Case Study: Uncovering Hidden Risks in a Specialty Chemical Acquisition.
Effective due diligence is paramount in any acquisition. In a prior engagement, Fisher Specialty Advising founder and president, Frank Fisher, was tasked to review a potential acquisition of a specialty chemical manufacturer. Although the target’s financials initially appeared attractive, a comprehensive assessment uncovered significant hidden risks.
The Challenge
The target company presented itself as a high-growth, profitable business with strong customer relationships and a robust supply chain. Our client was concerned about the validity of these claims and the true value of the acquisition.
The Process
Our due diligence process involved a deep dive into several key areas:
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Sales & Customer Relationships: We analyzed customer contracts, revenue concentration, and the nature of customer relationships. We discovered that the company’s sales were heavily dependent on long-standing personal relationships between the sales team and key customers, rather than a demonstrable competitive advantage in product quality or pricing. This raised concerns about customer retention post-acquisition.
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Supply Chain Analysis: We assessed the company’s raw material sourcing, contract terms, and potential supply chain vulnerabilities. Our investigation revealed a significant reliance on single-source suppliers for critical raw materials, coupled with a lack of firm, long-term supply contracts. This exposed the company to potential price fluctuations and supply disruptions.
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Operational Efficiency: We evaluated the company’s manufacturing processes, equipment, and back-office operations. We identified outdated manufacturing equipment that was completely unusable for current operations.
Key insights and results.
Our due diligence revealed significant discrepancies between the target company's perceived value and its actual condition. The dependence on relationship-based sales, the single-source supply chain vulnerabilities, and the operational inefficiencies represented substantial risks. By quantifying the potential financial impact of these issues, we demonstrated to our client that the target company’s true value was considerably lower than the initial asking price. This allowed our client to renegotiate the deal, resulting in a 15% reduction in the purchase price, saving them a substantial sum and mitigating the risk of overpaying for a flawed acquisition.
