Someday there's going to be a person in your shop you didn't hire and can't send home.
Sandee KaplanYoung, sharp, a golf shirt with somebody else's logo on it, a laptop they never set down, and not one hour of their life spent hanging parts or chasing a bad batch. They're not there to admire your line. They're there to open every drawer you own and find the one thing you were hoping nobody would. This is due diligence, and last month I promised it was coming, because you can do everything right on the money side and still watch a buyer reprice the whole deal over what falls out of those drawers. So pour the fancy coffee! There are more drawers than you think, and I want you to know what's in each one before a stranger does.
It does something to your head to be the one whose drawers get opened. You spend 25 years as the person who knows where every bolt and every decision lives, and then one week you're standing in your own shop watching a kid half your age photograph your electrical panel and frown at a permit older than he is. You want to tell him the story, because there's always a story. He doesn't want the story. He wants the document.
Whether the Number is Telling the Truth
They start where you'd expect, in the books, and it's less about the number than about whether the number is telling the truth. Last month's article was about how a buyer builds your value. Due diligence is where they check your work. They'll lay your tax returns next to your bank statements next to your P&L, and they'll want all three to tell the same story. When they don't, and for plenty of shops they don't, that's the first skeleton. The personal spending we talked about that never got documented. The "revenue" that's really one customer who hasn't paid since 2022 and never will, sitting in your receivables like a houseplant nobody waters. And the sneaky one that catches good people: sales tax- whether you charged it right, sent it in right, and kept the resale certificates that say you didn't have to. A sales tax mess is invisible on your P&L and very visible to a buyer's accountant, and it's the kind of bill that follows the business right past the closing table.
They'll test your backlog too, because a firm purchase order is money in the bank while a verbal "we'll keep sending you work" is only a wish, and a buyer knows the difference even when we'd rather they didn't.
Then they go to work untangling you from your own business, and there's usually more knitting there than you'd like to admit. If you own the building yourself and rent it to your own company, a buyer is going to reset that rent to what the market really charges, and if you've been paying yourself a sweetheart number in either direction, your earnings move the moment they do. Same with the relatives on the payroll. The nephew who shows up when he feels like it and the spouse drawing a check to keep books in a shoebox are add-backs on a good day, but in diligence they become questions, and every question adds time on the clock and doubt in the room.
Checking Whether Your Customers Are Loyal
Somewhere in that same stretch, they're going to want to call your customers, and that week is its own special kind of long. You'll sit by the phone praying your biggest account doesn't cheerfully mention to a stranger that they've been kicking around the idea of dual sourcing, or that the only reason they've stayed all these years is the relationship they have with you. A buyer isn't only checking that your customers are real. They're checking whether your customers are loyal to the shop or loyal to you, because one of those travels with the sale and the other one walks out the door on your last day.
Then they look upstream, at the people who supply you. If every pound of powder comes from one source, or your good pricing rests on a handshake with a rep who's three months from retirement, that's a risk with your name on it. Rebates and volume deals built on your relationship don't always survive new ownership, and a buyer counting on your margins wants to know whether your costs jump the day your handshake walks out with you.
The good news is that if you're selling the business and not the real estate, you're not handing anyone the deed to fifty years of somebody's contamination.
Then the people drawer, and here's where the buyer and I were looking for two different things. Their team checks whether your crew is clean on paper. They check whether anyone who should be an employee was called a 1099 contractor to dodge payroll tax, which does happen, though not as often as the horror stories claim. Whether your overtime and meal breaks add up, because in California, a wage-and-hour tangle can cost more than anything buried in your dirt. And they'll pull your workers' comp history and read the experience mod like a credit score, because a clean one tells them your floor is safe and a bad one tells them the premiums will keep bleeding. I've walked into shops that seem to open a fresh claim every week, and I promise you a buyer reads that history like a warning label.
The Things a Buyer Never Measures
But I'll be straight with you. That drawer never scared me, because I had a good team, and a good team tends to keep its own house clean. What scared me was the thing a buyer never measures. My people found out I was leaving about 72 hours before I walked out the door for the last time. I'd known it myself for only about 48 hours longer than they did, but that's another long story for another day. I told them on the floor, with the line running and the machinery humming the way it always did, and for one long second in that noisy shop you could have heard a pin drop. What kept me up at night was never my comp mod or my paperwork. It was whether the person signing the check would honor these people, work alongside them, keep what we'd built together, or roll over the whole crew and call it synergy. That's the part of selling that never lands on a spreadsheet, and it's the part I cared about most.
The next drawer is all paper, and this is where the surprises turn almost cartoonish, because they've sat in a folder for years doing nothing until the day they do everything. Liens, for one. That beautiful oven you're so proud of may still have a lender's name attached to it from a loan you half-forgot, and you have to clear every one of those before you can hand it over free and clear. Lawsuits and old judgments, the slip-and-fall, the customer who still swears you ruined a batch in 2021. And here's a tail that hangs on us and not on the machine shop down the street. We put a finish on somebody else's product and send it out into the world, so if a coating fails in the field two years after it shipped, a claim can come looking, and a buyer wants to know whether it lands on them. Your warranty language, your indemnity terms, and your claims history all get read closely, because nobody wants to buy a lawsuit that hasn't happened yet. There's the corporate housekeeping too, whether your entity paperwork really says who owns what, and whether there's a silent partner or a handshake or, this being real life, an ex-spouse with a community-property claim nobody ever wrote down. And the assignability question hides in every contract you've got. Your customer purchase orders, your supplier deals, and your lease all carry language about what happens when the business changes hands. A contract that doesn't travel is a customer or a building that doesn't come with the sale, and a buyer sees that empty chair the second they walk in.
That lease deserves its own word, because it’s a good share of your rent. More than half the manufacturing space in this country is leased, not owned, and out our way that number's worse, since a slab of industrial dirt here costs what a whole building costs in other states. The good news is that if you're selling the business and not the real estate, you're not handing anyone the deed to fifty years of somebody's contamination. The catch is that your lease just became one of the most important documents in the deal, because a buyer isn't buying much if the building doesn't come with it. They'll want to know whether the lease can be assigned at all, whether the landlord can bless the new owner and reset the rent to today's market while they're at it, and how many years are left before the whole thing's back up for grabs. You can lose real money on a building you never owned.
Deferred Maintenance Isn't Hidden, Just Expensive
While they're walking the floor, they're pricing the shop you have, not the one in your memory. The oven you've kept alive with baling wire and stern language, the line that needs a rebuild, the roof, the compressor- all of it lands on a list of money the buyer has to spend after they own the place, and every dollar on that list is a dollar they'd rather take off your price today. Deferred maintenance isn't hidden, just expensive, and in diligence it stops being your problem to postpone and becomes their reason to pay less.
Then there's the drawer that's ours alone, the one a buyer from outside finishing doesn't even know to open until someone smart on their team tells them to. Your approvals: NADCAP, AS-9100, ISO-9001, AAMA 2605/2604, and any or every other important certification your company has attained. The certifications and customer qualifications that let you coat the parts you coat. If you sit on an OEM's approved line, or hold a customer-specific chemistry approval, that thin stack of paper might be worth more than your whole plant, and what keeps a buyer up at night is whether it survives the sale or whether they have to requalify from scratch, which can eat the better part of a year and send your best customers shopping while they wait. They'll want your quality record too, the rework and the scrap and the complaints you'd rather forget. And because we run powder, someone on their side will ask about combustible dust, about whether your booths and housekeeping would survive a hard look from a fire marshal or an insurer, because powder in the air is a real hazard and a real line on their risk sheet.
And remember, this runs both ways, so open a few of their drawers too. Ask where the money's coming from, whether it's their cash or a bank's or a promise that hasn't cleared, and what became of the last shop they bought.
And then they head down to the basement, to the drawer nobody outside our world has to open, and this is the one that's ours alone to dread. They hire a historian for your dirt, a Phase I that reads your parcel's whole life story back to the orchard days, because contamination attaches to the ground and then to whoever owns the ground. It doesn't care that the mess belonged to the plating shop three tenants back. They'll match your air permit to the shop you run now, not the one you ran four ovens ago. They'll trace what leaves your washer for the drain and see whether the sanitation district keeps a folder with your name on it and a few strongly worded love letters inside. And if the historian's eyebrow goes up, they order a Phase II, which is the one where real people show up and drill real holes in your actual floor, and the afternoon the drilling starts is the afternoon nobody's talking about your purchase price anymore. Then somebody wanders out back and finds the drums under the blue tarp you've been meaning to deal with since the Obama administration. They always find the tarp. I know they do, because I had one too.
A Buyer's Job is to Price Risk
An M&A advisor I know, someone who lives inside these deals, once boiled it down for me: a buyer's job is to price risk. That's the whole tour, right there. Every dark drawer is a risk, and every risk is a number they subtract from what they hand you.
Here's the mercy in all of it. Due diligence doesn't create your skeletons. It turns on the lights in rooms you've been keeping dark, and every one of them was in there whether a buyer looked or not. I know that was a lot. But you can absolutely do this. The rest is a handful of boring things, handled a little at a time, on your own calendar, long before anyone ever makes you an offer, which is how every owner who sold clean got there. So the whole game comes down to who opens the drawers first, and it should be you. Start with the simple moves I left you with last month, because those were the front porch of this very house. Become your own stranger a year or two before you ever think about selling. Reconcile your own books until the three numbers agree. Put your people on the right side of the line.
Get the resale certificates in the file, clear the liens, chase the dead receivable, and price the maintenance you keep deferring. Confirm your approvals will travel before a buyer thinks to ask. Pull your own Phase I on a slow Tuesday when nobody's offer is on the table. Deal with the tarp, because I promise you it's easier to move a drum on your own schedule than to explain it on theirs. None of it has to happen at once, and none of it today. Every drawer you open yourself is a skeleton that can't jump out and cut your price when it's the buyer holding the handle. If you allot yourself two weeks to finish each small task, by the end of the year you will have checked 26 things off that list, and that is significant forward movement.
And remember, this runs both ways, so open a few of their drawers too. Ask where the money's coming from, whether it's their cash or a bank's or a promise that hasn't cleared, and what became of the last shop they bought. Ask what happens to your people. They spend these weeks deciding whether to trust your numbers, and you get the same weeks to weigh their check and their word. The seller who remembers that walks into the room standing a good deal taller.
A Good Deal Team Pays For Itself
I'm not a lawyer, an accountant, or an environmental engineer, so when this gets real, hire the ones who are, because a good deal team pays for itself several times over. But none of this waits on their permission. Most of it is boring, most of it is cheap next to what it costs later, and all of it is yours to start tomorrow morning.
There's one skeleton I've been stepping around this whole tour, because it earns its own conversation, and it's the one that ran my life for twenty-five years. Not what's in your drawers, but what's in your head, and what happens to a buyer's number when the shop can't run for a single week without you standing in the middle of it. That's where we're going next month, in a piece I'm calling "Working Your Way Out of the Middle," where I'll own up to how long it took me to admit I'd built myself a very good job instead of a business I could walk away from. Bring the coffee.
Sandee Kaplan is an Operations Leader and a former owner of a manufacturing and finishing business. Visit https://k2operations.com or email her at Sandee@K2Operations.com.
