Background and challenges
In private equity (PE), every investment decision must be backed by rigorous analysis and a clear understanding of the target’s operational health. A private equity firm approached L.E.K. Consulting to conduct operational due diligence on a promising precision medtech and life sciences engineering component manufacturer. The firm needed our expertise to evaluate the target company’s ability to scale its manufacturing capabilities to meet ambitious growth objectives, and to assess the robustness of its capital expenditure (capex) plans. The goal was not just to validate the company’s current operational performance but also to identify potential risks and areas for improvement that could impact future scalability.
Approach
We conducted a thorough and methodical review, designed to scrutinize every facet of the target’s operations. Our approach deployed four core operational due diligence capabilities: operational health check, manufacturing scalability, capex plan robustness and continuous improvement initiatives.
Operational health check
Our engagement began with a comprehensive health check, combining qualitative maturity assessments with quantitative performance analyses across five key dimensions: operational performance, quality and safety, labor, management systems and processes, and continuous improvement culture.
We started by diving deep into the company’s operational data, scrutinizing performance metrics to identify trends and anomalies. Site visits played a crucial role in this phase, allowing us to observe operations firsthand and interview key personnel. These interactions revealed both strengths and weaknesses, such as aging inventories and inefficiencies in handling customer complaints and corrective and preventive action closures. We provided the PE firm with actionable recommendations to address these issues and strengthen the company’s operational resilience.
Manufacturing scalability
Next we turned our attention to the manufacturer’s scalability. By analyzing both theoretical and realistic production capacities across various sites, using historical performance data and industry benchmarks, we aimed to understand the company’s ability to scale.
We conducted a detailed capacity analysis, identifying bottlenecks and areas for improvement. Our team explored noncapex measures like increasing equipment utilization and optimizing weekly shift operations. For capex-driven initiatives, we evaluated options such as adding production lines, building a new manufacturing site and expanding existing facilities. Ultimately, recommendations were crafted to support the company’s ambitious growth plans and ensure it could meet future demand.
Capex plan robustness
Our review of the company’s capex plans was particularly telling. We scrutinized the feasibility of the business plan for a new international manufacturing site, evaluating maintenance capex requirements and equipment age. Through detailed financial modeling and scenario analysis, it became evident that management’s estimates were overly optimistic. An increase of 30%-40% in cash flow would realistically be required to ensure appropriate planning and address the underestimation of maintenance costs.
Continuous improvement initiatives
We also evaluated the performance and impact of continuous improvement initiatives across the company’s sites. This assessment pinpointed underperforming sites and identified areas for improvement, enabling the PE firm to plan the refinement of these initiatives and build confidence in the target company’s ability to execute its investment thesis.
Results
The operational due diligence provided the PE firm with a clear and detailed picture of the target company’s operational health and scalability potential. Key outcomes included:
- Identification of opportunities to support an estimated 50% volume growth with minimal capex investments; further expansion would require substantial investments in new facilities
- Realistic capex adjustments resulting in an estimated 30% increase in maintenance capex budgets to reflect industry standards and mitigate underinvestment risks
- Enhanced buyer confidence through detailed assessments of continuous improvement initiatives and cultural alignment
While no critical red flags were identified, the study outlined clear watchouts and future considerations for the buyer and management to address. Our findings equipped the PE firm with the confidence to proceed with the investment, supported by actionable recommendations to unlock the company’s full potential.
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