Most comprehensive LOI to buy a mid market manufacturing firm with detailed opportunity evaluation, valuation methodologies, financing options as well as post merger integration plan.

1. ABC
&
Co.
250
Vesey
Street
New
York,
NY
10281-­‐1330
Dear
Michael
Rolland,
We
are
Team6
Capital
Partners,
a
group
of
investors
and
are
very
interested
in
making
a
bid
for
the
acquisition
of
Manchester
Tank.
We
are
looking
to
make
a
bid
of
$43,000,000
for
51%
of
Manchester
Tank
stock.
The
Reifschneider
brothers
have
created
an
incredible
market
dominating
company.
We
believe
combining
our
expertise
in
the
industry
with
their
wealth
of
knowledge
from
Manchester
Tank
can
create
an
excellent
team
for
future
success.
There
are
opportunities
for
Manchester
tank
both
domestically
and
internationally.
Domestically
we
feel
the
current
management
team
has
created
the
best
product
out
and
captured
a
significant
amount
of
market
share.
Because
the
company
has
such
a
saturated
market
share
in
the
U.S.
we
believe
there
is
more
opportunity
to
expand
internationally.
Expanding
to
international
markets
will
be
our
primary
growth
strategy.
Maintaining
Manchester
Tank’s
corporate
culture
is
extremely
important
to
us.
We
are
looking
to
work
with
management
to
expand
while
keeping
the
same
company
culture.
Our
hopes
are
to
work
with
the
brothers
for
the
next
2-­‐3
years
and
as
they
are
ready
to
transition
out
of
Manchester
Tank
we
will
be
able
to
continue
and
improve
on
the
legacy
they
have
created.
We
are
looking
to
provide
a
competitive
bid
to
win
this
deal,
but
still
provide
the
company
with
enough
cash
flow
to
execute
our
strategy.
The
strategy
is
mutually
beneficial
for
both
parties.
Management
will
receive
the
liquidity
they
desire,
keep
equity
in
the
company
and
will
have
the
opportunity
to
work
with
us
for
the
next
few
years.
I.
Strategy
1. Management
Team-­‐
We
would
like
to
work
with
the
current
management
team
in
expanding
and
improving
Manchester
Tank.
We
want
management
to
work
with
us
in
expanding
international
operations
more
aggressively.
Senior
management
will
need
to
be
the
face
of
Manchester
Tank
in
establishing
new
partnerships
internationally.
We
want
to
work
with
senior
management
in
order
to
establish
a
relationship
with
the
existing
and
new
customer
base.
2. We
would
like
to
add
one
member
from
our
investment
group
as
the
Senior
Vice
President
of
Corporate
Strategy.
His
primary
role
will
be
to
work
with
the
current
management
team
to
execute
our
current
strategy
in
place.
He
will
work
to
establish
relationships
with
new
customers
internationally
and
implement
the
MRP
system.
3. Domestic
Market
a. Our
approach
to
the
domestic
market
will
be
to
keep
management’s
current
growth
strategy.
The
Company
currently
has
the
premier
product
in
the
industry
and
has
the
current
market
share
to
show
it.
The
dominance
in
the
market
is
both
an
opportunity
1

2. and
a
risk
for
us
as
investors.
While
the
current
share
has
created
a
dominant
cash
cow
company,
we
are
not
as
quite
as
optimistic
as
management
in
their
ability
to
grow
domestically.
We
feel
that
with
such
a
large
market
share,
the
company
will
continue
to
grow
with
the
industry
at
about
6-­‐8%.
b. We
will
look
to
renegotiate
prices
with
our
suppliers.
As
we
expand
internationally
and
we
will
be
providing
them
with
an
increase
in
additional
business.
For
this
additional
business
we
would
like
to
work
with
our
suppliers
to
negotiate
prices
and
improve
margins.
4. Expand
internationally
to
South
America,
Latin
America,
Australia
and
New
Zealand.
a. Our
customer
focus
will
be
to
both
large
manufacturers
(i.e.
customers
like
Sunbeam)
and
to
distributors.
We
have
attributed
$800,000
each
year
in
our
projections
for
additional
sales
representatives
and
managers
for
the
international
locations.
See
the
projected
financials
for
further
details.
b. Manufacturers-­‐
We
are
going
to
hire
additional
sales
representatives
to
focus
on
international
expansion.
Their
commission
structure
will
be
linked
primarily
to
bringing
in
new
business
from
their
designated
region.
We
will
be
looking
to
sell
our
products
that
are
components
of
larger
equipment.
For
example,
selling
gas
tanks
that
are
assembled
with
gas
grills.
c. Distributors-­‐
In
order
to
get
our
product
to
a
wider
range
of
smaller
customers
we
are
looking
to
target
distributors
that
have
access
to
distribution
channels.
It
will
be
the
senior
vice
president
of
corporate
strategy’s
responsibility
to
establish
these
relationships.
The
products
sold
to
the
distributors
will
be
standalone
products
(i.e.
the
400lb.
propane
tanks).
d. The
reason
for
the
separation
in
products
sold
between
Distributors
and
manufacturers
is
the
distributors
will
more
than
likely
receive
cheaper
prices
in
order
to
sell
the
product
to
the
end
customer.
We
do
not
want
to
be
selling
the
same
product
cheaper
to
the
distributor
and
more
expensive
to
the
manufacturer.
5. Implementation
of
the
MRP
system
a. One
of
the
primary
strategies
will
be
fully
implementing
the
MRP
II
within
the
first
year.
The
Company
has
seen
significant
improvements
in
efficiencies
and
cost
savings
by
implementing
the
system
in
the
Elkhart
plant.
We
will
look
to
implement
the
system
across
the
company
to
streamline
Manchester
Tank’s
processes.
6. Plant
capacity
a. Expansion
internationally
will
quickly
increase
the
demand
for
products
at
our
manufacturing
facilities.
To
service
the
increase
in
demand
we
will
begin
to
add
second
and
third
shifts
at
each
location
as
needed.
We
feel
that
because
most
plants
are
operating
far
under
their
current
capabilities,
adding
an
additional
plant
will
not
be
necessary
for
a
few
years
out.
Additionally,
the
implementation
of
the
MRP
II
system
will
help
increase
efficiencies
and
better
prepare
Manchester
tank
for
international
expansion.
7. Marketing
Strategy
2

3. a. MT
CEO
will
be
asking
for
a
reference
to
Sunbeam,
Amerigas
and
top
2
distributors
and
approach
the
leading
gas
grill
manufacturers,
propane
marketers
and
distributors
in
Argentina,
Brazil,
Chile
and
Caribbean,
Australia
and
New
Zealand.
These
leading
US
companies
being
MT’s
top
customers
will
provide
a
strong
brand
endorsement
about
MT’s
products
in
these
emerging
markets.
b. The
SVP
of
Corporate
Strategy
will
be
responsible
for
getting
new
international
customers.
He
will
be
representing
MT
at
the
trade
shows
in
the
Latin
America
countries.
c. Once
these
new
relationships
turn
into
customers,
we
will
appoint
one
regional
sales
manager
for
Latin
America
and
one
for
Australia
/
New
Zealand
to
manage
these
accounts.
II.
Valuation
1.
Bid
Price-­‐
We
are
bidding
$43,000,000
for
51%
of
the
Manchester
Tank
stock.
This
bid
price
is
based
on
our
analysis
using
the
discounted
cash
flow
method,
enterprise
value
and
comparable
transactions.
We
believe
our
bid
will
be
competitive
and
includes
a
control
premium
for
taking
controlling
interest
of
Manchester
Tank.
.
2.
Comparable
Analysis-­‐
We
examined
a
number
of
different
comparable
companies
in
the
manufacturing
industry.
There
is
a
wide
range
of
multiples
based
on
the
size
of
the
company.
We
removed
outliers
from
our
analysis.
We
took
the
median
values
for
these
comparable
companies
using
revenue
multiples
of
.9x,
an
EBITDA
multiple
of
6.8x
and
an
EBIT
multiple
of
9.1x.
The
following
are
the
multiples
we
have
found
in
our
research:
Table
1
Summary
Statistics TEV/Total
Revenues
LTM
-­‐
Latest TEV/EBITDA
LTM
-­‐
Latest TEV/EBIT
LTM
-­‐
Latest
Olympic
Steel
Inc.
(NasdaqGS:ZEUS) 0.3x 4.2x 4.7x
Steel
Dynamics
Inc.
(NasdaqGS:STLD) 1.2x 4.9x 5.9x
Commercial
Metals
Company
(NYSE:CMC) 0.4x 5.0x 5.7x
AK
Steel
Holding
Corporation
(NYSE:AKS) 0.4x 5.6x 10.4x
Paul
Mueller
Co.
(OTCPK:MUEL) 0.3x 5.9x 9.9x
Schnitzer
Steel
Industries,
Inc.
(NasdaqGS:SCHN) 0.7x 6.3x 7.5x
Carpenter
Technology
Corp.
(NYSE:CRS) 1.5x 6.6x 7.5x
Chart
Industries
Acquisition 1.3x 8.3x
Reunion
Industries
Inc.
(OTCPK:RUNI) 0.9x 8.9x 12.7x
Chart
Industries
Inc.
(NasdaqGS:GTLS) 1.3x 9.0x 12.4x
Robbins
&
Myers
Inc.
(NYSE:RBN) 1.4x 13.2x 18.5x
We
made
adjustments
to
the
historical
financial
statements
(See
Table
6)
including
the
gross
margin,
taxes
and
SG&A
expenses.
The
gross
margin
was
reduced
as
we
do
not
want
to
rely
on
improved
margins
from
price
increases.
The
comparable
analysis
results
in
a
$102,000,000
valuation
for
the
entire
company.
We
used
a
20%
discount
for
the
comparable
analysis.
The
comparable
analysis
came
in
higher
3

4. than
we
could
finance
based
on
our
free
cash
flow
projections.
Here
is
the
Median
value
for
revenue,
EBITDA,
and
EBIT
multiples:
Table
2
Summary
Statistics
Mean 0.9x 6.8x 9.1x
Implied
Valuation
Manchester
Tank
Total
Revenue Adj.
EBITDA EBIT
1995 $141,729 $14,043 $15,412
Mean $117,517 $90,811 $128,060
Range
Mean $112,129
Private
Co.
Discount
@
20% $89,703
3.
DCF
Model-­‐
In
our
projections,
we
have
included
adjustments
and
investments
based
on
our
strategy.
We
felt
that
although
management
was
exporting
internationally,
there
was
not
a
large
effort
to
expand
quickly.
International
expansion
is
our
primary
value-­‐
add.
In
the
projections
we
have
added
$800,000
for
new
sales
representatives.
This
number
is
2
sales
representatives
and
1
manager
for
each
of
the
locations:
Caribbean,
New
Zealand
and
Australia,
and
South
America.
This
is
a
total
of
8
additional
sales
representatives
and
4
managers.
The
Caribbean
will
receive
one
team,
New
Zealand
and
Australia
another,
and
South
America
will
receive
two
full
teams
as
we
feel
this
is
the
largest
potential
market.
International
sales
were
only
2%
of
total
revenue.
By
year
5
we
hope
to
have
international
sales
as
20%
of
gross
revenue.
We
feel
our
marketing
strategy
will
allow
us
to
land
similar
customers
to
Sunbeam
and
Amerigas.
The
additional
of
just
1
or
2
of
these
customers
a
year
across
all
regions
will
greatly
increase
international
sales.
We
have
also
added
our
Senior
Vice
President
of
Corporate
Strategy’s
salary
of
$150,000
into
general
and
administrative
expenses.
All
domestic
sales
were
broken
down
by
product
line
based
on
the
market
share,
industry
growth,
management’s
projections
and
any
other
factors
presented
in
the
Dealbook.
Here
are
the
sales
projections
for
international
expansion
and
domestic
growth
by
product
line.
4

5. Table
3
Domestic 98%
Historical Projected
1995 1996 1997 1998 1999 2000
RV
Cylinders
14,778
15,517
16,293
17,108
17,963
18,502
Gas
Grill
31,651
36,399
40,767
44,843
48,431
52,305
Mass
Merchandising
6,239
6,738
7,209
7,570
7,948
8,346
Air
receiviers
20,163
21,776
22,864
24,008
25,208
26,468
Propane
Cylinders
34,734
38,902
42,792
46,216
48,527
50,953
Forklift
10,871
11,415
11,985
12,585
13,214
13,875
Fire
Suppressent
3,528
3,881
4,191
4,527
4,889
5,133
Chemical
Cylinders
6,567
6,895
7,240
7,602
7,982
8,381
Railcar
4,001
4,081
4,163
4,246
4,331
4,418
Water
Heaters
2,313
2,891
3,614
4,156
4,779
5,257
Other
4,049
4,130
4,213
4,297
4,383
4,471
138,894
152,625
165,332
177,157
187,655
198,109
Historical Projected
International
Sales 1995 1996 1997 1998 1999 2000
2,835
5,102
8,929
15,626
25,001
40,002
Revenue
Growth-­‐
Manchester
Tank 10% 8% 7% 6% 6%
5

6. Table
4
Growth
rate
1996 1997 1998 1999 2000
RV
Cylinders 5% 5% 5% 5% 3%
Gas
Grill 15% 12% 10% 8% 8%
Mass
Merchandising 8% 7% 5% 5% 5%
Air
receiviers 8% 5% 5% 5% 5%
Propane
Cylinders 12% 10% 8% 5% 5%
Forklift 5% 5% 5% 5% 5%
Fire
Suppressent 10% 8% 8% 8% 5%
Chemical
Cylinders 5% 5% 5% 5% 5%
Railcar 2% 2% 2% 2% 2%
Water
Heaters 25% 25% 15% 15% 10%
Other 2% 2% 2% 2% 2%
International 80% 75% 75% 60% 60%
Another
key
to
our
strategy
is
implementation
of
the
MRP
II
system.
Management
has
seen
cost
savings,
improved
efficiencies
and
improved
customer
service
by
adding
the
system
to
the
Elkhart
plant.
We
feel
that
is
the
system
is
implemented
across
the
company
we
will
see
improved
margins
and
reduced
SG&A
expenses.
We
have
assumed
the
MRP
II
system
to
be
fully
functional
by
the
end
of
year
2.
From
there
we
are
projecting
an
increase
in
the
gross
margins
and
reduced
SG&A
in
years
3-­‐5.
Here
are
the
assumptions
we
are
using
to
project
the
financials
based
on
our
strategy:
6

7. Table
5
Model
Assumptions
Historical Projected
Gross
Margin
% 20% 20% 20% 22% 24% 24%
Operating
Expenses
as
a
%
of
sales 10% 11% 11% 11% 11% 10%
Additional
Sales
reps
800
800
800
800
800
SVP
of
Corporate
Strategy
salary
150
150
150
150
150
MRP
II
System
200
200
-­‐
-­‐
-­‐
Annual
CAPEX
2,000
2,000
2,000
2,000
2,000
Federal
Income
tax
rate 35.00% 35.00% 35.00% 35.00% 35.00% 35.00%
Depreciation
as
a
%
of
sales 2.61% 2.61% 2.61% 2.61% 2.61% 2.61%
Table
6
(In
Thousands
$000)
Historical Projected
1995 1996 1997 1998 1999 2000
Domestic
Sales $
138,894 $
152,625 $
165,332 $
177,157 $
187,655 $
198,109
International
2,835
5,102
8,929
15,626
25,001
40,002
Total
Revenue
141,729
157,727
174,261
192,783
212,656
238,111
Cost
of
Goods
Sold
113,383
126,182
139,409
150,370
161,619
180,964
Gross
Margin
28,346
31,545
34,852
42,412
51,037
57,147
Operating
Expenses
14,303
16,867
18,536
20,405
22,411
24,980
Operating
Income
14,043
14,678
16,316
22,007
28,627
32,167
Other
(income)
e xpenses
Interest
1,369
4,480
4,529
4,496
4,457
4,410
Depreciation
and
Amortization
3,704
4,122
4,554
5,038
5,557
6,223
Net
Income
before
Taxes
8,970
6,076
7,233
12,473
18,613
21,535
Taxes
2,127
2,532
4,366
6,514
7,537
Net
i ncome
8,970
3,949
4,702
8,108
12,098
13,997
Depreciation
and
Amortization
3,704
4,122
4,554
5,038
5,557
6,223
Interest
1,369
4,480
4,529
4,496
4,457
4,410
EBITDA
14,043
12,551
13,785
17,641
22,112
24,630
Less:
Tax
adjustment
(3,140)
(1,382)
(1,646)
(2,838)
(4,234)
(4,899)
Less:CapEx
(2,200)
(2,200)
(2,000)
(2,000)
(2,000)
Change
i n
working
capital
Free
Cash
Flow $
10,903 $
8,969 $
9,939 $
12,804 $
15,878 $
17,731
Terminal
V alue
107,428
Free
Cash
Flow $
8,969 $
9,939 $
12,804 $
15,878 $
125,159
WACC 20%
NPV $79,742
DCF
Value
at
51% $40,668
7

8. III.
Financing
1.
Cost
of
Capital-­‐
We
are
using
a
weighted
average
cost
of
capital
of
20%.
This
is
the
cost
of
capital
for
our
financing
of
the
$43
million
purchase
price.
This
is
composed
of
$15
million
in
equity,
$21
million
on
the
revolver,
and
a
$7
million
mezzanine
loan.
The
revolver
is
at
$35
million
because
there
is
currently
$14
million
outstanding
already.
Our
financing
of
the
$43
million
purchase
price
plus
the
$14
million
in
revolver
is
the
total
financing
needed
to
be
tested
in
our
cash
flow
projections.
Table
7
WACC
Equity
15,000 26.3% 35% 9.21%
Seller
Financing
(earnout)
-­‐ 0.0% 0% 0.00%
Revolver
35,000 61.4% 10% 6.14%
Cash
flow
l oan
-­‐ 0.0% 10% 0.00%
Mezzanine
7,000.00
12.3% 15% 1.84%
Total Financing $ 57,000.00 100% WACC 17%
2.
Asset
Based
Loan-­‐
The
Company
currently
holds
a
revolver
loan
that
Manchester
Tank
can
borrow
against
the
receivables,
inventory,
and
property
plant
and
equipment.
Based
on
the
1995
balance
sheet,
we
have
calculated
that
the
loan
ceiling
for
the
revolver
is
about
$43,000,000.
The
current
revolver
is
about
$14,000,000
and
we
are
looking
to
borrow
an
additional
$21,000,000
against
the
line
of
credit.
Included
in
the
revolver
is
a
$2,000,000
cushion
for
any
CAPEX
or
working
capital
needs.
This
would
bring
the
total
revolver
to
about
$35
million.
We
are
using
a
10%
interest
rate
for
the
ABL
coming
to
$3,500,000
in
annual
interest.
Here
is
the
breakout
for
the
Asset
Based
loan:
Table
8
All numbers in $000s
Asset Based Loan (ABL)
A/R 21,145 @ 80% $ 16,916
Inventory 15,734 @ 50% 7,509
PP&E 38,044@ 50% 18,446
Total Financing $ 42,871
3.
Mezzanine
Loan-­‐
The
Mezzanine
loan
will
be
for
$7,000
at
14%
interest.
The
interest
will
be
9%
cash
and
5%
PIK
interest.
The
principal
will
begin
amortization
in
year
2
and
carry
on
for
7
years.
The
following
is
the
amortization
schedule
for
the
Mezzanine
loan:
8

9. Table
9
Loan
Amount
7,000.00
Cash
9%
PIK
Interest 5%
Term
(Years) 7
Year
1 Year
2 Year
3 Year
4 Year
5 Year
6 Year
7
Balance
7,350
7,114
6,833
6,500
6,102
5,629
Payment $1,391
1,632
1,632
1,632
1,632
1,632
1,632
Cash
630
662
640
615
585
549
507
PIK
Interest
350
368
356
342
325
305
281
Principal $0
603
636
676
722
778
844
4.
Coverage
Test-­‐
We
calculate
that
we
can
meet
2:1
coverage
ratio
all
five
years
using
this
financing
scheme.
The
following
is
our
coverage
ratio
test:
Table
10
1996 1997 1998 1999 2000
ABL 3,500 3,500 3,500 3,500 3,500
Mezz Interest 630 662 640 615 585
Mezz Principal - 603 636 676 722
$ 4,130 $ 4,765 $ 4,777 $ 4,791 $ 4,807
5
Year
Coverage
Test 1996 1997 1998 1999 2000
Free
Cash
Flow
8,969
9,939
12,804
15,878
17,731
Cashflow
available
for
P
and
I
4,485
4,970
6,402
7,939
8,865
Cashflow
used
for
P
and
I
4,130
4,765
4,777
4,791
4,807
Ratio
Covered
? Yes Yes Yes Yes Yes
IV.
Terms
and
Conditions
1. Each
party
shall
bear
its
own
costs
relating
to
the
Proposed
Transactions.
All
sales
tax
payable
as
a
result
of
the
consummation
of
the
Proposed
Transactions
shall
be
paid
by
Purchaser.
2. The
Parties
acknowledge
and
agree
that
the
existence
of
their
negotiations
relating
to
the
Proposed
Transactions,
and
the
terms
and
conditions
thereof,
are
highly
confidential
in
nature.
Accordingly,
neither
Party
shall,
without
the
express
written
permission
of
the
other
Party,
disclose
to
any
person
or
entity
(other
than
such
Party’s
legal
counsel
and/or
accountants)
any
information
regarding
the
Proposed
Transactions,
including
the
existence
9

10. of
this
letter
or
its
terms
and
conditions,
or
any
other
terms,
conditions,
or
matters
relating
thereto.
3. Purchaser
will
conduct
a
financial
and
legal
due
diligence
investigation
of
Seller’s
business.
This
investigation
may
include,
but
may
not
be
limited
to,
sales
volumes,
customer
counts,
operating
expenses,
profit
margins,
and
other
such
matters
as
Purchaser,
in
its
sole
and
absolute
discretion,
deems
necessary.
To
facilitate
this
due
diligence
investigation,
the
Seller
will
allow
Purchaser
and
its
representatives
such
reasonable
access
as
Purchased
and
its
representatives
may
require
during
normal
business
hours
to
Seller’s
facilities,
personnel,
books,
and
records.
Our
Due
Diligence
team
expects
the
process
to
take
no
longer
than
30
days.
If
our
bid
is
accepted
we
will
begin
immediately.
4. The
buyer
is
requesting
exclusivity
on
the
deal
through
Due
Diligence
5. The
Buyer
will
have
control
of
all
documents
through
the
bid
process.
6. Management
will
work
with
the
investor
group
to
help
transition
the
business
as
the
brothers
V.
Negotiations
Must
win
Nice
to
win
Controlling
Stake
of
51%
Exclusivity
to
the
deal
Control
of
the
documentation
60
days
to
complete
DD
First
right
to
buy
the
49%
VI.
Communications
Plan/
Day
One
Set
of
Actions
1. Communication
with
Senior
Management-­‐
Our
investor
group
will
meet
with
all
senior
management
members
to
discuss
the
outcome
of
the
transaction
and
how
it
affects
them
Our
investor
group
wants
to
relay
the
message
that
although
we
are
making
changes
to
the
strategy
of
the
Company,
we
want
to
work
with
all
senior
management
members.
We
hope
to
keep
them
as
part
of
the
team
due
to
their
extensive
experience
and
track
record
in
helping
to
get
Manchester
Tank
to
level
it
has
reached.
We
also
want
to
address
the
role
of
the
SVP
of
Corporate
Strategy.
We
want
to
relay
that
he
is
there
to
spearhead
the
new
international
growth
effort
along
with
implementation
of
the
MRP
system.
He
will
be
senior
to
the
other
management,
but
is
looking
to
work
with
current
management.
In
2-­‐3
years
as
the
brothers
are
ready
to
move
on
he
will
be
trained
and
ready
for
the
role
of
CEO.
Getting
senior
management
comfortable
working
with
the
new
SVP
will
be
critical.
2. Communication
to
the
employees-­‐
We
want
to
inform
all
employees
that
although
there
are
new
owners
with
the
brothers,
corporate
culture
will
not
change.
All
employees
will
be
presented
with
the
Company’s
new
strategy
for
growth
and
improvement.
We
wish
to
align
the
entire
company
with
our
vision
so
that
everyone
is
excited
and
comfortable
with
the
transition.
3. Communications
with
the
Bank-­‐
As
noted
in
our
financing
section,
we
are
looking
to
draw
additional
cash
from
the
line
of
credit.
We
will
still
be
far
below
the
line
of
credit
limit
based
on
the
above
calculations.
10

11. 4. Communications
with
customer/
suppliers-­‐
We
do
not
see
a
need
to
inform
the
customers
and
suppliers
of
the
transaction
initially.
As
the
brothers
are
ready
to
transition
out
of
the
business,
then
we
can
inform
our
customers
that
there
will
be
a
transition
in
management.
The
brothers
will
help
transition
those
relationships
to
the
new
SVP.
VI.
Due
Diligence
1. Detailed
P&L
statement
showing
the
chart
of
accounts
for
each
income
and
expense
category.
We
would
like
to
see
this
report
for
the
past
3
years.
Our
due
diligence
team
will
also
need
access
to
the
company’s
accounting
software
to
get
an
understanding
of
how
transactions
are
recorded
and
what
controls
are
currently
in
place
2. Visit
each
manufacturing
and
distribution
facility
a. We
want
to
get
an
understanding
of
how
operations
are
done
on
a
day
to
day
basis.
Because
we
are
in
the
same
field,
we
want
to
see
if
there
is
any
room
for
operation
efficiency
improvement.
b. We
want
access
to
the
company’s
time
entry
system
to
measure
employee
production.
The
reports
we
will
specifically
look
at
are
job
costing
reports
showing
employee
hours
spent
on
a
particular
product
and
their
billing
rates.
We
also
want
a
bill
of
materials
showing
what
raw
materials
must
be
added
to
each
finished
good.
c. Detailed
overhead
report
showing
how
the
company
allocates
overhead
expenses
to
finished
goods.
d. Customer
complaint
reports
to
see
if
any
customers
are
unhappy
with
the
product’s
quality.
3. Interviews
with
all
senior
management
members
a. We
want
to
see
payroll
reports
detailing
senior
management
salary,
bonus,
and
Benefits.
b. All
performance
reviews
for
senior
management
from
peers
and
other
employees
c. Questions
we
wish
to
specifically
address
are:
What
are
your
intentions
for
the
company’s
future?
Are
you
interested
in
working
with
our
investor
group?
How
long
do
you
plan
to
stay
with
the
company?
4. Legal
Due
Diligence
a. Discuss
the
company’s
current
law
firm
the
status
out
any
outstanding
lawsuits.
b. We
want
to
see
certification
showing
that
every
manufacturing
facility
is
environmentally
compliant
for
the
past
three
years.
c. Discussions
with
the
human
resource
department
to
look
for
any
employee
harassment
claims.
5. Inventory
and
accounts
receivable
valuation
a. For
accounts
receivable
valuation
we
would
like
to
see
all
subsequent
cash
receipts
received
after
yearend
to
confirm
that
the
customers
are
paying
in
a
timely
manner.
b. To
properly
value
the
inventory
we
will
sample
the
raw
materials
and
examine
the
most
recent
purchases
to
ensure
that
the
inventory
is
valued
at
LCM.
As
stated
above
by
checking
the
time
and
rate
employees
are
charging
to
each
finished
good.
We
will
also
look
at
the
overhead
expense
schedule
to
ensure
the
costs
are
being
properly
allocated
based
on
labor
hours.
11

12.
12