Diligence Readiness for Owner-Managed Manufacturers

Once heads of terms are signed, a buyer's lawyers and accountants will send a long list of questions and expect answers quickly. For an owner-managed manufacturer, the information usually exists somewhere, but it is spread across filing cabinets, the quality manager's laptop and the owner's memory. Gathering it under time pressure is where deals slow down and prices start to slip. The answer is to do most of the gathering before heads of terms, and to work alongside your own lawyers rather than leaving it all to them.

Financial information

The buyer's accountants will want to understand how the business makes money and how reliable the numbers are.

• Statutory accounts for the last few years, with the tax computations.
• Monthly management accounts that reconcile to the statutory accounts. Gaps between the two, or management accounts that change after the event, cause more delay than almost anything else.
• Aged debtor and creditor reports, stock valuations and the basis on which stock is valued.
• Sales by customer and by product, so the buyer can see concentration and margin.
• Budgets and forecasts, with the assumptions written down.

If your management accounts are produced late or inconsistently, fix that first. A buyer reads the quality of your reporting as a sign of the quality of your control. Our article on turning data into information covers the basics.

Contracts, customers and approvals

Customer terms are often the least organised part of a small manufacturer's records. Many customers trade on purchase orders that carry their own terms and conditions, alongside long-term agreements, supply schedules and quality agreements. Collect the current versions for your main customers and suppliers and note anything unusual: exclusivity, pricing commitments, liability terms and, above all, change of control clauses that let a customer review or end the relationship if ownership changes.

Approvals and certifications need the same attention. List every one you hold: AS9100 or ISO 9001 certification, customer approvals, special process approvals and any export licences. For each, find out what happens on a change of ownership. Certification bodies generally expect to be told, and some customer approvals require notification or re-approval. Whether a share sale or an asset sale is being proposed makes a difference here, and your lawyers will advise on that. The point is to know the answer before the buyer asks.

Have your quality records ready too. Recent certification and customer audit reports, open non-conformances and corrective actions, concessions, customer complaints and delivery performance all tell a buyer how the business really runs. If there are open findings, close them before you start. Our guide on preparing for an AS9100 audit is a useful checklist for the quality side.

Property, IP and tooling

If the business occupies leased premises, find the lease and any licences or side letters. Check the term, the break dates, the rent review position and any dilapidations exposure. Many leases restrict assignment without landlord consent, and some contain change of control provisions. Your lawyers will read them properly. Your job is to make sure the documents are complete.

Intellectual property in a contract manufacturer is often less straightforward than owners assume. Drawings and specifications usually belong to the customer. Tooling may be customer-owned, business-owned or disputed, and it is common to find tools on the shop floor with no clear record of who paid for them. Build a tooling register that shows ownership, location and condition. Where the business has its own designs, processes or software, record who created them and on what basis.

Employment and health and safety

A buyer will want a full staff list with roles, pay, start dates, contracts and any variations. They will want to see the pension arrangements, the handbook, any disciplinary or grievance matters in progress and any tribunal claims. Make sure every employee has a written statement of terms and that the file matches what people are actually paid.

Health and safety records matter in any factory and more so in one with presses, furnaces or chemical processes. Gather risk assessments, machinery guarding and inspection records, LOLER and pressure system examinations where they apply, accident and near-miss records and any correspondence with the HSE. Gaps here are expensive to discover late, because a buyer may insist on fixing them before completion.

Working with the lawyers

Readiness means giving your lawyers and accountants good material early, so they can spend their time on the things only they can do: negotiating warranties and indemnities, preparing the disclosure letter and advising on the structure and tax position of the deal.

A practical approach:

• Set up a data room with a folder structure that mirrors a typical diligence questionnaire.
• Appoint one person inside the business to own it, so the owner is not answering every request personally.
• Note known issues openly. Problems disclosed early can usually be managed. Problems found by the buyer damage trust and price.

Our article on how to complete a management buyout sets out how diligence fits into the wider timetable.

If you are preparing for a sale or a buyout and want help getting the business diligence-ready, that is a core part of our management buyouts work. Get in touch.