Focus on Business

Is Private Equity Investing in Your EMS?

Getting a grip on the many moving parts.

Much of my time this decade has been spent supporting private equity (PE) firms considering an investment in the EMS space, with no prior EMS experience on their staff. Those of us who have spent years in this space know there are vast amounts of “moving parts” involved with running a solid EMS business.

I’ve been told that my audits and SWOT writeups proved to be very valuable, provided accurate insight into a business the potential investors knew very little about and reduced previously unknown risks that would have crept into the deals.

Many similarities exist among the audits I’ve conducted over the past few years. Many of these findings would not surprise EMS industry veterans. But these situations may not be self-evident to an investor who hasn’t previously worked in this complex service industry. I have also seen many of these elements of risk at my direct EMS clients managed to different degrees of efficiency.

Some questions/topics to consider before making any investment decision include:

  • Aging capital equipment. SMT lines and supporting capex expenditures like AOI and x-ray equipment are very expensive and with the increasing costs of doing business, many capital expense budgets have been reduced, so unexpected short-term expenses could be looming for a new investor.
  • Identifying where the products (PCBA/box-builds) fall on the technology scale. Most EMS companies market their company as a “leading-edge” or “high-technology” manufacturer. The reality is many offer low- to medium-technology and therefore are a less “sticky” business, making it easier for customers to move programs to an EMS competitor. I don’t believe companies are intentionally deceptive in stating they build leading-edge electronics. Rather, I have found they just don’t realize the degree of complexity some EMS business models are operating in. (You don’t know what you don’t know.)
  • Determining if the top leadership is selling with a goal to punch-out. If so, you must assess the current staff, or have competent replacement leadership on the outside ready to take over the business for the investors. Even with some level of earnout, many leaders are not giving 100% as they did prior to the sale closing. This is a critical factor in the final valuations of the deal.
  • Were the 2021 and 2022 topline revenue figures due to the EMS simply requiring longer visibility on POs so they could drive long-lead components, or were new customers, new programs, higher-level assemblies, and/or market share gains being won part of that revenue growth? Time was, our industry was happy with six months of firm bookings. That extended to 18 to 24 months during the pandemic due to component lead-time extensions. Those are now returning to historically normal schedules. If topline growth was based solely on POs being booked out longer, it’s reasonable for topline revenues to shrink when that trend eases.
  • What were historical inventory turns pre-2022? How are lower inventory turns being managed to abate the EMS risks and conserve cash? What is being done to mitigate the cost of stagnant inventory waiting for the “golden screw” to arrive and having lost any asset value for their revolver and borrowing limits?
  • Are the sales and marketing functions driving growth, increasing brand awareness, differentiating from their competition, aggressively growing new customers, aggressively growing new sales partners (direct and indirect), and what support is being given to the business office to gain share at their existing customers? Does the business office know what their market share is and who has the balance of obtainable business at the existing accounts? Are the sales folks and business office simply order-takers? Is the sales tool kit robust and enabling the closure of new deals?
  • Are too few, or too many, KPIs being tracked and managed and are the critical ones in the mix? I’ve heard “we measure everything,” and because of that lack of focus, seen how no KPI is more important than any other KPI, with no real focus on the critical few. Does the EMS realize it can’t run a company just from its dashboards?
  • How does the market mix and customer concentration look? Some markets are counter-cyclical to others, so some diversity is usually less risky than a non-diverse mix. Many EMS companies also suffer from having a giant revenue client that could crater the business if they leave or have a terrible year. Ideally, I like to see no client larger than 12% to 15% of the total revenue, with a few other customers close to that percentage, across a few targeted markets.
  • Are the software systems robust enough to scale the business and handle an increasing complexity of daily activities?
  • Is problem-solving all “firefighting” or is there evidence of “fire prevention” at work? It could be continuous improvement programs/Kaizen events, floor employee suggestions being acted on and celebrated, Lean manufacturing events, a value-stream mapping “war room,” and various other visible activities or cases the EMS can demonstrate.
  • Are there frequent top-down communications with employees about the state of the business, opportunities, upcoming audits, benefits, and relevant topics? Does executive management walk the plant with some frequency, getting personally involved with the employees? Is there a culture supportive of what Abraham Maslow described as “belongingness?”
  • Is there evidence all executive staff are involved in cultivating “customers for life,” and is the EMS committed to delighting their clients? (I have been to places where the customer is denigrated and looked at as a necessary evil.)
  • Does the EMS live by a principle that taking equal care of all four elements of any business is a must? Those elements are: customers, employees, vendors and, of course, shareholders.
  • Does the QMS (Quality Management System) and subsequent quality certifications support the stated targeted markets the EMS is trying to grow? For instance, if the facility is not ITAR and with the AS9100 certification, can you really claim a focus on the A&D market?
  • Are the manufacturing floor processes institutionalized so consistency of process exists or is each day more of a brute force attempt to make committed shipments?
  • How robust is the new product introduction (NPI) process? Is NPI a new adventure with every new SKU launched and is each NPI leader doing it differently, or is a repeatable process following the same steps for the first new product launch as it is for the fiftieth?
  • Are the standard terms and conditions fair to the customers while still protecting the EMS from issues that could damage the business but are out of its control? Has the EMS executed egregious OEM contracts accepting unfair terms it can’t control? Speaking of legal documents, if manufacturer reps are part of the sales team, are those contracts fair to the reps or are they so one-sided the EMS can’t recruit good rep firms?
  • How good is the materials team and business office at managing excess and obsolete inventory? Are there clearly stated executed agreements in place documenting when the possession of slow-moving or obsolete inventory becomes the OEM’s responsibility? Are there software systems in place to manage these events?
  • Has the EMS negotiated favorable terms from its vendors and is it meeting its end of the deal, such as on-time payment?
  • Is the quote model capturing all applicable recurring and non-recurring costs and maximizing opportunities? Is it refined so that mid-level management can plug and play or does a senior executive have to administer all variable costs?
  • How are scrap rates, internal captures, and external escapes (RMAs) measured? Are internal bone piles growing or are they managed well and in a timely fashion?
  • Is the EMS trying to serve too many customers, stealing resources from its actual growth/strategic accounts?
  • Does the EMS really understand who its best clients are? Can it define the cream of the crop besides just using total spend?
  • Is there a universal understanding of what a “good fit” customer looks like or does the EMS simply require a pulse from a new prospect to engage?
  • Is a system in place to act as an early warning system (canary in the mine) so the EMS can take action to repair growing dissatisfaction at existing customers, before it becomes a lost cause?
  • Is digital marketing keeping pace with current trends?

These are just some of the deep-dive topics a PE firm should consider when performing diligence on a potential EMS investment. Even something as simple as auditing the MRB cage should not be overlooked: Often it contains too much idle cash with slow-dispositioned defective raw materials or is a catchall storage location for items that should be stored elsewhere. Safety, housekeeping, and many hours’ worth of Q/A often uncover not only risks but areas an EMS excels in, and I just summarized a few.

I encourage any investor group thinking of investing in the EMS space to reach out and discuss ways to mitigate their risk with the details obtained through a preaudit survey, an on-site audit, and a thoroughly documented SWOT analysis.Article ending bug

Jake Kulp is founder of JHK Technical Solutions, where he assists OEMs and EMS companies with optimizing demand creation offerings and deciding when and where to outsource manufacturing. He previously spent nearly 40 years in executive roles in sales and business development at MC Assembly, Suntron, FlexTek, EMS, and AMP Inc. He can be reached at