Kobus Van Der Zel is a turnaround specialist and master black belt in lean manufacturing who transforms struggling businesses into profitable operations. He works as an independent consultant charging clients based on the incremental profits he generates, and he’s currently acquiring his first majority-owned manufacturing company after 25 years of helping distressed businesses.
Nate Wheeler is the host of the popular Manufacturing Insiders podcast. He also owns weCreate, a nationally recognized marketing agency that helps manufacturers grow, save money, and become more efficient.
In this episode of Manufacturing Insiders, Kobus Van Der Zel explains how manufacturers can identify their single biggest bottleneck and turn around their operations in 90 days without major capital investment. Rather than trying to improve everything at once, he reveals the theory of constraints approach that focuses all improvement efforts on one machine or process that’s limiting the entire factory’s output. His method has helped companies achieve plant records and dramatically increase cash flow by simply maximizing what they already own.
Kobus walks through his proven five-step process for finding bottlenecks and demonstrates how manufacturers often leave millions on the table through excess inventory and underutilized equipment. He also shares what makes manufacturing businesses attractive to buyers and the common mistakes owners make when preparing for sale. Learn how to stop wasting resources on improvements that don’t move the needle and start generating real results fast.
Nate Wheeler (00:00.789): Welcome to Manufacturing Insiders. Today I have an awesome guest, and I’m excited to talk to Kobus about his experience in transforming businesses. I think this has a significant application for many manufacturers, especially as they’re aging and perhaps thinking about retirement or how to maximize the value of their business. Kobus has come into businesses and turned them around in as little as 90 days.
He is a published author who wrote a book called The Forces of Progress, which I ordered today and am looking forward to checking out. I’ve only covered a small portion of his accolades, but he also has a pretty cool accent because he’s from South Africa. Welcome to Manufacturing Insiders, Kobus.
Kobus Van Der Zel (00:53.816): Thank you, Nate. I’m really excited to be here and to give your audience some value from what I’ve learned over the years.
Nate Wheeler (01:00.491): You said today you’re at a client’s place. What are you doing there?
Kobus Van Der Zel (01:08.984): This is a company that was just acquired by private equity; they manufacture mobile homes, and we are taking them to the next level. We are applying some of the exciting concepts that I will be talking about here. We’re not only accelerating the throughput through their plant, but we are also accelerating the development of the people, which we’ll talk about later.
The previous owners were pretty dysfunctional, and these people have been left behind with technology. Now we are catching them up. Our processes are perfect for getting people to become Green Belts and Black Belts and to adopt technology to get back to where their competitors are.
Nate Wheeler (01:55.543): So you’re a Master Black Belt in continuous improvement and Lean.
Kobus Van Der Zel (01:59.19): Yes, in Lean, and I use the Theory of Constraints as a focusing mechanism. It’s very important not to do Lean everywhere. If you have 40 machines, don’t try to improve all 40; improve one. That’s the value that I’ll try to describe here, which can significantly improve your balance sheet and income statement with very little effort. That is the wisdom of what I’ve discovered over the last three years.
Nate Wheeler (02:31.699): You’re referring to the Overall Equipment Effectiveness terminology there.
Kobus Van Der Zel (02:38.308): Yes, that’s a Lean term. If you Google it, you’ll get a ton of hits. Everyone around the world is using Overall Equipment Effectiveness, or OEE. In a machine shop, it’s basically the percentage of an eight-hour shift that your spindle is actually turning. It’s not quite that simple, but that’s a simple way of looking at it. You can also apply that concept in an engineering environment.
Kobus Van Der Zel (03:05.686): You can apply it in a legal or knowledge-work environment where you define the value-added tasks. After a week, you look at which value-added tasks each person completed and rank them from top to bottom, like Jack Welch did. The behavior of the people changes because now they see they’re getting rewarded for being at the top of the list for creating value, or they’re at the bottom. Techniques like that, which give you an instant change in people’s behavior, are really powerful.
Nate Wheeler (03:42.775): As you were talking, you answered a question I had about how you would apply this to someone not running a piece of equipment. In my business, I’m always interested in ways I can improve the team’s efficiency and effectiveness, so that makes a lot of sense. You’re more or less identifying the real value they’re bringing to the table and how much of that they are doing versus all the other things.
Kobus Van Der Zel (04:08.226): It can get really complex, but my job is always to simplify it. I look at that concept like a jar full of rocks, pebbles, and sand. For any knowledge environment, say a group of 10 engineers, they may do different things, but you define the rocks—the big pieces of value in their standard job—and the pebbles, which are the smaller pieces. You forget about the sand, which is answering the phone and dealing with emails.
At the end of the week, you give them credit: this person completed the most rocks and pebbles, this person was second, and this person was third. That creates a very good feedback loop for people to see that to get to the top of the list, they need to perform better. Then you get a lot more rocks and pebbles through, which improves your income statement and your balance sheet.
If you sell that company, it really creates a peak, and you get that multiple EBITDA on the sale. Or, if you’re in trouble, it gets you cash flow in your bank. In both extremes—when you sell a company or when you are in trouble with the bank—that really helps you get out of trouble.
Nate Wheeler (05:32.555): Do you see situations where that mindset could get you into a negative spot? For example, let’s say we’re evaluating a machine operator on how much time his machine is running during the day. He might then start to neglect maintenance or not clean up the scrap. Do you see that happen a lot, and how do you deal with those situations?
Kobus Van Der Zel (06:05.058): Yes, again, I will make the point that you don’t do this to all of your machines. It’s very important to communicate to the team that you should run the spindle of that one machine 100% of the time while the others have spare capacity. For all of those important tasks that must be done, you have some of the other machines with excess capacity subordinate to this main machine and help with those tasks. This allows the most important machine, the bottleneck of your entire company, to continue producing at a high rate.
Some people may say that’s not fair, that one person gets away with things that others now need to do. But if you’re on a sports team or at the Olympics, that’s what teams are for. They must help each other to get the whole team there faster. That’s the concept we train people on, so they understand why they’re doing it.
Nate Wheeler (07:06.207): I get that. The other objection someone might have is that you can only have your machine running 100% of the time if you have work to fill it. How do you overcome that? How do you get that machine to 100% capacity just by improving the process?
Kobus Van Der Zel (07:36.6): That is a good point. In that case, which applies to about 50% of businesses, you have a market bottleneck. The bottleneck is in the market; if they had more jobs, they could complete them. The five-step process we follow is to identify your bottleneck, exploit it to get as much as possible out of it, and then subordinate the rest of the company to it. Those are the first three steps.
Kobus Van Der Zel (08:05.292): In a case where the market is your bottleneck, you need to take the orders you have and create an excellent experience for your current customers. You must try to identify what we call the “unrefusable market offer.” It is an offer so good that when you present it to your customers, they divert more work to you because they say, “Wow, this is exactly what I need. I’ve been hurt by some practices in the past, and now you are doing it perfectly for me.”
For example, a machine shop may identify that the type of customers they serve have a lot of downtime in their plants. If that plant is Coca-Cola, an hour of downtime can be millions. So, if they are the supplier and they promise a 24-hour turnaround time or they pay penalties or offer a discount, that type of market offer can have a big impact. It could get Coca-Cola to give them a much bigger slice of the pie than they are currently getting.
We start with that, and that opens the market as well. Marketing becomes a big part of this because as you improve internally, you don’t want to lay off the people who made those improvements just because you can’t get enough market share. You must always do the two together to stay in tune, which is difficult. People like you are perfect for this because you focus on increasing the lead flow. You know that it will take time, but there are a number of techniques in every industry where you can get these processes in place and open them up to grow with the company.
Nate Wheeler (09:52.757): I’m fascinated by this conversation about identifying what the market is looking for and coming up with that irresistible offer. It’s something we spend a lot of time thinking about with all of our customers. Usually, the route I take is asking them about their previous successes: What are you really good at? Is it working with very small components that require a lot of your engineering skill sets? Is it just pumping out components as quickly as you can? Is it your cost advantage? That’s one route to get to it, but it’s just looking at one side of the coin. How do you look at what the market actually wants? What’s your process for that?
Kobus Van Der Zel (10:42.712): Eli Goldratt is an Israeli physicist who wrote the book The Goal. Many of your viewers will know it; it’s a bestseller. Jeff Bezos used it as mandatory reading for Amazon managers, as have many other companies. But he wrote a follow-up book, It’s Not Luck, which explains how to deal with a market offer and how to come up with an unrefusable market offer.
I try not to reinvent the wheel. When I met Jack Welch in Chicago before he passed away, I said, “Jack, it’s so great to meet you, but I don’t have a question for you because your book laid it out so well for me,” and he loved that. It’s the same with Taiichi Ohno and Shigeo Shingo, who developed the setup time reduction process. We use the processes from the great minds that came before us, and Eli Goldratt is one of them. It’s a focusing mechanism, but it’s a whole process of how to create market offers. Your viewers can go and look at that, and they will be very excited.
Nate Wheeler (11:55.295): I’m interested to read that too. I’m a big reader, so I’m always looking for something new to check out, especially if I can apply it to business and get better at it. Tell me about the book that you wrote. What was the driving force behind The Forces of Progress?
Kobus Van Der Zel (12:16.484): I was never going to write a book, but I started in the 1990s. I went to the Navy, which was mandatory at that time. The Navy made me do things that I would have sworn were impossible, which was fortunate for me because I started to understand that I’m not the best judge of what I’m capable of. The last time I had a job was in 1999.
As a coach, I approached companies and said, “I will work with you and your team. You only pay me 10% of the incremental EBITDA that I generate for you.” I’ve been doing that since ’99. I wrote my book in ’04, and it was published in ’06. During that time, I started to see these patterns, and it became clear that certain forces hold companies back. I’m not going to go through all four forces, but I identified four different forces that you and your people have to overcome to be a continuous development company. That book is built on principles that never change, and it’s still very true today. Just like Jim Collins says in Good to Great, some of those concepts will never change because they are part of human nature. I try to focus on those types of principles as well because then you can become really good at certain processes.
Nate Wheeler (13:52.855): It is all about focusing on human nature because humans drive these companies forward and provide the labor. From that perspective, I’m curious because I feel like we’ve seen a big change in the labor force in the past decade, or even less. Since COVID, we’ve seen a big change in how employers view employees and vice versa. This includes how they want to work—virtual or in-person—the hours they want to work, and expecting more flexibility and pay. How has all of that influenced your philosophy or made you adapt the way you present information?
Kobus Van Der Zel (14:42.894): That’s an excellent point. A few months ago, I was the general manager of a Pakistani company that was sourcing people for US companies, and you can see the difference in their work ethic. The same is true for some of the Hispanic labor force here in Alabama, where I’m with this mobile home manufacturer. It’s a large Hispanic workforce, and there’s a huge difference between their work ethic and that of some American workers.
The challenge for companies is to have a good process for attracting people who really want to become the Olympic champion of their job, versus someone who just wants more and more comfort. People are creatures of comfort, which is something I discovered in the Navy. When somebody pushes you a little out of your comfort zone, but to a point where you agree to go along because it’s beneficial for you, you become a better worker and a better manager.
That is what we do. We want people who are comfortable being pushed a little outside their comfort zone. Some companies say, “That’s not for us. We want our people to be comfortable, and we want to give everyone gold stars.” That’s fine, but then I go elsewhere because I cannot help a company like that. More companies should have this mindset because we are competing on an international stage. I have a lot of respect for Elon, my fellow countryman, for what he’s done and the example he sets. Some people love him, some hate him, but if you just look at what he’s accomplished, it’s incredible. We should ignore some of the things that might be offensive and look at the things we can learn. That open-mindedness will be very beneficial for people.
Nate Wheeler (16:57.813): I think that’s something you could apply to our entire culture right now: quit paying attention to what’s offending you. I always say that offense is often a response to the truth. I agree, he’s a great guy and is doing a lot for our civilization in general. He’s doing things you would expect our government to be doing in advancing technology, so it’s very impressive.
One criticism I have of Elon is his on-earth transportation ideas. For some weird reason, I’m very passionate about this subject. He decided he was going to dig tunnels and use that as a transportation system. I’ve been saying for over a decade that the most efficient form of transportation occurs in a tube. When you go to the bank, you hit the button, and the canister shoots up. It takes very little energy because it’s all contained within the system.
This is the future of transportation, and you can’t do it by digging underground because it takes too much effort and energy. You need to build tubes above the ground. You can use existing highway right-of-ways and put these tubes along them. We could be getting to Pittsburgh in 15 minutes. Every time I drive down there, I think, “Why is this the same?” It’s been the same for almost 100 years. We’re doing the same thing with no advancement.
Kobus Van Der Zel (18:35.662): I’m not sure what’s blocking him, but it’s often regulations. If you look at the regulations in California, where he started out—he’s in Texas now—I think he’s just been… He gave that over; it’s not part of his companies anymore, though I think he is still involved with the person who runs it. There is probably something holding it back. It’s a great idea and could go much further. Just look at some of the high-speed rail projects they’ve tried to implement in the US; they’ve been blocked by regulations for so long. It’s a pity we allow that to happen, and he talks about that openly as well.
Nate Wheeler (19:17.847): But even high-speed rail isn’t revolutionary technology; it’s just making improvements on existing technology. I’m telling you, a tube is the answer. I shoot guns, and there’s no faster way to get a bullet somewhere than to send it down a tube with an explosion behind it.
Kobus Van Der Zel (19:37.349): And it’s so self-contained, as you say. It should be a no-brainer. I know from reading his books that he did consider putting it on top of highways. In his first book by Ashlee Vance, he talks about some of the restrictions in doing that, which is why he went underground. There are pros and cons, but he’s just such a sharp mind.
The way he has gone into NASA and convinced them to change their processes and make them common sense is amazing. It’s amazing how he can deal with business and regulators. Now that he’s also talking to the government, he can start improving efficiency there, which is really exciting to hear because that’s also necessary.
Nate Wheeler (20:28.727): That would be phenomenal. What he’s done for free speech is also worth noting. If he hadn’t bought Twitter (now X), there would be no free speech platforms. It is well-documented that Twitter, by order of the US government, was complicit in suppressing people who should not have been suppressed and removing people from their platform. Facebook and Instagram are all still doing it.
Kobus Van Der Zel (21:03.372): And he’s taking a huge personal risk in doing that. A lot of people would not have stuck their necks out, but he believed in the principle and should be respected for that, regardless of which side of the fence you are on. That demands respect, and he’s setting a really good example of someone who can think clearly.
Kobus Van Der Zel (21:26.958): I try to take a lot of those principles to the companies that need them most, either a company that has to be sold or one that’s in trouble. How can you quickly learn from people like Elon to accelerate your people? I have a website called yoursensei.org where people get education credits when they do training. Every type of training must be combined with doing.
They do this by creating a tree diagram, which is for one person to solve a problem, or a Kaizen event, which is for a group of people to solve a problem. That gets documented, and they earn their yellow belt up to their master black belt through the system. It’s a way I try to teach people, but then I throw them in, like Elon. He will just give you a task that you have to do by a certain time and get it done. This is a more structured way of getting people to where they think they cannot go in a very short time.
That’s how I do it, and I’m still learning from other companies all the time. I take my clients to speak at international conferences where companies like Mazda, Embraer, and others from around the world present so they can open their eyes and see what other companies are doing and what they can learn.
That openness is something I learned from Carlos Castaneda, and it’s in my book, The Forces of Progress. He said there are four forces that stop a person from becoming a person of knowledge. First, you have to overcome fear. Fear is what blocks most people from advancing their knowledge. When you do that for long enough, when you walk through fear and decide you’re not going to be stopped, you encounter your second enemy: clarity of mind.
Clarity of mind is a very devious one. It’s when you suddenly start realizing, “I think I know this now.” That is a mistake. You must tell yourself, “No, I don’t know it yet.” Continue asking questions and learning from people like you, from others, and from other companies at conferences. That is a great framework to learn from—to force yourself to continue to gain knowledge and learn from others, which maximizes your growth rate.
Nate Wheeler (24:08.959): I can definitely relate to the first two steps you described and think of examples on both sides. There are the “idea people” who say, “I have this great business idea,” but you know they’re never going to do it. That’s a fear thing. Then there are the know-it-alls, the people who think they have it all figured out and aren’t open to feedback or learning, which is also very detrimental. I’m excited to read more about that; I think it’s going to be a good read. Tell me about your decision to… I wasn’t sure if you wanted to talk about the machine shop, as it sounds like it’s still in progress.
Kobus Van Der Zel (24:56.834): We can talk about that. I’ve been charging for the difference in EBITDA I’ve been making for a long time. Since I’ve been doing it for 25 years, it makes sense for me to become a business owner. Once you have helped many companies that are in trouble and you put all these processes together… that’s what I’m doing now, acquiring companies.
Nate Wheeler (25:26.437): Is this going to be the first one you’ve personally acquired, or have there been others?
Kobus Van Der Zel (25:33.104): This will be the first one where I’m a majority owner. I’ve had others where I had a small stake.
Nate Wheeler (25:41.491): Why did you pick this particular company, and why a machine shop?
Kobus Van Der Zel (25:47.778): Well, I had to wake up. For a long time, I was trying to buy distressed companies, but the old debt became such a burden. People are angry at each other, the lender wants to get back at the company, and you just can’t get a deal done where new money can come in and continue without an ugly bankruptcy, which takes a long time.
I’ve been helping companies through the bankruptcy process. I’m a Certified Turnaround Professional, and I deal with M&A companies. My previous partner was Tom Goldblatt with Riveira Capital, which sold large companies. Through that process, you learn what is required to sell a company at the top level. Now I’m just doing that for myself, and it’s very exciting.
For this one, we didn’t make the mistake of going with an unprofitable company. We went with a very profitable one. “Very profitable” means it has no debt on its books because they are cash-flush. They paid it off long ago, so you can get new debt in. This was just a retirement situation, so we look at those types of factors to identify opportunities.
Every situation is different, so I can’t say these are the criteria for every good deal, but it’s generally good advice: don’t go for a very distressed company and think you’re going to get a bargain. A lot of these companies you can buy for a dollar when they’re really distressed. Market cycles will tell you that sometimes, in a down cycle, people throw their valuables overboard, like on old ships in a storm, to save the ship. That happens, and you can buy companies for a dollar because people just want to get rid of their losses. But you can be smart by going upstream. A more profitable company is a much more secure way to acquire a business; otherwise, you waste your time.
Nate Wheeler (28:09.153): As the person who identified this business and decided you wanted to buy it, this is the part that I think will appeal to some of the older machine shop owners and manufacturers who may be considering retirement. What did you look for? You know how to value businesses, and you’re probably much better positioned to do that than many people who buy businesses. What was your thought process?
Kobus Van Der Zel (28:45.764): I wanted to find a situation that wasn’t too competitively bid. At Riveira Capital, we would create a book for a business and send it out to 300 to 700 private equity companies, family offices, and private investors. It’s a very competitive process with timelines for different stages, and in the end, the person who wins that process pays top dollar for the company.
We were trying to find a company that wasn’t as well-marketed. In this case, the broker was not one of the top brokers in Chicago but a younger broker just getting started. It was also a much smaller company, so it wasn’t widely advertised, which gave us an in on a situation we liked. The owner was very experienced and really understood the machining game, but they didn’t understand the marketing game. What we can bring is the ability to take the company from an operator who maxed out its potential with their knowledge and add a marketing component to take it further. That’s what I wanted to do.
Nate Wheeler (30:13.647): That goes back to something I’ve been thinking about. When you talk about this 90-day turnaround, I assume there are some diminishing returns from what you’re doing, right? At that point, you need to grow the top line by bringing in new business.
Kobus Van Der Zel (30:34.198): Yes. If you’re in a situation with no top-line growth, and sometimes you can’t achieve that in 90 days, there’s still a lot you can do. Typically, my engagements are for a year, but in the first 90 days, you can get the bank off your back or get to a point where you can sell the company for a good profit. Then, hopefully, you use that platform to continue with the low-hanging fruit. I do a two-day opportunity assessment to identify those opportunities. The problem is we all think we can do better than the person currently running it, but that’s not always true. You have to be really disciplined to see exactly how much better you can do.
Some processes I’ve developed allow me to take all of their inventory by SKU, run a simulation, and see that in 90 days, I can get $2 million out of inventory into cash while continuing to operate at a better service level. I do the same with OEE: what’s the OEE of the bottleneck machine, the second bottleneck, and the third? If I open that up, what is the impact? Or, if they have seven locations, I analyze where the bottleneck is and determine if I can run it as three locations, where those would be, and what the bottom-line impact would be. I also look at taking a one-shift operation to a three-shift operation, which sometimes can be done in 90 days but typically takes longer.
Kobus Van Der Zel (32:30.464): I worked with an auto company in Michigan that had a huge backlog. Good customers were breaking down their doors asking, “Where are my parts?” In 90 days, we grew that company to an all-time plant record in sales and production throughput just by shipping the backlog. Those situations can happen very quickly. But if you need new customers, it takes a little longer. You need to develop the ability to see what difference you can make and where it will come from, not just guess. Guessing can be very dangerous.
Nate Wheeler (33:06.817): I understand that. With manufacturing, the trend I’ve seen is that even if we get you leads—say, five new opportunities in the first few months—there’s a good chance it will take six to 12 months before they become a customer. By the time you provide a first article inspection, make the tooling, and so on, there’s a time delay between finishing that 90-day period and actually growing the customer base.
Kobus Van Der Zel (33:50.03): My mentor, Alan Barnard, who is considered one of the best practitioners of the Theory of Constraints in the world and is also from South Africa, would say, “Impossible, unless…” So, if you give me five leads, it’s impossible to convert them in 90 days, unless we do what? That question opens the door to a solution. It’s very powerful. I always challenge teams by saying it will take a year or two if you just follow the normal process. But if you go into a session and ask, “Impossible, unless…?” you come up with good solutions.
Nate Wheeler (34:36.811): I’d like to dig further into that because I’m thinking about my other customers and how this conversation could help them get these deals done faster. Some of them are looking at a two-year timeline. I think of a die-casting operation that is extremely selective. We get them hundreds of leads a year, and they might work with one of them. I’m always telling them, “Why don’t you open up a low-budget end to your operation and take advantage of all this? Do something instead of just throwing it all away.” But they say they have a hard enough time finding employees for what they already do. I’m just trying to think of how we could apply this concept.
Kobus Van Der Zel (35:30.168): You’ve been on those calls where a well-scripted follow-up for a lead happens. We did this with the Pakistani recruitment company. They had people calling from Pakistan, just calling numbers until they set an appointment. Then, from the appointment, we would try to sell the person. If you come with an unrefusable market offer, you should do it the Socratic way.
The Socratic method says if you give a person the answer, you block them from reaching that conclusion themselves. So you ask the right questions during the call and get them to an “aha” moment. It’s a planned conversion. The questions aren’t always the same because people have free will and will take you to different places.
You have to train your team who does that follow-up call to present an unrefusable market offer in a Socratic way. Then you get what we call cognitive dissonance. The person on the other side thinks, “I didn’t know you could do that for me, and you’ve done it and have testimonials? Where do I sign?” That type of thinking gets you to be really effective. But often, people just call the leads.
They’ll say, “I called 20 leads and got voicemails.” And then what? They leave it there. You have to have a rigorous process. Read Elon’s books; he talks about how he does this. You have to be a grinder, dig in, and ask, “Impossible, unless…?” How do I get that end result? I want customers to have that cognitive dissonance on the first call.
Nate Wheeler (37:31.521): I’m taking a note and writing down the words “impossible, unless…” because I really like that.
Kobus Van Der Zel (37:36.81): It’s powerful; I love it. I always give credit to Alan because he came up with it. We all use it in the Theory of Constraints and the bottleneck community.
Nate Wheeler (37:46.677): To go back to the machine shop you’re looking at purchasing, how much did the facility, the equipment, and the knowledge of the team play into your decision to purchase this particular business?
Kobus Van Der Zel (38:17.518): The knowledge of the team was very important. It’s a Polish owner with a Polish-Ukrainian workforce, and those people are really good at programming and have a great work ethic. You could have found a more generic workforce, which might offer more upside, but I liked the combination of the team they had because I knew there was a lot of potential. The machines were quite old, but I’m not one of those people who says to get the latest and greatest machine. That takes a lot of capital, and buying a business and then getting money for CapEx is too much.
A much better strategy is to buy a business and use the existing machines more effectively for a while until you can pick the best one to upgrade. That’s what we found here: quite old machines, but they had been upgraded. The owner had done some upgrades, so they’re not junk, and we can continue to do more. We liked the capital plan he was using. The type of customers he had was also very important. If you don’t have a solid customer base, the company can become worthless very quickly if one or two customers leave. That was a key factor.
Nate Wheeler (40:00.427): Regarding the existing customer base, are there long-term contracts in place so you know that if the owner leaves, you’ll definitely still have those customers?
Kobus Van Der Zel (40:13.314): In this case, there were no long-term contracts. That’s something we had to finalize during the final terms—how to overcome that risk. We came up with a few good mechanisms. You can use a seller note, where the owner keeps some money on the table to ensure that sales from specific customers do not go down. We call that an “earn-down.”
You still pay him his full price, but some of that money stays on the table until certain conditions are met. Using techniques like that, you give the seller what he asked for but take some of your risk off the table. Of course, if there are full contracts and no risk, that is preferable, so look for those situations.
Kobus Van Der Zel (41:05.656): But if they’re not there, find creative M&A (merger and acquisition) ways to contractually leave the risk with the seller. That’s what we’ve done in this case.
Nate Wheeler (41:17.973): Understood. When a machine shop owner is selling his business, are you usually using the EBITDA number and a multiple of that to determine the sale price?
Kobus Van Der Zel (41:34.114): Yes, that’s typically what is used, and it’s what we used in this case. At Riveira Capital, which I mentioned, we sold many businesses, and most of them are valued that way. If it’s a family business run by an owner-operator, you get a very low multiple, typically two to three times, because you have to replace the owner with professional management. They sell it based not on EBITDA but on Seller’s Discretionary Earnings (SDE). If you Google it, you’ll see the definition and the difference; it’s similar to EBITDA but not the same, resulting in a lower multiple.
As soon as you can prove you’re a hands-off owner with a general manager in place who will stay with the company, private equity players will come to the table. Then you can get four to six times. If you have a strong growth record, a good technology story, and other positive factors, you can achieve even higher multiples. You have to understand these factors to demonstrate that while you’re getting in at one level, the potential return is significant.
We always try to show a buyer that the situation is teed up for them by presenting the growth stories. As a seller, you should try to get a professional who can help you tell that story in the best financial and operational way. You can explain what the machines and the people can do because of specific technological factors. It’s important to really sell that potential.
Nate Wheeler (43:28.726): Right. I make that same point in some of the content I’ve created. When you’re looking to sell your business, your thought process should be about setting the future owner up for success. That will make them more comfortable and willing to pay more for the business.
The way I pitch it is that if you have a lead pipeline and are consistently getting new leads, that makes a buyer much more comfortable. They know that even if they lose current customers, new ones are always coming in. I describe the mechanism for doing that, which includes having a good website that tells your story, presents a compelling offer, and has good SEO. I think we both have the same goal; we just take slightly different routes to get there.
Kobus Van Der Zel (44:32.376): Yes, it’s very important to combine lead generation and marketing with internal continuous improvement. I call a lack of internal improvement a “leaky bucket.” If you lose customers, you put more pressure on your sales force to sell more just to stay even. You should try to fix your leaky bucket by achieving perfect performance, perfect quality, and good technical features on your product to stay ahead of the game. That gives your sales force the best platform to sell from, and then everything they bring in is growth, not just maintaining the status quo.
Nate Wheeler (45:13.205): What do you think is the biggest mistake business owners make when they sell their business? When you look at a deal after the fact, what makes you think, “Man, they should have done this differently”?
Kobus Van Der Zel (45:31.192): A lot of them, especially those with multiple locations, leave a lot of money on the table in their supply chain and inventory because they haven’t become as lean as they possibly could. In 24 to 48 hours, I can run a simulation to show how many millions are tied up unnecessarily. That’s one area.
Another area is people. They say, “We’re maxed out on people; we need more.” This happens even in engineering or legal environments. Any large company can fall into the trap of thinking they are using their people optimally, but the actual value-added work they produce each week is a fraction of the time you pay them for. We use a concept similar to OEE (Overall Equipment Effectiveness) for people, which we call Overall Employee Effectiveness.
By making that type of improvement, you can get a group of lawyers, for example, to provide much more value each week. All of a sudden, you don’t need 20% more staff. This is perfect for situations where companies were scrambling for labor, like during COVID, or in industries that can’t find the skilled manpower or managers to grow. This leaves a lot of money on the table. If you can ramp that up before you sell and make your income statement pop, you can project that growth forward in a sale situation and benefit from it. It’s a double whammy for an owner to do that.
Nate Wheeler (47:25.237): The COVID period did force people to make some of those adjustments, often from an uneducated perspective. They were in a situation where they had fewer people and had to do more with less.
Nate Wheeler (47:40.379): I’m curious, when you look at a manufacturing facility, the conversation about improving efficiency and reducing labor costs often goes to automation. How much do you utilize automation in your transformation process?
Kobus Van Der Zel (48:03.554): That’s a great question. At the facility I’m at right now, the new private equity owners just took over a month or two ago. Another person wanted to bring in new technology immediately, but we said, “Hang on. First, we need to see what we can do with what they have.” You have to look at the current utilization of your machines and people and determine how much you can improve with existing assets.
If you rush in new technology, it can be a nightmare. There are many case studies where big implementations, like SAP, have weakened a company. You have to really know your processes. If you’re already good, it’s less of a risk, but if you’re not used to that technology, it takes time to incorporate.
Getting your people to a world-class level with what they have now prepared them for the technology. I always do that first. Then, when the new technology comes in, they are confident. They say, “We know what we’re doing. We know how to identify machine downtime, how to eliminate it, and how to run a Kaizen process to improve any area.” They have a plan for the new technology and can implement it effectively.
You have to build that confidence in your people first. If they already have it, fine. Otherwise, lead with improving existing processes until you reach a good comfort and confidence level, and then bring in the technology. I always do it in that order. It saves you tons of money.
Nate Wheeler (49:47.157): That’s a great point. You’re basically just creating a bigger mess for yourself. Not only that, but this technology costs money to incorporate. Robotics and similar systems are expensive.
Kobus Van Der Zel (49:59.938): Yes, and the technology companies often benefit from that rush. They will say their average implementation saves you a lot of money, but that’s not always the case. There are many instances where companies suffer while the tech provider benefits by charging for extra implementation hours. Sometimes you are totally at their mercy because your ERP system is ripped apart while they are putting the new one in. We worked with a company in California that was in that exact situation. They were stuck between two systems for two years, and the costs were millions of dollars just bleeding out.
Kobus Van Der Zel (50:40.654): So, getting your people operationally into peak condition first is normally good advice.
Nate Wheeler (50:47.605): Absolutely. I don’t know how many people would think about it that way, so I think it’s really important to emphasize that point.
Kobus Van Der Zel (50:57.762): And it’s not that hard. You can get an external coach or consultant like me. Some consultants just want to charge per hour, but I charge for the difference in incremental EBITDA. I like that model because it’s my way of saying to myself, “Impossible, unless…” It forces me to make a difference each month, otherwise I don’t get paid. There aren’t many people like me, but try to find a consultant who has excellent testimonials and a track record of getting results. They are normally worth their weight in gold.
Nate Wheeler (51:36.312): Who can work with you? Do you have a specific type or size of company that you work with? Who can reach out to you for consulting?
Kobus Van Der Zel (51:45.336): I work with MorrisAnderson, which is a large workout shop. They get calls from banks about companies that are in trouble with their asset-based loans, and those companies can be hundreds of millions in size. But we also work with small companies, from two million to eight million in revenue.
I know that’s a very big range, but we select companies that have the appetite for change. We want to work with like-minded companies that want to make a big difference and get good results. Manufacturers, distributors, and even knowledge-worker companies, like engineering firms, are all good fits for us to help.
Nate Wheeler (52:44.725): You have a huge amount of experience, and as I said, I can’t wait to read your book. I definitely appreciate your perspectives. You started out as a mechanical engineer, right?
Kobus Van Der Zel (53:00.184): Yes, I’m a mechanical engineer. I started working in the late ’80s, but from day one, I was really an industrial engineer. My first job was in a large industrial environment where we made export containers and refurbished locomotives, so I’ve been in many different industrial settings. I’m really an industrial engineer now, though I qualified as a mechanical one.
The thinking processes from that qualification help you understand continuous improvement techniques, Lean concepts, and people processes. How do you get people to care about their job instead of just watching the clock? Those types of processes excite me, and that’s what I look for—situations where that is needed.
Nate Wheeler (54:01.151): You have a ton of insight. I really enjoyed our conversation today, and hopefully, we can work together down the road. If someone wants to reach out to you, what’s the best way to do that?
Kobus Van Der Zel (54:17.092): You can email me at kobus.com. That is my main email and the best way to start a conversation.
Nate Wheeler (54:32.791): Cool. We’ll put a link for the book in the bio of the YouTube video so people can pick that up if they want. Thanks so much for joining today, Kobus. I enjoyed our conversation, and our previous one as well. It seems like we always have good ones. Thanks a lot for coming on Manufacturing Insiders today.
Kobus Van Der Zel (54:54.168): Thank you for having me, Nate. Well done on what you are doing, and I’m looking forward to working together. We will make good music together. Thank you.
Nate Wheeler (55:03.581): Awesome. Thanks.