Seller’s Operations: Plant And Equipment
August 29, 2007
Your seller may have the best of relations with suppliers and customers and the world’s most dedicated workforce, but it’s not going to matter if your plant can’t turn out the products your customers want to buy.
The first and most obvious inquiry relates to the age of the equipment. It may be going along fine now, but if the bulk of the equipment will have to be replaced in a year or two, a cash flow problem may arise. Most sellers who anticipate they’re going to sell the business tend to neglect maintenance and ignore needed capital expenditures; it makes the books look better. As for major pieces of equipment, such as the milling machines at Houston Sash & Door, find out how old the equipment is. Then write down the names of the manufacturers and the model and serial numbers of each piece of equipment and call the manufacturers. They will have a record of when each model was built and sold. (After all, your seller didn’t necessarily buy new equipment.) Ask about the normal life span of each piece of equipment. If you’re calling about machinery engaged in production, ask about the capacity of each item.
The seller may have a lower level of sales than you think you can achieve with some creative marketing, but you won’t be able to sell more than the machines can produce. You should also ask if the manufacturer has produced a newer line of better and faster machines; your competitors may already own these machines. Here’s what you don’t want to hear from a manufacturer: “The Model 150 milling machine? Heck, we haven’t sold one of those in more than 20 years. We didn’t even know any were still being used. You’re lucky it’s still running because there aren’t parts available for it anymore!” If you find yourself dealing with some really ancient equipment, you may even have a potential problem with the Occupational Safety and Health Administration (OSHA), a federal agency charged with patrolling compliance with industry safety and health codes. Just to be on the safe side, you might have your attorney check with OSHA to confirm that using the equipment doesn’t violate some federal safety or health standard. It should go without saying that if your seller has already been visited by an OSHA inspector, you should have all the details regarding that inspection.
Let’s reiterate something we discussed a while back regarding loan agreements. Just because your seller owns these assets doesn’t mean he or she can sell them. The assets may serve as collateral for a bank loan. The same holds true if the equipment has been leased. The equipment lease may not be assignable.
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