Contributed by Marc Datelle is the President and CEO of Anduro Manufacturing.

Due diligence: It’s what you do before investing in a company to ensure the deal is right, and that there are no hidden problems that will emerge once you’ve committed. But two lawyers, a mortgage broker, two investment advisors and a handful of CPAs aside, more than a year after closing our deal we were battling a perfect storm of broken promises, unfulfilled commitments and unhappy customers— and absorbing the associated costs amounting to more than our original investment.

How could this happen?

Our family had just sold a business and came across a ground-floor opportunity in the packing industry. The opportunity involved a lone BOPP/PP bag manufacturer in Central America, a tariff-free trade zone, and was close enough to the U.S. to beat typical delivery times of competitors’ bags by weeks. The facility was owned by an affable American with substantial experience in the packing industry. He was eager to capitalize on the producers’ growing appetite for the bags, but was woefully short of the cash needed to accommodate their requests.

Our financial advisors identified an amount that would resolve the cash flow needed to fulfill the needs of the company and its seemingly modest amount of debt, an amount equal to a 50-percent stake in the company. The deal was closed and we settled in over our five-year growth plan.

And then the dominoes began to tumble. Our initial surprise was the arrival of a large amount of raw material for a client order that had not been properly contracted and did not pan out. Then a previously unrevealed debt was found. Other issues soon came up regarding product quality, an inconsistency we realized only after we became involved with the company.

So what now?

We provided the money to cover the most pressing debts and improved operations in exchange for a greater stake in the company and more control. We implemented a facility management system and upgraded the manufacturing hardware. We negotiated better terms with our raw materials suppliers, financed some receivables for operating cash and restructured our pricing model to improve margins. Perhaps most importantly, we brought in the sales and customer service people who had performed so admirably for us in our previous businesses, and changed our model to selling based on a total value proposition, as opposed to the lowest price.

From 30,000 feet
No matter the depth of due diligence, there is still a great deal of “gut” in a decision to buy a company. But “gut” feelings beg for regulation. We should have spent more time examining the character of the people we were getting into business with than in statistical analysis. We could have contacted more clients, suppliers and other business associates, as well as more people who knew the previous owner personally. There were so many things that were hidden far below the surface, and when you are dealing with a situation that involves any level of trust, there is always margin for error.