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Due Diligence For Manufacturing Businesses

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Comments & Replies: 2     Views: 2306     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.



  Helpful Resources To Assist In Selling And Buying California Businesses
Elizabeth McGovern: Escrow Services - San Francisco Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

Timothy Cunha, JD - Business Broker, SF Bay Area

I am an experienced entrepreneur, attorney, & business professor. I & my EvergreenGold team offer business owners sound advice & expertise to build business value & achieve profitable sales. Call me today for a FREE business evaluation & SWOT analysis for your business anywhere in the USA.

Mani Singh, Business Broker, Riverside, San Bernardino Counties

I have successfully represented clients sell & acquire multitude of businesses ranging from Gas Stations, Liquor Stores, Markets, Super Markets, Smoke Shops, Postal Stores, Restaurants, General Retail, Auto and Construction related. Phone me for assistance with selling or buying at 951-296-7646 Cell

Shalonda Chappel-Pilgram: Escrow & Bulk Sale Services - Southern California

Escrow services to brokers/agents, sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services. 951-808-3972.

Christina Lazuric, CBI, Business Broker - Orange County

California's Premier Brokerage for Selling Orange County Service Based Businesses since 2005! C.B.B. provides a step by step approach to Business Brokerage, Mergers & Acquisitions, Business Consulting and Valuations. We work on creating the best possible presentation for your business!

Bob Baumgarten, Business Broker: Orange, LA Counties

National Business Brokerage is a full service brokerage company that has been serving buyers and sellers of Southern California businesses since 1994. We are dedicated to providing the highest standards of professional service for our clients. Phone Bob direct at 949-588-8727.

George Lanza, Business Broker, At Plethora Business Sales

Plethora Businesses, a division of A Premier In Services, Inc., is a Business Intermediary Consulting Firm headquartered in Orange, California. Plethora specializes in the listing and sale of small and medium sized private businesses.

Janet Carrera: Escrow & Bulk Sale Services - San Francisco Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.


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