Buying a Manufacturing Company: What Financial Due Diligence Matters?

Start with at least three years of financial statements and the underlying general ledger, then reconcile them to tax returns, bank statements and the fixed asset register. The goal is to confirm that reported revenue matches banked cash and that reported costs match what the operation actually spends.

Pay special attention to management reporting. If the seller's monthly reports are unreliable, the earnings history itself is unreliable. Pagac's case study of a Metro Detroit electrical-parts manufacturer showed how an accounting-system error effectively counted the same labor cost twice, creating almost $250,000 in false cost swings. A buyer who relies on uncorrected reports can overpay for earnings that never existed.

Normalized earnings remove one-time items, owner perks, family payroll and discretionary expenses so the buyer sees what a new owner would actually earn. Add-backs must be documented and realistic; aggressive add-backs inflate the price and usually surface later as a shortfall.

Working capital is part of the same conversation. A target that runs lean on inventory and receivables may show strong cash flow today but require a real investment after closing. The purchase agreement should define the working capital baseline the buyer is actually buying.

Customer concentration is the biggest one: if a third of revenue comes from one customer, the value depends on that relationship surviving the change in ownership. Supplier concentration, sole-source materials, expiring certifications and reliance on one key engineer or plant manager carry the same kind of risk.

Inventory needs a physical and valuation review, including obsolescence and work in process that may not convert. Equipment condition and maintenance records matter, and environmental or compliance exposure on the facility should be checked before closing, not after.

Whether the buyer acquires stock or assets changes the tax result for both sides, and so does how real estate is handled. In Pagac's manufacturing acquisition case study, the deal closed in late December on a compressed calendar, and ownership of the building was restructured through a separate company as part of the transaction.

Timing, entity structure and the allocation of purchase price to assets all have tax consequences that should be modeled before signing. A deal that makes sense before tax can look very different after it, and the reverse is equally true.