Preliminary Diligence
Preliminary diligence for industrial and mission-critical services deals
What an acquirer must establish before an LOI on a fire and life safety, building automation, testing and inspection, metal fabrication, equipment maintenance or specialty distribution business: certifications, technicians, backlog, concentration, safety and capex. BizNexus matches you with a diligence provider sized to the deal.
Preliminary diligence on an industrial services or manufacturing business must establish which certifications the revenue depends on, how much of it recurs under code-mandated inspection cycles, whether technicians who hold the credentials will stay, how firm the backlog is, and what safety, environmental and capex exposure sits under the earnings. BizNexus matches you with a provider sized to the deal.
Before the LOI
What to establish before the LOI
Five areas a preliminary review covers in industrial manufacturing and mission-critical services, and the specific questions inside each. Answer these before the LOI and the quality of earnings work starts with a scope instead of a blank page.
Certifications and code-driven recurring revenue
- Every certification, accreditation and listing the company sells under, and whether it is held by the entity or by an individual
- Revenue tied to code-mandated inspection, testing and maintenance cycles versus discretionary project work
- Inspection and service agreements: term, renewal, pricing and whether they are assignable on a change of control
- Authorized dealer, distributor and manufacturer service agreements, with change-of-control and exclusivity clauses
- Audit history with accrediting bodies and any open findings
Technicians and credentials
- Credentialed technicians by name, certification, expiry date and tenure
- Share of revenue that only credentialed staff can perform, and the depth behind each credential
- Wage rates against the local market, overtime load and open requisitions
- Non-compete and non-solicit coverage on the people who own the customer relationships
- Union agreements, expiry dates and pension withdrawal liability where they apply
Backlog and revenue quality
- Backlog by project with contract value, percent complete, billings to date and expected margin
- Percentage-of-completion accounting: over-billings, under-billings and how estimates have moved
- Bid-to-win history and gross margin on completed projects against the margin at bid
- Warranty reserves, callback rates and open claims
- Retainage outstanding and the collection history on it
Customer and end-market concentration
- Top ten customers by revenue and margin over three years, with the contract or purchase order that supports each
- Exposure to a single end market, plant or general contractor
- Pricing power: pass-through of material and labor cost increases over the last two years
- Customer contracts that require re-approval or vendor requalification after an ownership change
- Spec position: whether the company's products or services are written into customer specifications
Safety, environmental and capex
- OSHA logs, recordable incident rates and the experience modification rate for five years
- Environmental permits, hazardous material handling, and any site assessment findings on owned or leased property
- Equipment register with age, condition, calibration status and replacement cost
- Maintenance capex versus depreciation for three years, and deferred items
- Working capital seasonality: inventory, work in process and receivable days by month
- Product liability and completed operations coverage, with loss runs
Red Flags
Red flags in this sector
None of these ends a deal on its own. Each one changes the price, the structure or the scope of the diligence that follows.
- The certification the company sells under is held by one person who is retiring at close
- Backlog counted at contract value with no margin estimate and no percent complete
- Manufacturer or dealer agreements with change-of-control clauses nobody has read
- A single plant or general contractor above a third of revenue, on purchase orders rather than a contract
- Recordable incident rate or experience modifier trending up, or an open regulatory action
- Equipment fully depreciated and out of calibration, with add-backs that assume no replacement
Data Room
First data room request
The documents to ask for first. A seller who can produce these inside a week is organized; one who cannot has told you something too.
- Monthly financial statements for the trailing thirty-six months, with the work-in-process schedule
- Backlog report by project: contract value, billings, costs to date and estimated cost to complete
- Revenue by customer and by service line for three years, tagged recurring inspection, service or project
- Certification, accreditation and listing documents, with the named holder of each
- Technician census: name, credentials, expiry dates, tenure and pay basis
- Manufacturer, dealer and distribution agreements, including change-of-control terms
- Top customer contracts, master service agreements and open purchase orders
- Safety records: OSHA logs, incident rates, experience modifier and open claims
- Environmental permits, inspection reports and any site assessments
- Equipment register with calibration records and a three-year capex history
Where the Buyers Are
Acquirer demand in industrial manufacturing and mission-critical services
Active acquirer demand in industrial manufacturing and mission-critical services, pooled and anonymized across current mandates, is on the industrial manufacturing and mission-critical services buyers hub.
Sourcing in This Sector
Diligence starts with a target
OmniSource sources industrial manufacturing and mission-critical services deals across Off-Market, Pre-Market and On-Market channels and matches them against an active mandate, so the targets that reach preliminary diligence already fit the thesis they are being checked against.
FAQ
Industrial manufacturing and mission-critical services diligence, answered
- What should I check before buying a fire and life safety company?
- Start with the inspection base: how many systems are under a recurring test-and-inspect agreement, what those agreements say about term and assignment, and how much revenue comes from code-required work versus installation. Then confirm who holds the licenses and certifications the company operates under and whether they transfer. A preliminary review also reads the backlog for margin and the safety record for exposure.
- How do I verify recurring revenue in a testing, inspection or maintenance business?
- Tie the recurring figure to the agreements. Each inspection or service contract should show a term, a renewal mechanism, a price and a customer that is still billing. Then reconcile that list to three years of revenue by customer. Code-mandated inspection revenue is durable because the customer has to buy it from someone. Preliminary diligence answers whether they have to buy it from this company after the owner leaves.
- How should backlog be valued in an industrial services acquisition?
- Backlog is only worth what it will earn. A preliminary review asks for backlog by project with contract value, billings and costs to date, and the estimated cost to complete, then compares margin at bid to margin on recently closed jobs. Over-billings, under-billings and warranty exposure all sit inside that schedule. A large backlog with thin or unknown margin is a working capital commitment, not an asset.
- What is a quality of earnings report and do I need one for a $2M EBITDA deal?
- A quality of earnings report is an independent review of whether reported earnings are real, recurring and correctly stated: revenue recognition, percentage-of-completion estimates, add-backs, working capital and one-time items. At $2 million of EBITDA most lenders expect one, and in a project business the percentage-of-completion work alone usually justifies it. Preliminary diligence sets the scope so the QoE goes where the risk is.
- Who pays for preliminary diligence?
- The acquirer engages and pays the diligence provider directly, on terms the two of them agree. BizNexus makes the introduction and does not sit inside the engagement. Scope and price follow the deal: a preliminary review on a lower middle market industrial services business is scoped to the questions above, not priced as a full-scope engagement on a larger transaction.
- What does the BizNexus preliminary diligence network do, and what does it not do?
- BizNexus maintains a network of diligence providers, including quality of earnings firms, valuation professionals and market analysts, and matches an acquirer with one sized to the deal. BizNexus does not perform the diligence, issue findings, negotiate or structure the transaction, hold funds, or appear on the engagement letter or closing documents. The provider engages and delivers directly with you.
Book a diligence consultation
Tell us the target, the stage and the size, and we will match you with a diligence provider from the network sized to the deal. The provider engages and delivers directly with you.