Private equity checklist: Selecting operational improvements

Curt GendronRyan Silvino
12/19/2022
Private equity checklist: Selecting operational improvements

To maximize returns, private equity groups should choose the right improvements for portfolio companies.

The right value creation strategies can transform even underperforming portfolio companies into high-growth winners. In particular, operational improvements offer tremendous potential for earnings before interest, taxes, depreciation, and amortization (EBITDA) gains, delivered through cost-saving and efficiency measures. But private equity group (PEG) managing directors and their deal teams should first overcome two challenges:

  1. Identifying the right improvements and not overlooking hidden opportunities
  2. Selecting and prioritizing improvements to balance timing, impact, risk, and resources

Those challenges call for a rigorous and data-driven approach to identify and assess operational improvements. PEG teams can enhance their existing process by incorporating these checklist steps and questions.

Primary steps to identify and select operational improvements

  • Assess potential operational improvements early – ideally before a deal closes, during the due diligence phase. 
  • Review a portfolio company’s profit and loss (P&L) statements to identify the highest-priority areas of opportunity. 
  • Invest time to analyze the processes and technology that drive major costs.  
  • List potential operational improvements in a decision matrix. 
  • Evaluate individual improvements by answering questions on timing, impact, risk, and required resources. 
  • Score each improvement in the decision matrix, based on the answers to the guiding questions. 
  • Select and implement the highest scoring operational improvements.  

4 drivers for choosing operational improvements

4 drivers for choosing operational improvements

Guiding questions to evaluate operational improvements

Timing

Timing

  • How well does this operational improvement align with our point in the holding period (year zero, year one, year two)? 
    •  Is there enough time to execute this activity and achieve returns? 
    • How is the business expected to change during the holding period? 
    • Are we close enough to exit that an analysis of the opportunity (and road map to execute) would be part of our sell-side materials? 

Impact

  • What is the impact of this proposed improvement compared to other opportunities? 
    • What is the anticipated EBITDA impact? 
    • Does this activity affect our ability to hit our growth and revenue goals during the hold?
Impact
Risk

Risk

  • What are the risks of implementing this initiative? 
    • What is our appetite for risk based on our goals and expected returns? 
    • Do we have enough information to adequately assess risks and refine tactics, or do data gaps remain? 
    • At exit, are we limiting the pool of potential buyers if we haven’t addressed this issue? 

Resources

  • What is the anticipated time commitment and level of effort required? 
    • What is the capacity of management to dedicate attention to this initiative? 
    • Do we have the expertise to complete this initiative successfully, either in-house or through third-party consultants? 
    • Is this initiative sustainable? Can the portfolio company staff manage it on an ongoing basis once implemented? 
Resources

Sample decision matrix for the most common operational improvements 

Top operational improvements
Once you’ve chosen operational improvements, follow these 6 emerging practices to plan and execute them. 

Look to an adviser with deep industry experience

Crowe specialists understand the challenges and opportunities your portfolio companies face, whether in manufacturing, financial services, healthcare, or other major industries. By leveraging our expertise to thoroughly perform due diligence, we can help you uncover the most effective opportunities to lower costs and increase EBITDA margins. 

Contact us with your private equity questions

Curt Gendron
Curt Gendron
Partner, Operational Transaction Advisory Leader
Ryan Silvino
Ryan Silvino
Principal