What Operators See on the Shop Floor That Financial Buyers Miss

A quality of earnings report will tell you what a business has done. Walking the shop floor will tell you what it can become.

That distinction matters more today than at any point in private equity’s history. According to McKinsey’s 2026 Global Private Markets Report, 53% of limited partners now rank a GP’s value creation strategy among their top five criteria when selecting a manager, up from outside the top five just one year earlier.¹ Operational improvements account for roughly half of all value creation in modern buyouts, up from less than a fifth in the 1980s.² And in a January 2026 survey of 300 global LPs, about 70% reported plans to maintain or increase their PE allocations, with a clear preference for managers who can demonstrate execution, not just financial engineering.¹

The industry has arrived at a consensus: operational capability is the differentiator. Yet in the lower middle market, where the majority of independent sponsor transactions close at enterprise values between $10 million and $75 million, diligence still overwhelmingly starts and ends with financial analysis.³ The quality of earnings gets done. The site visit, if it happens at all, is a formality.

This is where the operator’s edge begins. But that edge cuts both ways. The same operational lens that finds hidden value in one deal reveals hidden risk in another. Sometimes the most valuable thing an operator does on a shop floor is develop the conviction to walk away.

The Gap Between the Spreadsheet and the Shop Floor

We recently evaluated a specialty manufacturer of modular medical units. The company designs, fabricates, and delivers mobile healthcare facilities, everything from surgical suites and sterilization departments to dialysis clinics and compounding pharmacies, deployed by hospitals, government agencies, and health systems across the country. It operates from a dedicated factory, builds across dozens of medical specialties, and serves an impressive roster of institutional clients including VA hospitals, major universities, and county health departments. The financials were clean. Adjusted EBITDA margins were strong. The founder had built something genuinely remarkable from scratch over nearly two decades.

A financial buyer reviewing the CIM would have seen a profitable niche manufacturer with government contract exposure, a diversified customer base, and a growing rental fleet of high-value medical trailers generating recurring revenue. They would have built a model, applied a multiple, and moved to LOI.

We flew to the facility and spent a day on the shop floor.

What we found did not contradict the financial picture. It complicated it in ways that only an operator would recognize. And in this case, those complications led us to a conclusion that no spreadsheet would have produced: the company was a remarkable capability shop, but not yet a repeatable manufacturing business. Despite our genuine admiration for the founder, the end market, and the team, the operational lift required to bridge that gap was too heavy for the premium being asked.

Here is what the site visit revealed, organized around the six categories of our Operational Due Diligence Framework.

The Operational Due Diligence Framework

Every deal we evaluate at Amalgam Capital runs through six categories of operational assessment. Financial diligence answers the question “what has this business earned?” Operational diligence answers a different and arguably more important question: “what is this business capable of earning, and what stands in the way?”

1. Workforce Depth and Knowledge Concentration

What financial buyers see: Headcount, payroll expense, benefits cost as a percentage of revenue.

What operators see: Where the actual know-how lives, how transferable it is, and what happens if key people leave.

At this manufacturer, the entire workforce was fewer than 20 people, with a small production team responsible for building modular medical units that had to meet CDC, CMS, ADA, and ISO 9001 compliance standards. Each unit was essentially custom, configured for a different medical specialty (surgery, sterilization, dialysis, dental, behavioral health, compounding pharmacy) with different regulatory requirements, equipment layouts, and environmental controls.

This is not assembly-line manufacturing. It is skilled fabrication guided by institutional knowledge. Unlike competitors that primarily retrofit interiors into pre-manufactured RV bodies or step vans, this company employed a vertically integrated build process that begins with a bare chassis-cab and manufactures the entire vehicle body in-house. The workers understood which materials passed inspection for specific clinical use cases, how to route HVAC and medical gas systems within the dimensional constraints of a trailer chassis, and how to sequence a build so that regulatory inspections could proceed without rework. None of that knowledge was documented in a procedures manual. It lived in the team.

A financial buyer would note the low headcount as an efficiency metric. An operator would note it as a concentration risk and ask: What is the plan for cross-training? How long does it take to bring a new fabricator to full productivity? Has any of this institutional knowledge been captured in standard operating procedures?

The founder had built a deliberate retention mechanism. Production workers received generous profit-sharing contributions well above what you would expect at a company this size. It was not just a tax strategy. It was the reason the company still had the team it needed, and any buyer would need to think carefully before rationalizing that expense.

But here is where the operational picture began to diverge from the financial one. The low headcount was efficient for a bespoke operation, but it also meant the business had no bench depth for scaling. Every build pulled from the same small pool of institutional knowledge, and that knowledge was not documented in SOPs or standardized work instructions. When each unit is custom and the know-how lives in a handful of heads, you do not have a manufacturing process. You have an artisan shop. There is nothing wrong with an artisan shop, but you cannot put a manufacturing multiple on it.

Questions operators ask that financial buyers don’t:

How many people on the production floor could you lose before output is materially affected?
What is the average time-to-productivity for a new hire in your most skilled roles?
Are build sequences, compliance checkpoints, and material specifications documented, or do they exist as tribal knowledge?
What retention mechanisms are in place beyond base compensation?

2. Production Capacity and Process Efficiency

What financial buyers see: Revenue per unit, units delivered per year, gross margin.

What operators see: The actual production process, its bottlenecks, its idle capacity, and what it would take to increase throughput.

Walking through the facility, we could observe the full lifecycle of a build: raw chassis receiving, structural framing, interior buildout, medical equipment integration, systems testing, and final compliance inspection. The builds were happening in parallel bays, but the sequencing was largely managed through the founder’s personal oversight rather than a formal production scheduling system.

The company was in the process of transitioning ERP systems, moving from a legacy platform to one with better scheduling and materials control. That is itself a telling data point. It meant the founder recognized the limitation but had not yet solved it. During diligence, an inventory reconciliation revealed significantly more materials on hand than previous reporting suggested. That is not fraud. That is what happens when a fast-growing, founder-led manufacturer outpaces its systems. But it is also something a financial buyer relying solely on a QofE report might never catch, or might misinterpret as a red flag rather than what it actually was: a business with more raw materials ready to deploy than the books reflected.

On the surface, the margins were outstanding. Cost of goods had come down substantially over recent years even as revenue grew, thanks in part to the hire of a dedicated supply chain manager who brought real discipline to procurement. A financial buyer would see those margins and model them forward.

An operator would ask a harder question: are those margins a product of efficiency, or are they a product of bespoke pricing on a very small number of highly customized units?

In this case, it was the latter. The company was building mobile surgical suites, sterilization departments, dialysis clinics, dental units, compounding pharmacies, and more, each one essentially a one-off engineering and fabrication project. Every build was different. Different chassis configurations, different interior layouts, different regulatory requirements, different medical equipment integrations. The pricing reflected that complexity, and the margins were real. But the lack of any standardized product line or repeatable build process meant those margins came at the cost of predictability, scalability, and throughput.

There was no way to look at the production floor and say: “If we invest X in tooling and Y in labor, we will produce Z more units next year.” The relationship between investment and output was too variable, because each unit was its own project. For a buyer trying to underwrite growth, that is a fundamental problem.

Questions operators ask that financial buyers don’t:

Walk me through a build from chassis arrival to customer delivery. Where does the process slow down, and why?
How is production scheduled? Is there a formal system, or does it depend on the owner’s judgment?
What is your theoretical capacity versus actual throughput? What would it take to close that gap?
How many distinct product configurations have you built in the past 24 months, and how many of those are repeatable?

3. Asset Utilization and Hidden Optionality

What financial buyers see: Fixed assets on the balance sheet, depreciation schedules, deferred maintenance.

What operators see: What the assets can do that they are not currently doing.

This manufacturer had a set of completed and partially completed modular medical units sitting on the property. Some were fully built-out surgical and sterilization trailers that had been previously leased but were not currently generating revenue. Others were structurally complete shells not yet configured for a specific medical application.

A financial buyer would look at these assets and see a drag. Non-revenue-generating inventory. Carrying cost. They might even discount the valuation because of it, or ask the seller to exclude them from the transaction.

An operator sees something more nuanced. In principle, each shell, once configured for a medical specialty, represents a unit that can be leased or sold at a significant price point. The fully built trailers could re-enter the rental market. The question is not “why aren’t these earning?” It is “what pipeline opportunities exist to put these to work, and how certain is the conversion?”

In this case, the optionality was real but founder-dependent. The pipeline that would convert idle assets into revenue ran through the founder’s personal relationships and long sales cycles. That is optionality with a key-person risk attached. A financial buyer might structure an earn-out around it. An operator would ask whether that optionality is transferable, and at what cost.

The company had built a rental fleet of high-value medical trailers that generated meaningful recurring revenue, which in principle smooths the lumpiness of project-based unit sales. That is a structural advantage. But the rental fleet was itself composed of highly specialized, bespoke units. Each one was configured for a narrow clinical application. That limits the redeployment options if a lease ends and the unit does not match the next customer’s medical specialty requirements. Recurring revenue is only as stable as the match between what you own and what the market wants. When every asset in the fleet is a one-off, that match becomes harder to maintain.

Questions operators ask that financial buyers don’t:

Are there assets on the property or balance sheet that are not currently generating revenue? Why not?
What would it cost to bring idle or partially completed assets to a deployable state?
Is there existing pipeline or customer interest that could absorb this capacity?
How redeployable are the specialized units if a current lease or sales opportunity falls through?

4. Customer Dynamics and Revenue Predictability

What financial buyers see: Revenue concentration percentages, customer lists, contract terms.

What operators see: How the sales process actually works, what drives customer decisions, and how long it takes to close.

This business sold to hospitals, government agencies (VA, county health departments, FEMA), universities, and healthcare organizations. The sales cycle was measured in quarters, sometimes years. A single government RFP could take 18 months from initial contact to signed purchase order. Deals that appeared lost would resurface a year later when budget cycles reset or emergency funding became available.

The founder shared an example of a seven-figure purchase order from a government entity that went from first phone call to signed PO in under a week during a public emergency. That is a genuine blue-bird event that no financial model would forecast. But it illustrates something important about the business: the revenue is lumpy, the pipeline is long, and the customer relationships are deeply personal.

The customer base was impressively diversified. Government, education, healthcare, and private-sector clients each contributed meaningfully. That kind of end-market breadth is unusual at this revenue scale, and it represents real durability.

But diversification of customers is different from repeatability of revenue. Each customer wanted something different. A VA hospital needs a mobile surgical suite. A county health department needs a mobile dental clinic. A university needs a mobile research lab. Each engagement was a new design-engineering-fabrication cycle. The company had never employed a dedicated sales team; all leads came through organic web traffic and the founder’s network. The company had far more inbound interest than it could serve, which is a luxury that many businesses would envy. But without a sales function, without CRM discipline, and without a standardized offering that allows a sales team to quote and close on a repeatable basis, all of that inbound interest was being filtered through a single person’s judgment about which custom projects to take on.

An operator looking at the growth story would ask: can this business scale without the founder, and if so, what does it sell? If the answer is “whatever the next customer asks for, designed from scratch,” then you do not have a scalable sales motion. You have a consulting practice with a factory attached.

Questions operators ask that financial buyers don’t:

What does the average sales cycle look like from first contact to signed contract?
How many active opportunities are in the pipeline, and what stage are they at?
What percentage of revenue comes from repeat customers versus new business?
If the founder stepped back from sales tomorrow, how many deals in the pipeline would stall?
Is there a standardized product or configuration that a sales team could quote without founder involvement?

5. Regulatory and Compliance Complexity

What financial buyers see: A line item for compliance costs, maybe a note about certifications.

What operators see: Whether compliance is a moat or a liability, and how deeply it is embedded in the production process.

Every unit this manufacturer produced had to meet federal and state healthcare facility standards: CMS requirements for Medicare reimbursement eligibility, CDC guidelines for infection control, ADA accessibility standards, and in some cases, Joint Commission accreditation specifications. Mobile surgical suites required HEPA filtration, medical gas systems, and sterile processing environments built to the same standards as fixed-site hospitals. The company held ISO 9001 certification and was registered for federal contracting.

The depth of regulatory expertise was not generic. This company had achieved several genuine industry firsts in specialized mobile clinical environments, including pioneering certifications in areas like mobile dialysis and compounding pharmacy that took years of regulatory navigation to achieve.

This is not a business where a competitor can show up with a cheaper product and undercut you. Most competitors in the mobile medical space primarily retrofit interiors into pre-manufactured RV bodies. This company starts from the chassis and manufactures the entire structure, giving it full control over structural design, materials selection, and regulatory compliance at a level that retrofit approaches cannot match. The regulatory barriers are real, and the manufacturer’s track record of successful deployments represented accumulated credibility that reinforces the competitive moat.

A financial buyer sees compliance as a cost center. An operator sees it as the reason this company’s competitive position is more durable than its size would suggest.

But here is the tension an operator also sees: the regulatory moat protects the company, and it also constrains it. Because each product configuration has its own compliance pathway, the proliferation of SKUs across dozens of medical specialties means the company is maintaining regulatory expertise across an enormous surface area. Every new specialty it enters requires a new body of compliance knowledge. That breadth of capability is impressive, but it is also a source of complexity that makes it harder to standardize, harder to train new people, and harder to scale.

A narrower product line with deeper regulatory expertise in fewer specialties would be easier to scale, easier to staff, and easier to defend. But that would require the company to make strategic choices about which specialties to focus on, which is a fundamentally different operating philosophy than “we build anything a customer asks for.” That strategic refocusing is itself a significant post-close initiative, and the question for any buyer is whether the founder and the team are aligned on that shift, or whether the culture of the business is built around being the shop that says yes to everything.

Questions operators ask that financial buyers don’t:

What certifications and regulatory standards does each product line need to meet?
Have you ever failed an inspection or had a unit rejected for compliance reasons? What happened?
How much of the compliance knowledge is embedded in the production team versus documented in processes?
What would a new competitor need to invest in order to achieve equivalent regulatory standing?
Which product lines carry the most regulatory complexity relative to their revenue contribution?

6. Facility and Overhead Structure

What financial buyers see: Lease expense (or absence of it), SG&A as a percentage of revenue.

What operators see: Whether the overhead structure reflects economic reality and where adjustments will be needed post-close.

At this manufacturer, the production facility was owned by the founder through a separate entity. There was no lease expense on the income statement. If you were building a model from the financials alone, you would see artificially elevated margins that would not persist under new ownership.

We identified this immediately and established a fair market lease rate benchmarked against comparable industrial properties in the area. The adjustment was material to the EBITDA calculation, moving margins by several hundred basis points.

Similarly, the founder’s compensation ran through a combination of base salary, retirement plan contributions, and various personal expenses that are common in founder-led businesses. Normalizing these add-backs is standard in a QofE, but the operator’s advantage is knowing which add-backs are real and which are aggressive. Having run businesses ourselves, we know what a CEO of a company this size actually costs to replace, what benefits packages are needed to retain key employees, and what operating expenses will increase (not decrease) under institutional ownership.

The company operated with a lean administrative structure. The founder managed sales, strategy, and key customer relationships while the on-site team handled design, engineering, and production. That structure had worked under founder-led operations, but it raised questions about what the management overhead would look like under new ownership. Would the business need a general manager? A dedicated sales function? More back-office support for reporting, compliance, and governance? Each of those represents a real cost that does not appear on the current income statement.

The founder had invested in some organizational infrastructure, including a formal operating system and defined accountability structures. That is unusual and commendable at a company this size. But the gap between a founder who has groomed successors and a business that can actually run without the founder is often wider than it appears, particularly when the founder is the primary sales channel, the primary customer relationship holder, and the final decision-maker on which custom projects to accept.

Questions operators ask that financial buyers don’t:

Is there a related-party real estate arrangement, and what would fair market rent be?
What personal expenses are currently running through the business?
Which owner-performed functions will require hired replacements, and at what cost?
What overhead costs will increase under institutional ownership (insurance, reporting, governance)?
How dependent is the business on the founder for decisions that cannot yet be systematized?

Why This Matters Now

The private equity industry is in the middle of a structural shift. According to Simon-Kucher’s 2025 PE Value Creation Study, 33% of deal teams and operating partners now identify operational improvements as the most important driver of the equity story, nearly double the next lever.⁴ McKinsey’s 2026 report found that LP selection criteria have moved decisively toward value creation capability.¹ And TBM Consulting Group’s 2026 PE Outlook warns that the bar for operational due diligence has risen sharply: buyers are expected to validate asset condition, probe actual versus theoretical capacity, test staffing models, and examine throughput and maintenance data before they commit capital.⁵

Yet in the lower middle market, most diligence processes still consist of a quality of earnings report, a legal review, and maybe a half-day site visit that is more photo op than assessment.

The gap between what the industry says it values and what most buyers actually do in diligence is where the operator-investor finds edge. Not by running a better financial model, but by asking the questions that only come from having walked shop floors, managed production teams, and lived inside the operational complexity of mid-market businesses.

What We Found (and Why We Walked Away)

At this manufacturer, our site visit changed the deal, but not in the direction you might expect.

We liked almost everything about this opportunity. The end market is compelling: mobile healthcare infrastructure is a secular growth story driven by access gaps, disaster preparedness, and the structural shift toward decentralized care delivery. The founder had built something genuinely innovative, with an institutional client base and regulatory credentials that would take a new entrant years to replicate. The team was capable and committed. The margins, on paper, were outstanding.

But the more time we spent on the shop floor, the more clearly we saw the gap between what the financials described and what the operations could support.

The business was a capability, not a process. Every unit was essentially a custom project. There was no standardized product line, no repeatable build sequence, no way to predictably translate investment in labor and materials into a defined number of units. The margin profile reflected bespoke pricing on one-off work, not the efficiency of a scalable manufacturing operation.

The SKU proliferation created hidden complexity. The company could build anything a customer asked for across dozens of medical specialties. That breadth was a source of pride, and understandably so. But it also meant the business was maintaining design capability, regulatory knowledge, supplier relationships, and fabrication expertise across an enormous range of clinical configurations. Each new specialty was another experiment that consumed management attention and production bandwidth without necessarily contributing to a repeatable revenue stream. The company wanted a full premium for all of that capability, but capability without repeatability is not what manufacturing multiples are built on.

The systems were catching up, but not there yet. The ERP transition, the inventory discrepancy, and the founder-dependent production scheduling all pointed to a business that had outgrown its infrastructure. The founder knew this and was investing in fixes. But from a buyer’s perspective, these were pre-close problems that would become post-close capital requirements.

The overhead structure needed significant normalization. The missing lease expense, the founder’s compensation structure, and the lean administrative overhead all meant that the true cost of operating this business under institutional ownership was materially higher than the income statement suggested.

The operational lift was too heavy for the price. To turn this business into a scalable platform, a buyer would need to rationalize the product line, invest in standardized build processes, document the institutional knowledge currently living in the team’s heads, complete the systems infrastructure, build a sales function, and manage a founder transition. Each of those is doable. Together, at the valuation being discussed, they represented more post-close risk and investment than we were comfortable underwriting.

We passed. And we did so with genuine respect for what the founder had built. This is a business that, in the right hands and at the right price, could become a significant platform. The end market fundamentals are strong. The regulatory moat is real. The founder’s vision is as compelling as any we have encountered.

But our job is not to fall in love with stories. Our job is to walk the shop floor, assess what it would take to create value, and make an honest determination about whether the gap between current operations and the asking price is one we can bridge. In this case, the gap was too wide. A financial buyer working from the CIM alone might have paid the premium and discovered the operational reality post-close. An operator sees it on day one.

That is the difference between acquiring businesses and advising on them.

The Operational Due Diligence Framework (Summary)

Category	What Financial Buyers See	What Operators See
Workforce Depth	Headcount, payroll, benefits cost	Knowledge concentration, cross-training gaps, retention mechanisms, time-to-productivity
Production Capacity	Revenue per unit, gross margin	Bottlenecks, scheduling systems, theoretical vs. actual throughput, bespoke vs. repeatable production
Asset Utilization	Fixed assets, depreciation, carrying cost	Deployment-ready optionality, conversion cost, redeployment flexibility, pipeline certainty
Customer Dynamics	Revenue concentration, contract terms	Sales cycle length, pipeline depth, founder dependency, product standardization for scalable sales
Regulatory Complexity	Compliance costs, certifications held	Competitive moat depth, knowledge embedding, SKU-driven complexity burden
Facility and Overhead	Lease expense, SG&A percentage	Related-party arrangements, true replacement costs, institutional ownership adjustments, founder dependency

This framework is not a checklist to run through on a site visit. It is a lens for seeing what a business is actually capable of, and what stands between its current performance and its potential. Every deal we evaluate at Amalgam runs through all six categories before we make an investment decision, because that is where the value creation plan starts. And sometimes, it is where the discipline to walk away starts, too.

We conduct operational due diligence on every deal we evaluate, and we share our full Operational Due Diligence Framework with capital partners before every close. If you are an investor looking for a sponsor who goes deeper than the spreadsheet, request a copy of the framework and we will walk you through how we apply it. If you are a business owner wondering what an operator would see on your shop floor, we will give you a confidential, no-obligation assessment. No pitch, just perspective.

**Contact Rachit Shukla, Managing Director, at rachit@amalgamcapital.com **

McKinsey & Company, Global Private Markets Report 2026: Private Equity, February 2026. ↩ ↩² ↩³
Press & Associates analysis of PE value creation data; corroborated by PwC PE industry research, 2024. ↩
McGuireWoods, 2024 Independent Sponsor Deal Survey, analyzing 300+ transactions. ↩
Simon-Kucher, PE Value Creation Study 2025: Industrials and Business Services. ↩
TBM Consulting Group, Private Equity Outlook 2026: Cautiously Optimistic Amid Challenges, February 2026. ↩