Purchasing a manufacturing company is both
a rewarding and stressful experience. Especially if it is your first time as a
buyer; maybe you do not know what to expect from the process itself—how long it
will take, or exactly how much it will cost. At the same time, you will want to
ensure that you are buying a legitimate company that is trustworthy and
credible, with no links to fraudulent groups or individuals. And, of course,
that the business you are interested in buying will prove to be a smart and
profitable investment for you.
The only way to do all the above is with a comprehensive
due diligence check. It allows the buyer to ensure that they are making smart
investments that won't result in financial losses due to problems appearing
down the line that could have been avoided or rectified with early detection.
In this article, we discuss due diligence,
its importance, and what you can expect as the buyer during the process.
Whether you are making your first acquisition (and are hearing of due diligence
for the first time) or you are a seasoned professional, these steps will help
to prepare you for what you can expect during the process.
What is Due Diligence?
As we have explained in this article,
due diligence is an audit or investigation of a potential business deal
conducted by the prospective buyer. It authenticates the information provided
by the seller in addition to assessing the value of the investment.
Why Is A Due Diligence Check Important When
Buying A Manufacturing Business?
1.
Due diligence will provide you
with all the information you need to determine any potential financial risk.
2.
It provides the knowledge you
need to negotiate better terms of sale.
3.
A manufacturing business's inventory
and its accounts, both payable and receivable, are continually fluctuating.
This frequent change in finances can cause numbers to fall significantly
depending on the severity of your situation. Understanding how money flows in
and out of the company will help you prepare a plan of action to prevent or
deal with a dip in finances.
4.
Manufacturing businesses often
have multiple relationships with vendors and clients that are complicated.
Again, knowing about these relationships beforehand will help you prepare for
when you take over the company.
5.
A check allows you to identify,
ahead of time, any issues that can lead to an incomplete sale or a renegotiated
price.
The Due Diligence and Valuation Process
A due diligence check is typically the
first and one of the most critical steps in the purchase process. Depending on
the size of the business and its location, it can take between 3 and 6 months,
and it begins after a non-disclosure agreement and a letter of intent are
signed. Then, the seller will give you full access to any data that is crucial
to their business allowing you to conduct the following research:
Lien Search
The lien search is critical since it allows
you to identify others who may have potential claim over the business, its
property or income. This step ensures that you are the only one with a
legitimate claim (ownership) over the company and its assets.
Public Records
and Litigation Search
This due diligence step informs you of any unresolved
or active lawsuits against the company you are buying. Alternatively, it may
bring to light previous court judgements that you will have to abide with once
you become the new owner. The litigation search is essential because it allows
you to better plan for how you will run your company once you claim ownership.
Financial
& Accounting Review
An in-depth financial review will be a
determining factor in whether buying a business is a smart investment
opportunity. This step will also help you to identify critical economic issues,
potential problem areas, and to better plan for the growth of the business.
Contract
Review
In this step of the due diligence process, you review
all the contracts associated with the seller’s business because you may have to
continue to abide by those contracts once the company becomes yours.
Real Estate
Review
At this step, you are reviewing any real estate owned
by the seller. Here, you are explicitly reviewing the title deeds and lease
agreements, as well as conducting physical inspections of any properties that
are connected to the business. When purchasing a manufacturing business, we
recommend that you also consider doing an environmental assessment to prevent
potential lawsuits.
Insurance
& Liability Review
The due diligence process also helps you to
understand what you are liable for, i.e. what coverage your insurance policy
will provide. By thoroughly reviewing your policy, you will be able to make
adjustments—like negotiating better coverage amounts and lower deductibles.
Intellectual
Property (IP) Review
Businesses do not only own physical assets;
they also own intellectual property. As part of due diligence, you must
identify which intellectual property you have rights over. This may include
patents, copyrights, tradenames, company branding assets (including logos), and
any unique techniques/processes that are essential to the running of the
business.
Human
Resources (HR) Review
This step is a revision of the company's
existing HR policies and the identification and collection of employee
information—especially background screening, employment and education
verification of the company’s top management—and employee structures. During
this phase, it is crucial to ensure that the company has a holistic and
comprehensive HR policy that will protect you from internal lawsuits.
Supplier and
Customer Review
The supplier and customer review ensures
you will continue to have the support and business of the company's biggest partners
and patrons once you take over.
Operations
Review
This stage mainly involves checking that
all the machinery and equipment works. You don’t want to immediately spend a
large sum of money on replacing and repairing equipment as soon as the business
is transferred over to you!
A company’s local reputation or reputation
within their industry can speak volumes about how the business has been run.
This review helps you decide whether you will risk your own company’s
reputation by association with the purchased entity and also whether they may
be suspected of links to bad practices, corruption or even to terrorist
organisations.
PEP Screening and Sanctions Checks
The last thing you would want is to
associate with a company that is politically exposed in an adverse way due to close
to associations with or funding of political parties or has any type of
sanctions against it or its current owners or senior management. Knowing the
company is free of any such handicaps will give you the peace of mind to
proceed with your purchase.
Conclusion
Ensure that you are making excellent
investment choices and protect your company from exposure to unwanted
associations with Cedar Rose’s meticulous investigative
due diligence. Our clients can trust that when they hire us to investigate
on their behalf, we do it with the utmost discretion and with strict compliance
to global anti-bribery and anti-corruption legislation.
Our international coverage with a focus on the
Middle East, Africa and Asia helps clients to remain compliant and avoid the
risks and threats that stem from associating with criminals and their
organizations. Our watertight adherence to international regulation such as the
FCPA (Foreign Corrupt Practices Act) and the Anti-Bribery Act ensures that by
collaborating with us for your due diligence investigations, you also remain
compliant.
Give us a call at (+357) 25 346630 to find
out more about how our due diligence services can help you make sound
investments.