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:
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.
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.
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.
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.
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.