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Due Diligence For Manufacturing Businesses

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Comments & Replies: 2     Views: 2087     Posted By: Timothy Cunha JD  Timothy Cunha JD: Business Broker, SF Bay Area



Topics: Buying A Business, Due Diligence     Tags: buying a business, due diligence



I would like to start this discussion and see what other BizBen Users feel about (and possible contribute to this list via a comment and replies below) what items/questions/information buyers should be thinking about during the due diligence and buying process of manufacturing related businesses.

Here are my thoughts on due diligence for manufacturing companies:

"Due diligence" is not just the "tire kicking" stage, but the "let’s take the engine apart and see how it runs” stage".

For the manufacturing business, due diligence is particularly intricate and involved. The buyer will examine all the typical factors: accounting and financials, human resources, suppliers, customers, equipment and physical plant, legal issues, etc. But, the buyer will be examining other matters unique to manufacturing.

Will key management and essential employees stay? If not, can the operations continue effectively with new personnel? The buyer will be looking for detailed documentation of all operating procedures and policies, bills of material, sources of supply, engineering specifications, prints and schematics, maintenance procedures, distribution channels and procedures, and more.

The buyer will also be giving close scrutiny to the physical plant and the inventories. Does the equipment really exist? What is their state of repair and functionality? How easily and inexpensively and quickly can they be repaired or replaced in the event of a failure? Are their dies, jigs, or fixtures off-site at sub-contractors? Is it clear who owns them? Is there custom-made tooling? What would be the impact of its failure?

Are the business operations inherently dangerous? Is there inordinate exposure to liability? Are there environmental or work safety issues? Is the seller currently insuring the risk adequately? How much will appropriate insurance cost?

Do the inventories exist and what condition are they in—both raw materials and finished goods? Are there redundant suppliers for critical raw materials? Can the buyer rely on just-in-time purchasing or will they need to stockpile materials in advance? Will preferential supply contracts be transferable to a new owner? Are there outside consultants or experts essential to the success of the business? Will those relationships continue?

Are the computer systems for tracking and managing finances, orders, operations, marketing, shipping, billing, etc. up to date? Is the software the most recent version? Does it work efficiently and reliably?

Is the lease of the business premises transferable? On what terms? Can the business be moved, or must it be moved? What costs are involved?

Another key issue in due diligence will be the transfer of knowledge from the current owner to the buyer. Often this will entail the seller staying on in an advisory/consulting/training capacity for weeks … or months. At whose cost? Under what conditions? How many hours per day, per week?

I would like to know what other BizBen Users feel would be additional questions or items to look into when going through the due diligence process on manufacturing companies - please comment above, would love to hear your thoughts. Thanks.

Replies To This Comment
 
Contributor: Business Broker, Northern California  Post ID: 757
Tim, your discussion is interesting and in particular with the amount of detail and questions you ask. Your questions outline a rigorous approach to help a buyer but may be challenging for a seller to provide in such detail. A seller only has a limited amount of time in a day to help sell his business. A good seller will be engaged in the process and provide quick and detailed answers. How much does he share during due diligence will depend on the quality of the buyer, their offer and probably an explanation of why there are so many questions. The purpose of due diligence is to verify the representations of the seller. If there are too many proprietary questions; especially if the buyer is a competitor then that may challenge a sellers comfort level.


Contributor: Business Appraisals, Valuations Advisor

One other important step in the due diligence process is to have the buyer sign off on the due diligence stating that he is satisfied with the results.

Replies To This Comment
 
Part of the escrow agent's instructions - that are signed by buyer and seller after due diligence has ended - should include a certification by the buyer that the buyer has concluded due diligence and is satisfied with the results.



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