All That Glitters Is Not Gold – Due Diligence Can Define The True Value
A few years ago I conducted what might be the world’s cheapest, fastest and most cost effective due diligence study ever done. This study took one hour and cost the client about $500.
I was approached by two new members of a well-recognized financial institution. They were assigned to evaluate opportunities to capture low cost natural gas. They had discovered an ammonia plant for sale in an intensely agricultural region in the Midwest-US. Considering feedstock cost, proximity to market and asking price for the plant, they thought this was a gold mine.
Their superiors had some concern about the enormous enthusiasm of these new employees and asked them to evaluate the condition of the asset to determine if it would perform at reasonable rates with acceptable mechanical availability. That is when they reached out to me. A call was scheduled and they explained the situation and “golden” opportunity. They we indeed fired up about this plant.
The conversation proceeded as follows:
Me: Is the plant running?
Them: No
Me: How long has it been down?
Them: Ten years.
Me: Hmmm [long pause]
Me: Was there a layup plan?
Them: What’s that?
Me: A defined plan on how to shut down, drain and flush all lines and equipment, nitrogen blanket certain equipment, put on motor heaters, etc.
Them: We don’t know
Me: Is there an ongoing maintenance program
Them: Well there is one guy there manning the gate and answering the phone.
Me: Any other contractors or maintenance people?
Them: No
Me: Have you visited the plant with maintenance, operations and inspection personnel?
Them: No but we had a report that many of the lines have cracks. Is that a problem?
Me: Absolutely. Then I explained the inspection process and asked about plant records, drawings, operating instructions, P&IDs etc.
Them: What are P&IDs?
Me: Drawing of the configuration of the flow through the plant and instruments.
Them: We think most of that has been lost.
Me: I explained the time, effort and manpower to recreate the documents and rough cost of a complete inspection and mechanical integrity turnaround.
Them: Wow that’s a lot of work and the cost is really high.
Me: Do you have your own trained operators, maintenance personnel, engineering staff and HSE personnel?
Them: What’s HSE?
Me: Health, safety and environmental.
Them: We don’t have any of that. We are financial people.
Me: You might consider another plant that is operating, staffed and has documentation and performance records. I realize on paper this looks like a profitable venture however without internal resources and knowledge of the plant, buying an asset shut down that long is risky business.
Them: We will get back to you.
A few weeks later they called again.
Them: Mr. Hoffman thank you for saving our jobs. Based on our conversation we are not going to buy the plant we discussed. It would have been career limiting at best and career ending in the worst case.
Me: Glad to help. Have a nice day.
This is a true example of the value of engaging a variety of experts when evaluating an asset. The people I spoke to had expertise in their field but lacked knowledge of actual plant operations and reliability considerations. Fortunately they engaged others, asked an expert, and saved their organization from making a multi-million dollar mistake.
Becht Engineering has extensive experience in performing due diligence studies. Of course, most take more than an hour. However, with the right team an evaluation can usually be done with a week on site and a week of pre- and post-work before and after the on-site evaluation. This can give the prospective investor a wealth of information and a path forward after the acquisition – should it go through.
Please contact Rick Hoffman, Director – Mechanical Integrity, at (970) 389-9950 or email Rick directly (Click Below) for more information.
