Due Diligence Checklist for Buying a Manufacturing Business

Reconcile Earnings to Production

• Revenue, units, labor, material, overhead, scrap, rework, freight, warranty, and gross margin by product, customer, and job
• Orders, production records, shipments, invoices, credits, deposits, and bank activity
• Owner labor, related-party costs, maintenance, insurance, quality, and compliance normalization

Test Capacity and Equipment

Map rated and demonstrated capacity, constraints, downtime, maintenance, tooling, changeovers, utilities, certifications, software, and operator dependence. Inspect major equipment and quantify immediate and replacement capex.

Review Customers, Suppliers, and Backlog

• Revenue and gross profit concentration
• Contract term, pricing, volume, cancellation, assignment, warranty, and change-of-control provisions
• Single-source materials, lead times, minimum orders, tooling ownership, and alternative qualification
• Backlog definition, deposits, margin, schedule, and cancellation risk

Verify Inventory and Working Capital

Observe counts and test raw material, work in process, finished goods, consigned stock, obsolete items, reserves, standard costs, and customer deposits. Build a normalized working-capital target that fits the production cycle and supplier/customer terms.

Review Labor, Safety, and Environmental Exposure

Review skilled-role concentration, pay, overtime, turnover, training, classifications, OSHA history, internal incidents, permits, waste, emissions, wastewater, chemicals, property history, and insurance. Escalate technical findings to qualified specialists.

Worked Buyer Example

A buyer finds stable accounting profit but rising scrap, aging finished goods, deferred maintenance, and dependence on one customer and one tooling supplier. The buyer adjusts normalized earnings, adds capex and working capital, requires inventory and equipment procedures, and negotiates customer, supplier, lien, environmental, and closing protections.

Required Documents and Controls

• Monthly financials, tax returns, bank records, job or product margin, and general ledger
• Backlog, customers, suppliers, contracts, purchase commitments, pricing, and forecasts
• Equipment register, liens, leases, maintenance, downtime, inspections, tooling, and capex
• Inventory detail, counts, aging, costing, reserves, scrap, rework, and warranty
• Employee roster, payroll, skills, safety, permits, environmental, facility, and insurance records