Expanding the Due Diligence Conversation When Investing in Manufacturing
February 08, 2021
Lisë Stewart interviews Barry Ramsay, an expert in manufacturing who helps investors to determine whether they will realize a desired ROI from a potential investment. Listen and learn what Barry looks for in a manufacturing operation and how this can help investors to make a wise decision.
LS: We've got plenty to talk about today, and you know how it is with podcasts, plenty to talk about and not always a whole lot of time. Today we decided that we wanted to share with our audience some of the work that we do around manufacturing. This has really become a very popular topic. What we know has been important to some of our clients is how we help private equity groups in their investing, and when they're investing in a manufacturing organization. I've just got a few questions for you, Barry, and you can lead us through it. Tell us, first of all, why do private equity firms engage with a manufacturing expert like yourself?
BR: Typically, it's because of an acquisition. Usually it's on the pre-purchase side, it might be simple due diligence or risk assessment. On the post-purchase side, it's usually doing something to help the company be more productive, more profitable. Typically, the way I do that is just with an assessment of the organization's culture.
LS: I know you know a lot about this. So actually we should probably pause in our conversation a minute and give you a chance to talk just briefly about what is your background in manufacturing. Why should any PE firm listen to you?
BR:That's a good question. Well, as you know, Lisë, I owned my own manufacturing firm for about 25 years. I sold that business, became a VP of operations for a hundred-million-dollar company. It was owned by PE and then acquired by a $6 billion company. Throughout that experience of working for the larger corporation, I was doing a lot of internal consulting work, where I was helping the business units and helping with doing coaching after an acquisition, doing transitional coaching to help organizations with their operational excellence.
LS: Yeah, actually, it's great even just to hear you say that, because it brings back lots of memories when you and I were working together on your manufacturing company, so this is awesome. Given that, given your knowledge and experience, tell me a little bit about- When a PE firm is considering investing say in a manufacturing company, what are some of the most important aspects of the business that you look for to determine whether or not it's potentially a good investment for that PE firm?
BR:Besides the traditional historical financial and operational results, what I'm looking for is history of sustainable results. To do that, we could certainly look at the financial metrics, but what's more important is going and seeing, going and seeing the operations, looking at the manufacturer and doing what I call a cultural assessment. That's where you walk the floor, you talk to people at all levels of the organization, whether it's the senior leadership, associates, supervisors, managers, and you're really trying to assess whether or not safety, quality, continuous improvement, are truly embedded in the culture. If they are, that's good. It adds value to that organization. The PE firm can have confidence.
If not, if we don't find those elements of the culture, that's okay too, because that's our opportunity. Hopefully we can buy the company at a rate the investors are comfortable with, and then we can immediately start to improve the organization for those sustainable results we're after.
LS: That makes sense, and actually just a beautiful lead-in to my next question. Once a PE firm has made the investment, what are some of the things that you tend to do to ensure that the organization can realize a nice positive ROI?
BR:The first thing we have to come to understand is what's the timeframe. Is it just a year or two? Is it three to five years? Is this a longer commitment to the investors? Once we know that, then immediately we have to ask, does the organization, does this newly-acquired manufacturer have a strategic plan? Then if they do have a strategic plan, we have to be concerned about what we call strategic deployment. You and I have talked about this. A lot of organizations go through the pain and the intense activity to develop a strategic plan, and then it's a document that just sits on the desk of the senior leaders and nothing ever happens.
Strategic deployment is when the entire organization gets what I'll call organizational alignment. People, everyone understands the purpose, why they're there, what they're trying to achieve. There's certainly metrics that are set, traditional operational metrics like OEE or first-pass yield, on-time delivery. Those are all important, but really what we're trying to do is help the organization create systems that then guide the behaviors so that everybody in the organization understands their commitment, their connection to that strategic plan.
LS: Right. So everybody's sort of moving in the right direction and, as you said, aligned with that strategic plan. I would imagine for a PE firm, if there's a board that's involved, it must be just a real relief to have somebody like you there who understands how manufacturing organizations operate and how to really bring out the very best in the people and the systems and the processes, the productivity, and that of course leads to higher profitability, so that's great.
You and I have talked about this before, this concept of gussying up a business, when perhaps a company is starting to look at the possibility of selling, and they don't want to take two or three or four years to really turn the whole business around, but there are some things that they could do in order to make the business look a little bit more attractive to an outside investor. You had talked about things that they could do to become more profitable and productive. What are some of the things that a manufacturing company can do pre-sale to ensure that perhaps they get the full value or at least a better value for their business?
BR:In manufacturing, when there's an organization that's about ready to sell, they've probably done everything they can do to create an image with their financials, and their story, the narrative, but something they can do if they have, say, six months, they can start this whole process of marching towards operational excellence, taking the metrics that they've had, push them to the plant floor, getting people engaged. Once you start doing this, especially for an organization that is new on their journey of continuous improvements, they can quickly start making improvements that will already start to show up on the bottom line. A lot of buyers that come through manufacturing plants, they understand what they're looking for. They can walk the plant floor, do the same kinds of questions that I ask of the organization, and they're going to be able to tell in six months this organization is starting to change the culture, and for a knowledgeable buyer, they're going to recognize that as a positive thing, as a sustainable culture that's going to yield ideal financial and operational results.
LS: It's just so exciting to see, as you and I know, when you start to make these changes in a manufacturing facility, it's wonderful to see people get in line, understand the big picture, understand the strategy, and to be really committed to all of the positive changes that we need to make in order to ensure that it's profitable, it's strong, and it's sustainable for the future.
Barry, I could talk to you all day as I have done in the past. It's great to catch up. I'm just so excited that we can now offer some of these services to our clients. We have a real passion for manufacturers and a real passion for making sure that they get access to the services, the help, the support that they need in order to be successful. I really appreciate you joining us today.
For everybody who's listening, if you'd like more information, please visit our website. Go to eisneramper.com/CIOP, for more information and more podcasts. We hope to see you again next time. Again, thanks, Barry. Take care.