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Unlock the Value That Doesn’t Show Up on the Financials

Published on February 21, 2017

The owner of a family run manufacturing firm is selling his company. His asking price is $100 million and he has three bidders. All three bidders are attracted to a growing market, and all three see that the company is running 24-7 and will need to build additional capacity to meet customer demand. But one bidder was more thorough in the due diligence, and sees that they can build capacity and profitability without any capital expenditure. Who has the advantage in the bidding war?

Valuations can be tricky, but ultimately it all comes down to return on equity: How much profit can you make, and how quickly can it be realized. Very often buyers and sellers don’t go deep enough into a company to see the hidden value or the undiscovered expenses right in front of them. But if you can identify and address these issues, you can get to your EBITDA and IRR goals much sooner.

So where does one look when evaluating an industrial? I had a chat with my colleague Michael Roth, President and Owner of Go-Lean-Six Consulting and Training. I asked him, “When you go to a facility, where do you look? What are some of the readily apparent things that make you say, ‘We should take a deeper look here?”

Here’s what Mike shared…

  1. “Is product sitting? How much raw material, WIP [work in progress] and finished goods are just sitting there? They are 100% non-value adding.” What value is added to the products while they’re sitting on a pallet waiting to be loaded somewhere? None! And what else could you do with that extra space? Perhaps that space could be used for extra capacity….

  2. “Are the spindles spinning? If not, your capital is being wasted. Companies often try to produce in large lots to get scale, but end up less profitable because of too much downtime – especially during changeover.” This perception can be fixed with a thorough understanding of the total value stream.

  3. “Are your lead-times longer than your competitor’s because of non-value added tasks?” Fix this problem, then instruct the sales staff to tell the customers about a shortened lead time…it will be a very pleasant conversation.

  4. “We look at how many extra fork trucks they’re operating. Say a company has 20 running, and they can produce and ship the same amount of products with 10. That’s $1,000,000 per year…plus much better on-the-job safety.” Fork lift incidents are extremely common: In the United States, forklifts are involved in 20,000 injuries and 100 fatalities per year.

  5. "How many delays are caused by the back office? How often is the shop floor stopped and waiting because of missing or erroneous information?” More often than one would expect, delays are caused by the office. It often takes too long to process information. This concept can be readily applied to customer service and sales organizations.

  6. “And here’s a fun one: Can anyone find anything in someone else’s workspace in 20 seconds?”

Next I asked, “So if you see these things and want to fix them, where would you start?”

He explained, “We like to start with an overview of Lean and show the client the eight main categories of waste. From there we help the client do a Value Stream Analysis. We map the current state then map a future state. We identify the opportunities and create a transition plan from current state to future state. It’s not unusual to find 75% non-value added time, therefore many lead-times can be cut by greater than 50%.”  Wow. That’s a LOT of non-value added time, and it costs a company a fortune. Just imagine if you could get your work done in half the time….

So let’s ask ourselves, “What about my company?” Or how should we address the operational due diligence for a company we want to buy? How much value can we uncover, and what could this company be worth? If you’d like to see how much more profitable your company could be, contact us and we’d be happy to schedule an assessment.

Gordon Adelsberg  is Principal at Adelsberg Consulting, Lean Six Sigma Coach at Go-Lean-Six and CEO of Communication for Geeks. He can be reached at gordon.adelsbergconsulting@go.lean.six.com.com or @WeTeachGeeks.

Michael Roth is President and Lean Six Sigma Master Black Belt at Go-Lean-Six Consulting and Training. He can be reached at michael.roth@go-lean-six.com.