Rapid Plant Assessments for Private Equity Due Diligence

Manufacturing and distribution (M&D) organizations have become increasingly popular targets for private equity firms looking to drive value through operational improvements, supply chain optimization, and market consolidation. Beyond the traditional financial, tax, and IT due diligence private equity firms conduct prior to consummating a transaction, incorporating an additional layer of operational due diligence when buying manufacturing plants can surface value that would otherwise stay hidden.

A rapid plant assessment (RPA) is the operational deep dive that fits into the due diligence process supporting mergers and acquisitions. It gives a fresh set of eyes to the plant floor, evaluating the potential to increase efficiency, improve quality, eliminate rework, prevent premium freight costs, and address countless other cost-reduction and margin-enhancing opportunities. The assessment produces a score or rating that indicates relative operational efficiency and provides a sense of scale for the improvements available to positively affect cost, quality, and delivery.

This article discusses how private equity funds can use RPAs during the pre-deal process and after the successful closing of a transaction.

Key Takeaways

• Private equity firms can benefit from adding a rapid plant assessment (RPA) to traditional financial, tax, and IT diligence when evaluating manufacturing and distribution entities.
• The RPA should be performed before the buyer sets its offer price so that operational findings can shape both the purchase price and deal structure.
• RPAs evaluate efficiency, quality, inventory, and manpower to surface cost and margin opportunities that the current owner has left unaddressed.
• After closing, buyers should sequence RPA findings into a prioritized improvement plan with clear ownership to raise ROIC over the hold period.
• Because private equity funds typically underwrite exits at a fixed valuation multiple, a $1 million gain in run-rate EBITDA from operational improvements can add $5 million in enterprise value at sale.

What Is a Rapid Plant Assessment?

An RPA provides an evaluator with a structured, educated way to walk a plant floor and discern its strengths and weaknesses with a high degree of accuracy. The output of the process is a lean-state measure sufficient to identify improvements and recommend next steps. It assesses the potential to improve or optimize efficiency, quality, throughput, inventory, and manpower, using a relative ranking system to benchmark the target against comparable operations. Depending on the available data, the assessment often produces an estimate of the value created by making the identified improvements.

The ranking system matters because it turns a walkthrough into a comparable, defensible data point. Rather than a narrative account of what looked good or looked dated on the plant floor, the buyer receives a score that can be weighed against other targets, tracked over time, and tied back to a dollar figure.

How Can Private Equity Firms Use RPAs During a Deal Process?

An RPA identifies inefficiencies and institutionalized waste by observing actual shop floor operations rather than relying solely on financial statements and management commentary. These observations help the acquirer better understand the target's operations and build a clearer picture of the target’s current and potential future value. The timely completion of an RPA can influence both the buy decision and the purchase price.

Conducted before the buyer sets its offer, an RPA surfaces the gap between how a plant runs today and how it could run under focused operational attention.

What the RPA Can Surface in Private Equity Firms

Each of these areas connects back to the deal thesis. A buyer who understands, before signing, where the operational upside sits is in a stronger position to negotiate price, structure the deal, and build a credible 100-day plan.

How Does an RPA Increase ROIC?

Private equity firms evaluate targets, in large part, on the return on invested capital (ROIC) they are expected to generate. An RPA gives the buyer a data-driven basis for that projection, rather than relying on assumptions drawn from historical financials.

Operational improvements identified through an RPA tend to affect ROIC through multiple channels simultaneously. Efficiency and throughput gains increase output without a proportional increase in invested capital. Quality improvements and reduced rework directly improve margins. Inventory reductions free up working capital, which lowers the capital base against which returns are measured. Manpower right-sizing reduces the cost structure supporting that output. Taken together, these levers can meaningfully move ROIC beyond what a purely financial read of the target would suggest, giving the fund a firmer basis for its investment thesis and its return targets.

How Does the EBITDA Multiplier Effect Work at Exit?

The value of an RPA extends beyond the hold period. Private equity firms typically underwrite an exit at a fixed valuation multiple. Increasing baseline earnings through operational improvements compounds dramatically when the organization is sold at that multiple. A dollar of EBITDA gained on the plant floor is not worth a dollar at exit; it is worth a dollar times whatever multiple the market applies to the deal.

Illustrative example: Consider an organization acquired and later sold at a five-times EBITDA multiple. An RPA-driven improvement plan that adds $1 million in run-rate EBITDA through efficiency gains, quality improvements, and manpower right-sizing does not add $1 million to enterprise value. It adds $5 million. The same operational levers that raise ROIC during the hold also raise the earnings base against which the exit multiple is applied. The multiplier effect means the fund captures a return on the improvement, working well beyond the cost of making it.

This is why the RPA earns its place alongside financial, tax, and IT due diligence rather than as an afterthought. Every dollar of avoidable cost or missed throughput identified during the assessment represents a multiplied dollar of value at exit. A firm that quantifies this upside during diligence is better positioned to price the deal, build the case for its investors, and prioritize the improvements most likely to move the needle by the time of sale.

Putting the RPA to Work After Closing

Identifying opportunities during due diligence is only the first step. Once the transaction closes, the purchaser should put a plan in place to capitalize on the findings, sequencing the highest-value, most-achievable improvements first and assigning clear ownership on the plant floor. The relative ranking established during the RPA provides the new owner with a baseline for measuring progress. It also gives them a way to demonstrate the value-creation story to investors over the life of the hold.

Where EisnerAmper Fits In

For private equity firms pursuing manufacturing and distribution targets, an RPA adds a layer of insight that traditional financial, tax, and IT due diligence cannot provide on its own. Performed before the offer price is set, it gives the buyer a clearer view of a target's true operating condition, informs the purchase price and deal structure, and lays the groundwork for a post-closing plan built to increase ROIC. Because those same earnings gains carry a multiplier effect at exit, the return on a well-executed RPA and the improvement plan that follows can far exceed the cost of the assessment itself.

EisnerAmper’s Private Equity team works in parallel with the firm’s M&D team and its joint venture, RPM Partners, to drive measurable gains in supplier performance and profitability in the private equity space. To work with our multifaceted team, contact us below.