In a company sale transaction, the financial figures are reviewed under a magnifying glass. The industrial asset base —the production equipment, the production lines, the fleet, the technical installations— receives far less attention. And it is precisely there that the risks the balance sheet does not show are hidden: machines that no longer exist, maintenance postponed for years, equipment that fails to comply with current regulations.
What is industrial due diligence?
Industrial due diligence is the independent technical review of a target company’s productive asset base before closing a transaction: it verifies which assets actually exist, what condition they are in and how much they are worth. It is carried out by a valuation team independent of both buyer and seller, and it complements —it does not replace— financial and legal due diligence, which work on financial statements and contracts, not on the machines.
In our practice, the trigger is almost always the same: in a capital-intensive business, the asset base carries significant weight in the price, and the buyer has no way of checking the fixed-asset register against the reality of the plant without an independent inspection.
What exactly does a technical due diligence of industrial assets review?
A well-designed technical due diligence covers, as a minimum, five fronts. Each answers a specific question the buyer needs to close before signing.
Does the physical inventory match the accounting records?
The starting point is to reconcile the fixed-asset register with what is actually on site, line by line. In our practice it is common to find two symmetrical deviations: assets still on the balance sheet that no longer exist —sold, scrapped or cannibalised for spare parts— and fully operational assets that were never recorded. The output of this phase is a verified inventory: the first defensible figure of the transaction.
What condition is the equipment in and how has it been maintained?
Accounting age says nothing about actual condition. A fully depreciated machine may run for another ten years; a recently purchased one may be at the end of its useful life through misuse. The inspection assesses the technical condition and residual useful life of each relevant asset, and the analysis of the maintenance history —work orders, downtime, CMMS records where available— reveals whether the asset base has been cared for or squeezed. This is where deferred CAPEX comes from: the investment in renewal and maintenance the seller has been postponing and the buyer will inherit after closing.
Is there obsolescence the balance sheet does not capture?
Obsolescence takes three forms. Physical obsolescence is accumulated wear. Functional obsolescence appears when equipment still works but no longer competes: uncompetitive energy consumption, discontinued spare parts, end of manufacturer support. Economic or external obsolescence comes from outside: regulatory, demand or technology shifts that reduce the asset’s utility. Accounting depreciation distinguishes none of the three — two machines with an identical net book value can have radically different market values.
Do the facilities comply with current regulations?
The review covers the statutory inspections of technical installations, operating licences and the applicable environmental and industrial-safety requirements. A non-compliance detected before signing is a quantifiable remediation cost; detected afterwards, it is a production-stoppage risk that already belongs to the buyer. This front also includes pure operational risk: dependence on a critical machine with no spare part and no redundancy.
How does market value relate to book value?
Net book value is a convention —historical cost less depreciation— and can sit far above or far below market value. Due diligence closes the loop by estimating the market value of each asset under recognised standards: the RICS Red Book, which incorporates the International Valuation Standards (IVS) of the IVSC. That valuation is what makes it possible to discuss the price with figures, not impressions.
Where does it fit in the sale process?
In a typical M&A process, technical due diligence is carried out in the confirmatory phase: after the indicative offer and the letter of intent, in parallel with financial, legal and tax due diligence, and before the sale and purchase agreement is signed. This is the window in which the buyer has access to the data room and to the plant, and in which findings can still be carried into the negotiation.
There is also a sell-side variant. In a vendor due diligence it is the seller who commissions the review before going to market, to anticipate findings, put the inventory in order and prevent a technical surprise from eroding the price mid-process.
What deliverables does it produce?
The result is not an opinion: it is a set of documents the negotiating team can use as they stand.
- Verified, reconciled inventory, with the differences between plant and balance sheet identified one by one.
- Per-asset risk matrix: condition, criticality, regulatory compliance and operational dependencies.
- Recommended CAPEX plan, quantifying the deferred investment and sequencing it over time.
- Per-asset valuation at market value or fair value, depending on the purpose.
- Quantified executive summary for the investment committee and the financing bank.
How does it affect the price and the warranties in the SPA?
In standard M&A practice, technical findings translate into three negotiating levers. The first is the price adjustment: a quantified finding —for example, deferred CAPEX estimated at EUR 800,000— is a direct argument for revisiting the offer. The second is the seller’s warranties: specific representations on the condition, ownership or regulatory compliance of the assets, which allocate the risk if the finding materialises. The third is pre-closing actions: remediations the seller undertakes before signing. Which lever is used in each case is for the parties and their legal advisers to decide; what due diligence contributes is the quantified basis without which none of the three works.
It is worth saying plainly: industrial due diligence does not “find problems” to sink the transaction. It provides defensible data to negotiate on an objective basis —and so that the investment committee and the financing bank know exactly what is being bought. An asset register carrying a material share of non-existent assets is not a technical nuance: it is price paid for nothing.
How does it differ from financial due diligence?
Financial due diligence examines the financial statements: quality of earnings, net debt, working capital. Its raw material is the accounting and its typical profile, the auditor’s. Technical due diligence examines the physical assets: its raw material is the on-site inspection and its profile, that of a valuer with industrial judgement. They do not compete — they feed each other. The normalised CAPEX estimated by the technical review corrects the projections in the financial model, and the verified inventory corrects the balance sheet the financial review works on. When both tell the same story, the buyer signs with eyes open.
And after closing? Purchase price allocation
Once the transaction has closed, accounting requires the price paid to be allocated across the acquired assets —the purchase price allocation under IFRS 3—. That allocation needs the fair value of each asset, one by one. The valuation carried out during due diligence is the basis of that allocation, ready for the auditor: the same fieldwork serves twice.
How does Capital Appraisal approach it?
Our industrial due diligence service combines field inspection —with structured digital capture— and documentary analysis, and delivers a per-asset risk matrix, a recommended CAPEX plan and the fair value valuation, backed by our industrial asset valuation practice. All under the RICS Red Book and designed for an M&A or Private Equity transaction in which every figure will have to stand up before third parties.
The balance sheet states what the company believes it owns. Industrial due diligence states what is there. Between the two, a good part of the price is decided.