returns, or return on assets, then you're doing pretty well.
Jeff: Tim, if someone out there might be interested in getting in touch with you how can they reach you?
Tim: We have our website, it's proactiongroup.com. Our company's phone number is 312-726-6111. We'd love to talk to anyone, a business owner or private equity firm to share more information and help however we can.
Jeff: Tim, this has been once again a real pleasure. I want to thank you so much for agreeing to join us today on Deal Talk and we'd love to have you back on the program in the future if you're willing.
Tim: I look forward to it.
Jeff: Tim Van Mieghem, partner at the ProAction Group has been my guest. We hope you enjoyed the discussion. Tell a friend about Deal Talk won't you? In addition to morganandwestfield.com you can find us on iTunes, Stitcher, and Libsyn. Deal Talk has been brought to you by Morgan & Westfield, a nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com. My name is Jeff Allen. Until next time, thanks for your listening and we'll talk to you again.
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