Preparing for an Exit: What to Expect in Supply Chain and Operations Due Diligence

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When preparing (hopefully in advance!) to sell your business, it helps to understand what buyers will looking for and asking about.  While revenue and financials are well-known areas of due diligence, for companies in the product space the efficiency and riskiness of operations and supply chain are also fair game.

Buyers are concerned about a target company’s ability to complete products to satisfy customers and drive revenue. This depends on a robust supply chain and manufacturing strategy. They will consider questions such as: what do you build and buy?; why?; where?; and, what risks are associated with that (geopolitical, tariff, logistical)?

While many people know that potential buyers will ask questions about customer concentration, some do not realize that savvy buyers will also ask about supplier concentration in order to better understand the risks of dependency on a few (or one!) suppliers for critical materials needed to generate revenue. In cases where there are limited suppliers available, buyers will want to know how that risk is mitigated. They may be interested in whether you have too few suppliers (creating risk) or too many (leading to high managerial overhead and low influence with each supplier). Supplier relationships and total cost of ownership – payment terms, inventory programs, whether you have been paying your suppliers on time, etc. are all areas that buyers may look into.

Buyers are also interested in inventory levels of both finished goods, work-in-progress, and raw materials. This can be a major drain on cash flow.  Obsolete inventory (which has been in stock for a long time and has no likely future use) also raises concerns.  Inventory accuracy may be a concern – if they think they are buying $2M in inventory but there really only is $1.5M from a physical count, that will lead to some discussions. It is wise to expect a possible inventory count and prepare in advance with your own counts to assess and improve accuracy.

It is best to think like a buyer and prepare early to set up supply chains and operations that will impress potential acquirers and not raise red flags.  By deliberately thinking through manufacturing and supply chain strategies and addressing potential risks, companies can best situate themselves for successful exits. Please feel free to reach out to Lustig Global Consulting (www.lustigglobalconsulting.com; steven@lustigglobalconsulting.com) for further information.

Updated: Aug 21, 2023

About the author
Steven Lustig of Lustig Global Consulting is a member of XPX Atlanta

Lustig Global Consulting that helps companies create risk management programs, establish robust manufacturing and supply chain strategies, and enable sustainability initiatives.