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Buyer Alert – Do Your Due Diligence Before Due Diligence

due diligence
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First in a two-part series on due diligence.

From Entrepreneur Magazine, Due Diligence is defined as,A reasonable investigation of a proposed investment deal and of the principals offering it, before the transaction is finalized to check out an investment’s worthiness; generally performed (with the assistance of) the investor’s attorney and accountant.”

The due diligence phase, in our world, officially begins when the LOI (Letter of Intent) is signed by both the buyer and seller.  But as a potential buyer, there is plenty of information you can and should gather before you even consider submitting an LOI.

We at Accelerated Manufacturing Brokers, Inc. work with many first-time buyers and they generally fall into one of two categories – those who ask A TON of questions prior to putting forth an LOI and those who don’t.  For those of you falling into the second category, you need to take a page from the notebook of the first group and learn to ask, ask, ask!  By doing so you will be empowered to make an informed decision more quickly, potentially save money in professional fees later, and stand a good chance of experiencing a more smooth and expeditious official due diligence.

In this blog and the next, we’ve assembled our recommendations for our Buyer’s Top 10 – What You Should Know prior to due diligence and why each is important to your decision-making process.  In this blog, we’re highlighting the first five.

SHAREHOLDERS INVOLVEMENT

    • WHY is this important?
      • To maximize the opportunity for success, it’s important that the business you are exploring is not completely dependent upon the seller. A well-run company will have other individuals in place who also do what the shareholders do.  It’s important early in the process, prior to due diligence, you understand the situation.  So, consider asking:
        • What specifically do each of the shareholders do on a daily basis? Does anyone else in the company duplicate their job function(s)?  If not, is anyone in training to perform these duties?
        • How much of sales are dependent upon relationships with any one of the shareholders?

PRODUCT INFORMATION

    • WHY is this important?
      • If a business you are looking at has registered patents or trademarks, those generally increase the value of the company IP and overall value. However, it’s important to understand how much “runway” is left on the patent … said another way, “When does the patent/trademark expire?”
      • Additionally, when speaking with a potential seller, we often learn of a secondary product line they have been working on but not given a lot of attention to. With the infusion of marketing and business development, this could potentially be a whole new revenue stream for the acquiring entity.

CUSTOMER CONCENTRATION

    • WHY is this important?
      • There can be danger in acquiring a business with sales being generated by one or two customers. That said, we recently sold a company just like this.  If the relationships are long-standing, or if the parts being produced are spec’d into a design or a critical component of the customer’s product, the danger diminishes.  The point is to be sure you have an understanding of the customer landscape.   Suggested requests:
        • A revenue report outlining percentage of sales by industry
        • A revenue report outlining the percentage of sales by customer within each industry. (At this point in the process, you should expect the customer’s names to be redacted)

SALES INFORMATION

    • What kind of sales information and WHY is this important?
      • The type of sales information we are referring to here relates to the kind of work being done – contract work vs. one-off projects. There is an upside to each and challenges with each.  Wrapping your brain around this prior to due diligence will provide insight into other things you can expect down the road.
        • Contract work is guaranteed work over a specific period of time…could be one year, could be five years. In some cases, the wear and tear of repetitive work like this can be harder on the equipment, than one-off jobs, which should lead to a question about annual capital expenditures.
        • One-off projects generally command higher margins and the wear and tear on the equipment, as stated above, can be less. However, pipeline fulfillment is critical with one-off projects, which may require a greater focus on sales development, networking, and getting out in front of upcoming projects in the industries served.
      • What percentage of your sales are repeat sales vs. new business? Simple enough, but understanding this will impact your sales strategy going forward.

OVERALL COMPANY CONCERNS

    • What does this mean and Why is it important?
      • Many of our sellers have been in business for 20, 30, or 40+ years. As they’ve worked hard at growing their business and keeping jobs in their communities, stuff may have happened.  This stuff could be related to OSHA or EPA issues, legal or worker’s compensation claims.  None of these are guaranteed deal breakers, but gaining insight prior to due diligence prevents unanticipated surprises later.  For many of our sellers, OSHA issues are rare and minor.  EPA regulations vary by state, so be familiar with what’s required by the state in which the business of interest is located.  Worker’s Comp and legal issues come in all shapes and sizes, so one more time, just be sure you’re asking the right questions.

Each buyer we work with comes to us with a different set of expectations, vision, experience, skillset, and strengths. At Accelerated Manufacturing Brokers, Inc. we believe buyers should be educated and informed, before due diligence and thus empowered to make this exciting and life-changing decision from the best place possible.

Next week, part two in this series.

About Frances Brunelle

Frances Brunelle is the founder of Accelerated Manufacturing Brokers, Inc., which specializes in the sale of lower middle-market manufacturing companies nationally. Fran and her team help to ensure the continuity of U.S. Manufacturing by transitioning ownership to the next generation of entrepreneurs. Recently Fran was named to 2020 Most Influential Women in Mid-Market M&A (Mergers & Acquisitions). Fran is also the host of the WAM (Women and Manufacturing) podcast, a Jacket Media production. Fran writes on topics that help manufacturing business owners prepare their companies for sale and navigate the sale process to ensure a positive financial result in support of their retirement.

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