Operational Improvement: What Aurelius Does

Step 1: Entry EBITDA

EBITDA = Revenue - Materials - Direct Labour - Other Production Costs - SG&A

Using the LTM figures from the vendor due diligence pack (revenue €400.0m, materials €180.0m, direct labour €70.0m, other production and logistics €50.0m, SG&A €88.0m):

EBITDA = €400.0m - €180.0m - €70.0m - €50.0m - €88.0m = €12.0m

EBITDA margin = €12.0m / €400.0m = 3.0%

EBITDA is the earnings the business generates from operations before financing, tax and non-cash depreciation, and it is the number every leveraged buyout is priced and levered off. A 3.0% margin in an industrial manufacturing business where listed peers earn 9–12% is the single most important fact in this case: it tells you the asset is cheap for a reason, and that the entire investment case rests on closing that margin gap rather than on paying a lower multiple. This is why turnaround investors screen for margin gaps rather than for growth.

Step 2: Working Capital Efficiency at Entry

First establish the cost of goods sold base used for the inventory and payables ratios:

COGS = €180.0m + €70.0m + €50.0m = €300.0m

DSO = Accounts Receivable / Revenue × 365

DSO = €80.0m / €400.0m × 365 = 73.0 days

DIO = Inventory / COGS × 365

DIO = €65.0m / €300.0m × 365 = 79.1 days

DPO = Accounts Payable / COGS × 365

DPO = €40.0m / €300.0m × 365 = 48.7 days

Net Working Capital = Accounts Receivable + Inventory - Accounts Payable

NWC = €80.0m + €65.0m - €40.0m = €105.0m, equal to 26.3% of revenue

DSO, DIO and DPO translate balance sheet stocks into days, which is what makes them comparable across companies of different sizes and directly benchmarkable against peers. The pattern here is the classic non-core-division profile: the business collects slowly, carries too much stock, and pays its suppliers faster than it needs to, because nobody in the parent group was ever measured on cash. Each of those three deviations is a separate, independently actionable pool of cash, which is why an operational plan always starts by decomposing working capital rather than looking at the aggregate figure.

Step 3: One-Time Cash Release from Working Capital

Target Balance = Driver × Target Days / 365

Applying the benchmarked targets of 55.0 days DSO, 60.0 days DIO and 65.0 days DPO to the unchanged revenue and COGS drivers:

Target AR = €400.0m × 55.0 / 365 = €60.3m, so the release is €80.0m - €60.3m = €19.7m

Target inventory = €300.0m × 60.0 / 365 = €49.3m, so the release is €65.0m - €49.3m = €15.7m

Target AP = €300.0m × 65.0 / 365 = €53.4m, so the release is €53.4m - €40.0m = €13.4m

Total one-time cash release = €19.7m + €15.7m + €13.4m = €48.8m

New net working capital = €60.3m + €49.3m - €53.4m = €56.2m, equal to 14.1% of revenue

A working capital release is cash, not earnings: it changes net debt and therefore equity value directly, but it never appears in the EBITDA bridge, and it is a one-time effect rather than a recurring one. At €48.8m against a €60.0m purchase price, the release alone very nearly funds the acquisition, which is precisely why cash-poor, working-capital-heavy carve-outs are the natural hunting ground for turnaround sponsors. The trap to avoid is treating payables extension as free money: pushing suppliers from 48.7 to 65.0 days on a business that has just changed owner can trigger tighter credit terms or price increases that show up later as a procurement cost.

Step 4: Procurement Savings

Procurement Savings = Total Materials Spend × Addressable Share × Negotiated Savings Rate

Using materials and bought-in components of €180.0m, an addressable share of 70% (0.70) and a negotiated savings rate of 6.0% (0.060):

Addressable spend = €180.0m × 0.70 = €126.0m

Procurement savings = €126.0m × 0.060 = €7.6m

Procurement savings drop straight to EBITDA because they reduce a cost line without touching volume, which makes them the highest-quality lever in any operational plan and the one lenders will underwrite most readily. The two figures an interviewer will interrogate are the addressable share and the savings rate: the 30% (0.30) of spend that is sole-sourced or contractually locked cannot be re-tendered in year one, and applying a headline savings rate to the full spend is the most common way candidates inflate a plan. A 6.0% rate on genuinely addressable spend is defensible for a business that has never run a competitive tender; 15% would not be.

Step 5: Headcount Reduction Savings

Headcount Savings = Positions Removed × Average Fully Loaded Cost per FTE

Using 180 positions removed from indirect and administrative functions at an average fully loaded cost of €72,000:

Headcount savings = 180 × €72,000 = €13.0m (€12.96m, rounded)

The 180 positions represent 7.5% of the 2,400 total headcount, and because they sit entirely in duplicated indirect functions rather than in production, output and therefore revenue are unaffected. Fully loaded cost matters here: it includes employer social contributions, pension and facilities cost, not just gross salary, and using salary alone would understate the saving by roughly a quarter in a German industrial setting. The counterweight is the €15.0m restructuring provision funded at close — a German carve-out requires works council negotiation and severance, so the saving is real but it has to be bought, and the cash cost lands roughly twelve months before the full run-rate benefit does.

Step 6: Net Pricing Effect

Net Pricing Effect = Gross Price Uplift - EBITDA Lost on Attrition

Using affected revenue of 40% (0.40) of the €400.0m top line, a price increase of 3.5% (0.035), volume attrition of 2.0% (0.020) and a contribution margin of 25% (0.25) on the volume lost:

Affected revenue = €400.0m × 0.40 = €160.0m

Gross price uplift = €160.0m × 0.035 = €5.6m

Lost revenue = €160.0m × 0.020 = €3.2m

EBITDA lost on attrition = €3.2m × 0.25 = €0.8m

Net pricing effect = €5.6m - €0.8m = €4.8m

Pro-forma revenue = €400.0m + €5.6m - €3.2m = €402.4m

Pricing is the fastest lever to implement and the most dangerous to model, because a price increase flows to EBITDA at a 100% margin while the volume it costs you only flows out at the contribution margin on that volume. That asymmetry is exactly why a modest price rise survives a meaningful volume loss: here the business could lose more than seven times as much volume before the pricing action turned EBITDA-negative. Interviewers test whether you apply the contribution margin rather than the full revenue figure to the lost volume, and whether you can name why the spare parts and service book is where pricing power sits — installed-base customers face high switching costs on replacement parts.

Step 7: EBITDA Bridge to Run-Rate

Run-Rate EBITDA = Entry EBITDA + Procurement Savings + Headcount Savings + Net Pricing Effect

Run-rate EBITDA = €12.0m + €7.6m + €13.0m + €4.8m = €37.4m

Run-rate EBITDA margin = €37.4m / €402.4m = 9.3%

The bridge more than triples EBITDA and takes the margin from 3.0% to 9.3%, which lands the business at the bottom of the 9–12% peer range rather than above it — a deliberately credible endpoint, because a plan that projects best-in-class margins for a business that has never managed its own costs will not survive an investment committee. The fourth row is the point of the whole case: the €48.8m working capital release is the largest single number in the plan, and it contributes exactly nothing to EBITDA. Confusing a cash release with an earnings improvement is the error that most often ends an operational improvement interview, because it means the candidate would also value it at the exit multiple.

Step 8: Entry Structure and Exit Equity Return

Entry Enterprise Value = Entry Multiple × Entry EBITDA

Entry EV = 5.0x × €12.0m = €60.0m

Total Uses = Entry Enterprise Value + Restructuring Provision + Transaction Fees

Sponsor equity = €80.0m - €20.0m = €60.0m

Exit Net Debt = Entry Debt - Working Capital Release

Exit net debt = €20.0m - €48.8m = -€28.8m, i.e. a net cash position of €28.8m

Exit Enterprise Value = Exit Multiple × Run-Rate EBITDA

Exit EV = 5.0x × €37.4m = €187.0m

Exit Equity Value = Exit Enterprise Value - Exit Net Debt

Exit equity value = €187.0m + €28.8m = €215.8m

MoM = Exit Equity Value / Sponsor Equity

MoM = €215.8m / €60.0m = 3.60x

IRR = MoM ^ (1 / Holding Period) - 1

IRR = 3.5967 ^ (1 / 3) - 1 = 1.532 - 1 = 53.2%

MoM measures how many times the sponsor got its money back and IRR annualises that outcome, and the two together are how every private equity investment committee frames a decision. Note what is absent from this return: no multiple expansion and no revenue growth were credited, and leverage at 1.7x entry EBITDA is barely a third of what a conventional buyout would carry. The entire 53.2% comes from operational execution plus the balance sheet clean-up, which is the signature of the turnaround model — and it is also why these assets change hands at 5.0x while healthy peers trade at 9x or more. The seller is not being naive; it is pricing in the execution risk that the buyer is taking on.

Final Results

• Entry EBITDA and margin: €12.0m at 3.0%
• Run-rate EBITDA and margin: €37.4m at 9.3%
• Total annual EBITDA uplift from the three earnings levers: €25.4m (procurement €7.6m, headcount €13.0m, pricing €4.8m)
• One-time working capital cash release: €48.8m, taking net working capital from 26.3% to 14.1% of revenue
• Exit equity value on €60.0m of sponsor equity: €215.8m, a 3.60x MoM and a 53.2% IRR over three years

This quantified plan becomes the operating budget the sponsor holds management to, the basis for the management equity ratchet, and the evidence pack a lender needs before sizing debt against a business whose current earnings would support almost none. It also feeds directly into the value creation bridge that will be presented to the investment committee at exit, where each euro of the €25.4m uplift has to be traced back to a named owner and a delivery date.

Would you like to explore further refinements, such as phasing the levers across the three years rather than assuming instant run-rate delivery, stress-testing the plan for a procurement savings rate of 3.0% instead of 6.0%, or working out how much of the €48.8m release a lender would actually allow to sit as cash rather than mandatory debt prepayment?