Due diligence is an essential process for any business acquisition or investment. Recognising potential red flags early on can help investors and companies avoid costly mistakes and ensure the long-term success of their ventures. The due diligence red flag report identifies likely risks and liabilities that may impact the financial health, operational efficiency, or overall stability of a business.
This article provides a comprehensive overview of the most common red flags that warrant attention when conducting due diligence.
Operational red flags
One of the most concerning red flags for food and agribusinesses is inadequate food safety practices. Poor hygiene management, improper temperature control, and insufficient pest management are just some of the issues that can cause foodborne illnesses and costly product recalls, on top of jeopardising consumer health and trust. The use of outdated technology and poorly maintained equipment often compounds these problems, leading to inefficiencies, food safety hazards, and increased maintenance expenses, all of which ultimately harm business performance.
Unfortunately, these problems frequently go unnoticed without a thorough due diligence red flag report, as they often require detailed operational assessments and expert analysis to identify. Surface-level inspections may miss systemic issues in food safety protocols, equipment maintenance schedules, and staff training programs. These hidden weaknesses can manifest later as serious, and sometimes fatal, problems.
Safety concerns are also an issue at the workplace level. A history of workplace accidents is indicative of inadequate safety protocols, all of which increase the likelihood of worker injuries, legal challenges, and higher insurance premiums further down the line. Diminished worker morale aside, these factors greatly disrupt future operations.
High levels of obsolete or slow-moving inventory also serve as critical operational red flags, as this may reflect declining demand. Equally concerning is an excess of low-margin inventory, as this ties up capital without meaningful returns, squeezing profit margins, complicating inventory turnover, and diverting resources from higher-value products.
Supply chain vulnerabilities often compound these risks, particularly where there is an overreliance on a small number of key customers or suppliers. When an organisation relies heavily on a limited number of key customers or suppliers, it becomes vulnerable to operational disruptions and loses negotiating leverage. Any deterioration in these critical relationships could substantially impact revenues, profit margins, and operational flexibility.
Additionally, the absence of robust traceability systems can further exacerbate these challenges. Without end-to-end visibility into supplier practices or the origins of their raw materials, food and agribusinesses risk compliance failures, quality inconsistencies, and product recalls. This lack of transparency can invite regulatory scrutiny and easily lead to more compliance and regulatory issues.
Environmental and social red flags
Key environmental issues, often flagged in a due diligence red flag report, include non-compliance with environmental regulations. Failing to meet waste disposal, water use, land management, and pesticide use standards can quickly generate negative media coverage, erode customer and investor confidence, and even result in significant legal liabilities and regulatory investigations. Similarly unsustainable practices, such as overusing agri-inputs or inadequate soil conservation, can degrade soil health and reduce long-term productivity. This can lead to decreased crop yields, increased reliance on chemical inputs, and even threaten the long-term viability of the business.
Resource depletion and a lack of preparedness for the impact of climate change are yet more significant red flags, especially in arid regions. For example, an agribusiness that relies on a single water source for irrigation could face severe operational disruptions if that water source is likely to become compromised due to prolonged drought conditions or changing precipitation patterns. Any conflicts with local communities over land use and resource rights should also be prioritised as they can escalate into significant operational and reputational risks. Such conflicts can easily attract negative media attention and invite scrutiny from regulators or advocacy groups, resulting in legal disputes, project delays, or even complete shutdowns of operations.
Equally, labour practices should be closely monitored and proactively managed. The most obvious red flag here is high employee turnover rates. An elevated level of churn often signals underlying issues such as inadequate compensation, poor working conditions, and even labour exploitation. In extreme cases, such practices could violate compliance and ethical standards. High turnover rates often result in reduced operational efficiency, inconsistent product quality, and increased recruitment and training costs.
It is also worth ensuring that the company does not overly rely on depressed commodity prices, particularly where these fail to provide a living wage for employees and suppliers, as this can undermine the long-term viability of supplier relationships, attract negative media attention, and erode stakeholder trust.
Cultural alignment and management capabilities also play crucial roles in organisational success. For example, if an acquiring company has a strict hierarchical culture while the target company has a more collaborative and egalitarian culture, this could lead to conflicts, resistance to change, and difficulty integrating the two organisations. This is a broad concern for international acquisitions. Alignment concerns also extend to the quality of an operation’s management. Acquisitions of organisations with inadequate management personnel often lead to poor strategy execution and weakened organisational resilience over time.
Regulatory red flags
Compliance risks are significant red flags for food and agribusiness operations. Operating without the required licenses and permits can result in substantial fines, operational shutdowns, and reputational damage, all of which directly threaten business continuity. Similarly, non-compliance with food safety regulations, particularly those governing labelling, traceability, and hygiene standards, heightens the risk of product recalls and consumer safety incidents.
Intellectual property issues are another key vulnerability that is often highlighted in a due diligence red flag report. Both the inadequate protection of patents, trademarks, and other intellectual assets and the unauthorised use of protected intellectual properties can erode competitive advantages and market position.
Prioritising and mitigating red flags
While all the issues in a due diligence red flag report warrant attention, their significance can vary depending on the specific context of the due diligence investigation. The type of business, investor’s risk tolerance, and deal structure will all have a bearing on how these risks are prioritised and addressed. For instance, a business involved in food processing may focus more heavily on compliance with safety and hygiene regulations, while a commercial farm operation might prioritise environmental sustainability and resource management.
It is also worth noting that different risks will frequently interact and exacerbate each other. Successful due diligence requires not only identifying red flags but also understanding their potential impact, prioritising them based on the specific circumstances, and developing effective mitigation strategies. By taking a proactive and comprehensive approach, investors can best prepare for potential challenges, safeguard their investments, and position themselves for sustainable growth and profitability.
Uncovering opportunities and mitigating risks
Due diligence in the food and agribusiness industries requires a comprehensive approach that considers financial, operational, environmental, social, compliance, and regulatory factors. By identifying potential red flags early on, investors can make informed decisions that mitigate risks and ensure the long-term success of their ventures.
At Farrelly Mitchell, our commercial, technical, and environmental due diligence consultants provide more than just professional support; we deliver tailored, actionable insights that help our clients to identify risks, uncover opportunities, and strengthen their decision-making process. To learn more about our services and ensure that your choices are backed by years of hands-on agribusiness experience, contact us today.