Whether buying or selling a Company, due diligence is critical to a successful M&A process.

ClearRidge sets itself apart from other firms by conducting much of the due diligence in the field, rather than relying on data sent to us in the comfort of our own office.  Access to primary sources at our client’s location improves the reliability and accuracy of our analysis and invariably gives us a better insight and understanding that we would not otherwise have had access to.

Many of the failures in mergers and acquisitions that we read about could have been avoided if the parties had spent time conducting a thorough, insightful and methodical due diligence process.

In this section, we detail a general checklist for due diligence. This is not an all-inclusive list. It varies from Company to Company and Industry to Industry.  We only list the bullet points here and will provide further information about our process, which will be tailored to the requirements of a particular company and deal.

Due Diligence Discovery and Analysis

Financials: thorough review of financial accounts and reported financials with supporting detail, consolidated data as well as by location, product categories and other relevant categories for historical and forecasted periods.

In depth analysis and report on quality of earnings, accounting systems and methodologies and compliance with or departures from GAAP. Normalize sales, gross margin, and operating expenses.  Provide feedback towards compliance with debt instruments.

Perform analysis on AR, Inventory, CAPEX, working capital, debt and coverage, and profitability.

Liabilities: pending lawsuits, violations, liens, judgments, tax, environmental factors.

Operations: required capital expenditures, IT systems and expenditure, insurance cost changes, purchasing procedures, inventory management, production technology, resource requirements, loss of proprietary capabilities.

Tax: federal income tax filings, state and local income taxes, sales and use tax, property tax, employment tax.

Legal: permits, licenses, certifications, patent expiration, intellectual property, statutory records, tax property titles, contracts, corporate registers, good standing in current and proposed operating regions.

Reputation: customer satisfaction and service history, late shipment and poor quality history, history of regulatory violations, Better Business Bureau records, media exposure.

Industry: micro and macroeconomic trends, growth rate, growth patterns, cyclicality, risk of product obsolescence, comparative performance versus competitors.

Competition: strengths and weaknesses of key competitors, changes in competitive strategy, barriers to entry, proprietary capabilities, potential or emerging competitors, supplier base, market share, pricing strategies, product and service development.

Customers: key contracts, customer lists, customer support, customer retention and loyalty, risk of customer loss post-acquisition, order volume changes, new demands on quality or product design.

Suppliers: availability of raw materials and cost fluctuations, trends in supplier base, changes in supplier leverage.

People: organizational structure, employee turnover, demographics, compensation, employment contracts, non-compete agreements, remuneration and benefits, training and skills gaps, reliance on key employees, availability of capable management, unionization, labor disputes, management philosophy and style, employee networks.

Property, Plant & Equipment (PP&E): ownership structure, condition of property, availability of equipment and facilities post-acquisition, lease expiration, lease terms, zoning and construction, vacant land and buildings, room for expansion.

Other Risks and Liabilities: integration risks, environmental issues, health and safety issues, internal controls, vendor and distribution relationships, credit history with banks and suppliers.

Due Diligence Discovery and Analysis – for Growth Opportunities

Cost reduction: productivity enhancement, implementation of IT systems, plant layout and workflow redesign, process redesign, supplier cost reduction, asset utilization improvements, synergies to realize.

Sales: inside and outside sales efforts, sales strategy, customer base expansion, marketing efforts, increase volume to existing customers.

Product expansion: new product extensions, expand product line through acquisition.

Price per unit growth: product improvements and services that add value, customer segmentation and targeted pricing.

Modeling: cash flow and debt service modeling for multiple scenarios.

Roll-up: potential scale efficiencies, availability of add-on acquisitions, vertical integration opportunities.

Exit strategy: develop exit strategy based upon different events and outcomes, target future sale to strategic or financial buyers, potential for IPO or private resale, timeline and transition plan.

Conclusions.  Report the risks and rewards with their value weighted by probability.  Identify the areas to address in a written integration plan and forecast the cost of integration and/or additional post closing investment needed.

Data needs to be obtained from as many primary sources as possible, including plant and equipment inspections, financial statements, government records, industry research, interviews with customers, suppliers, employees and management, as well as consultations with outside experts and other sources.

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