1. PCB & COMPANY
Back to Basics: A Series on Private Company
Transformation in the Middle Market
Middle Market Turnarounds: We’ve restructured the debt and
optimized the capital structure, now what?
Not that long ago, turnarounds were a bit more straightforward. Identify the underperforming
company saddled by excessive debt, close the transaction, restructure the debt, hold for two years,
then flip for an impressive multiple. But the business has become more challenging: holding periods
have extended, deal competition has increased, and the pressure to apply available capital and realize
leading returns continues to rise. Private equity (PE) firms are often paying a premium based on limited
information, and can end up with an imperfect company that needs significant improvement.
The days of generating a superior ROI from pure financial engineering are long gone, and limited
partners expect the funds to bring both strategic and operational value to their portfolios. PE firms
have realized that while financial restructuring is critical for establishing a solid platform for success,
the business itself needs to be managed in a new way to avoid a relapse. Accordingly, deal teams are
becoming increasingly astute at identifying gaps in operations and projecting, pre-close, how
improvement in the operations will drive increased ROI.
The Leadership Void
More often than not, founders don’t survive a middle market turnaround. Typically, this is not due to
a lack of product or market brilliance. Rather, it is frequently the result of an inability (or even fear) to
delegate in a manner that will engage the help needed to build structure and process into the business.
Entrepreneurs who are successful at taking their company through multiple stages of growth typically
have a strong financial acumen and a desire to regularly review goals and financial performance - and
hold their teams accountable to results.
This lack of this intense focus on performance is often a root cause behind a solid private company
finding itself in distress. PE investors are perceptive; they are quick to see this going into a deal and
plan for the need to eventually make adjustments. The challenge is that change needs to occur from
Day One and the current leadership “didn’t get it done.” Delaying the inevitable often results in morale
issues and a “muddling through” period.
The Case for the Interim Executive
To drive action from Day One, many large PE firms have built their own operations teams, while others
leverage turnaround firms. In the middle market, though, these approaches can be cost prohibitive.
Recovery firms focused in this niche often rely on their network of seasoned, interim executives to
provide the requisite Day One intensity. Benefits of inserting an interim executive include:
 Common Day One issues (see table) are foundational and a seasoned executive can easily spot
and resolve these issues without significant analysis – it’s often about leadership.
 They focus on developing structure & accountability through the internal team which needs to be
part of the future. Relying on large external teams can often delay this cultural transition.
 They are laser focused on identifying constraints and driving results in real time.
Common Trouble Spots… …and “Quick Win” Opportunities
Trouble Spot Warning Signs Immediate Action Risk & Potential EBITDA Impact
Inventory  Cannot produce an aging
 Unable to match detail to F/S
 Levels appear excessive as
compared to industry / sales
 Goods not rotated or stored
on FIFO basis
 Cannot quickly find goods in
warehouse
 Assemble a cross functional
team, plan, and conduct an
organized full physical
 Segregate old and slow-
moving inventory and assign
a team to determine
disposition
 Redesign systems /
processes for purchasing
and inventory
 Continued over-purchasing, lack of
understanding of true margins, and
production inefficiencies
 May require drastic action to “stop
the madness,” particularly when
purchasing is being performed in
isolation of inventory / production
 May be subject to a write down, with
unexpected EBITDA impact

2. © 2015 PCB & Company
References from PE and turnaround firms and CEOs are available on request. PCB & Company is not licensed or registered
as a public accounting firm and does not issue opinions on financial statements or offer attestation services.
Trouble Spot Warning Signs Immediate Action Risk & Potential EBITDA Impact
Quality  No Materials Review Board
(MRB) in place
 Customer issues not tracked,
acknowledged, communicated
or resolved
 Scrap and variances not
tracked or investigated
 Evaluate quality team and
establish cross functional
working group
 Aggregate data, run analytics
and establish processes for
capture, tracking,
investigation and resolution
of issues
 Prioritize issues by customer
and engage on resolution
 When combined with a scenario that
is revealing inventory issues, a large
EBITDA surprise may be lurking in
the shadows
 Long standing lack of attention to
quality often results in a flood of
historical issues requiring resolution.
 Unexpected concessions may be
required to retain customers
Financial &
Performance
Management
 Budget at a level below F/S
line item does not exist and
no one is clearly accountable
for metrics
 Sales pipeline does not exist
or is haphazard
 Management cadence not in
place for weekly review of
budget and pipeline
 Performance metrics do not
exist, are not aligned with
goals, and/or are not used to
drive decision-making
 Rebuilding the team and
accountability based on
achievable targets and
performance management is
Job One. Without this
foundation, improvement
efforts will be short-lived.
 Invest time immediately in a
more detailed, activity level
budget (with targets &
metrics aligned with EBITDA
goals), and assign
accountabilities
 Formalize sales pipeline and
establish weekly cadence to
review progress against
goals, issues and actions
 “You can’t manage what you don’t
measure”
 Such scenarios run a high risk of
continued surprises
 Issues identified during this process
of reestablishing the management
foundation may impact existing
EBITDA targets. The goal is to have
a challenged, but realistic vision for
achieving expected results. This may
involve resetting expectations with
the PE investors
 Depending on the depth of issues
identified, and the impact on cash, it
may require lender discussions
“These are basic, foundational processes, are companies really struggling here?” It is
astonishing how often these issues are observed in the middle market. “They were asleep at the wheel”
is a phrase commonly uttered. Leading PE firms are responding to this by expanding their due
diligence efforts beyond core financials to include operational specialists to gain greater visibility prior
to a transaction. If such warning signs are identified, the target may still represent a strategic buy,
but the investors are aware of the challenges going into the deal and can prepare to respond post close.
Our Point of View
 Take a broader view of the interplay between finance and operations during diligence.
 Engage a senior, hands-on interim leader with cross functional skills to reset the foundation and
drive change from Day One.
 Expect the common trouble spots. Look to resolve those first, and expand from there.
 Speed to improvement is critical, but if you try to tackle everything at once, you will fail. Use
metrics to identify & prioritize the changes that are required to drive margin & EBITDA.
 Don’t delay your search for permanent leadership. Once identified, plan for a parallel team of
interim and permanent to ensure a smooth transition.
Profile
 Interim CEO – CRO – COO – CFO – Program Leader
 F500 and Big 4 experience - middle market focus
 Turnarounds, growth, M&A, carve-outs, wind-downs
 Hands-on: focused on margins and EBITDA
 Operations and finance function domain expertise
 Lean approach focused on performance management
Contact
Philip C. Boken CA CPA #70832
philipboken@outlook.com
+1-650-823-6777
@Bk2BsicsFinance
Tactically focused on working with and developing internal teams. When additional specialists are necessary, we introduce
experts from our network of trusted advisors.