Ever hear “I sure wish I had known ___” from a fellow marketer shortly after his last acquisition? Because acquisitions are an emotionally charged activity, with the excitement of increased volume often overpowering good sense, be especially alert for red flags before you buy. Think of the due diligence process a little like dating – use the time to explore whether you really should be married, not just charge forward to the goal. Here are some good ones to watch out for:

1) “Revised” P&L data – During initial talks, a seller’s summary P&L’s are fine. But the seller may be leaving out legitimate costs. By due diligence, insist on unedited internal financial statements, even though they will likely include expenses you won’t have (the current owner’s kid’s salaries, his wife’s vehicle and insurance, etc.).   To be fair, ask the seller to provide you with a list of unnecessary or non-business related expenses for pricing purposes.

2) Unrealistically Low Maintenance and Repairs. At Meridian, we define low as less than one-half cent per gallon. Some sellers defer repairs and maintenance. Although this

boosts EBITDA temporarily, it can result in unforeseen repair bills for an unsuspecting buyer. You know your own repair costs. If the seller’s seem low, start asking questions.

3) Hidden Potential Bad Accounts – Most purchasers know to use an escrow for potentially uncollectible receivables, but may neglect review of all “significant” account credit files. Don’t let a good receivables aging fool you. Have a competent credit person analyze major accounts.

4) Inventory surprises – Many a buyer has been faced with discovering unidentifiable drums in the back of old warehouses! Verify exactly what is on site by the time of the transition. Refuse obsolete inventory, and require the seller remove any unwanted items within 24 hours.

5) Non-disclosed tanks in the field – There are times when acknowledging ownership of those tanks and ownership transfer is advantageous to customer retention. If so, understand tank condition through inspection if feasible. If you don’t need those tanks for customer retention, and you are acquiring through a stock purchase, specifically exclude them from purchase. (Selling company writes-off and/or gifts to customers.) Have a competent petroleum attorney draft language that will protect you from liability.

6) Significant new profits or lower costs needed to justify price  – No matter what a seller thinks his business is worth, never pay for what you bring to the table in lower fuel costs or operational proficiency. The only time you should pay a premium over current profit value is to keep out a potential competitor. If that competitor could wreak havoc on your own company’s profits if you allow them into your marketplace, the premium becomes very justified!

Stay alert to these common red flags. Thorough due diligence (much more than just the big ones mentioned here!) will minimize your chance of painful surprises. You’ll be able to brag about your acquisition, instead of lamenting about the unpleasant surprises.

PetroAnswers Avoid Lurking Dangers in Next Acquisition