A comprehensive due diligence process has been developed by Aleutian Capital Partners for evaluating potential acquisitions. The firm scrutinizes all aspects of a business (see the two tables below for a sample of the risks and opportunities assessed) and puts great demands on sellers to support claims of past performance and prospective growth opportunities.
While many small companies are for sale by owners who simply wish to cash out after years of hard work, others are on the market with hidden difficulties. Aleutian’s due diligence process is designed to exhaustively seek out potential problems, whether they reside with customers, competitors, suppliers, the business environment, or the company itself.
Key Due Diligence Elements – Risks
Verification of reported financials, inventory value, accounts receivable risk; identification of adverse trends, etc
Growth rate, risk of product obsolescence, micro- and macroeconomic trends and cyclicality, performance of business relative to competition
Risk of significant customers leaving after acquisition, order volume changes, new demands on quality or product design
Strengths and weaknesses of key competitors, changes in competitive strategy, barriers to entry, proprietary capabilities, potential or emerging new competition
Continuing availability of materials, trends in supplier base (e.g., consolidation) and potential changes in supplier leverage, changes in material cost
Reliance on specific employees, availability of capable management, unionization, risk of key employees leaving, general morale, employment and education status in operating regions
Tax and other government, pending litigation, environmental factors, employees, violations (caught or not), liens, etc.
History of regulatory violations, Better Business Bureau records, late shipment and poor quality history, customer attitudes, credit history with banks and suppliers, media reports
- Operations and PP&E
Loss of proprietary capabilities, patent expiration, availability of manufacturing and operating equipment and facilities post-acquisition (lease termination or terms changes, zoning, etc.), condition of property, plant and equipment, required capital expenditures, insurance cost changes, legal good standing in desired operating regions.
Data will be obtained and verified during on- site inspections, interviews (when possible) with customers, suppliers, employees and management, inspections of plants and equipment inspections, financial statement reviews; government records reviews, industry researches, consultations with outside experts and other sources.
Company valuation and opportunities for improving the business are also examined in the due diligence process. ACP generates financial models for a range of scenarios are created to determine possible investment outcomes, and the identification of opportunities and likelihood of scenarios are established based on the specifics of each company.
Key Due Diligence Elements – Opportunities
- Sales volume:
customer base expansion, increase volume to existing customers, new product extensions
- Price per unit growth:
product improvements and services that add value, customer segmentation and targeted pricing
- Cost reduction:
productivity enhancement, adoption of IT systems, plant layout and workflow redesign, supplier cost reduction, asset utilization improvements
potential scale efficiencies, availability of add-on acquisitions, vertical integration opportunities
appeal to strategic buyers, potential for IPO, private resale as a stand-alone going concern
Aleutian’s due diligence services are available to our buy-side clients to help in assessing their prospective acquisitions.