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How to Efficiently Conduct Operational Due Diligence

Show Notes Of Podcast

What is operational due diligence?

Operational due diligence is the investigative analysis conducted by a buyer of the operations of a target business. In the broadest terms, the operations of the business consist of how the business turns inputs into outputs. The role of operational due diligence is to assess this process and its future sustainability for the buyer in an M&A transaction.

Operational due diligence may be the most forward-looking kind of due diligence that exists.

The aim here is not to look over several years of past performance, but rather to project into the future and assess how value creation will be sustained into the future with the target company’s operations.

Hundreds of DealRoom clients conduct their operational due diligence using our M&A platform, allowing them to take advantage of our operational due diligence template.

In this article, we look at how to conduct operational due diligence, as well as providing a checklist of the items that require attention to ensure this part of your company’s due diligence process passes successfully.

Operational due diligence may be the most forward-looking kind of due diligence that exists.

The aim here is not to look over several years of past performance, but rather to project into the future and assess how value creation will be sustained into the future with the target company’s operations.

Hundreds of DealRoom clients conduct their operational due diligence using our M&A platform, allowing them to take advantage of our operational due diligence template.

In this article, we look at how to conduct operational due diligence, as well as providing a checklist of the items that require attention to ensure this part of your company’s due diligence process passes successfully.

What is operational due diligence?

Operational due diligence is the investigative analysis conducted by a buyer of the operations of a target business. In the broadest terms, the operations of the business consist of how the business turns inputs into outputs. The role of operational due diligence is to assess this process and its future sustainability for the buyer in an M&A transaction.

Buy-side operational due diligence

As with any aspects of due diligence in the M&A process, most of the discussion tends to center on the buy-side.

Buyers look at the operational side of a target company and think

“if this was ours now, how could we make it work?”

As mentioned at the outset of this article, operational due diligence is forward-looking for the buy-side. It’s not looking at the past five years of production (in the same way that financial due diligence looks at past financial results).

Rather, it’s seeing if the operations of the target company will be sustainable in the coming years.

Sell-side operational due diligence

Because operational due diligence is forward looking, in some ways it resembles a strategy for a company’s operations.

In this regard, it pays any company on the sell-side to conduct its own operational due diligence - a kind of critical analysis of how the company’s operations are functioning. This is something a company should be performing, even if a sale of the business isn’t immediately on the horizon.

  • Do your machines require investment?
  • Are you going to need to extend your capacity?
  • Could your operations run more efficiently in some way?

All questions that have the potential to generate significant value for a business.

The operational due diligence checklist

Operational due diligence is where a virtual data room or complex diligence management software such as DealRoom comes into its own.

The nature of operations is that all manner of seemingly unstructured and yet, completely warranted questions can be asked during this type of due diligence that it pays to ask them on a platform that gives them some structure.

The unique request function in DealRoom is custom-built for better operational due diligence. Here is how the requests could be organized. Btw you can utilize and pre-fill your workspace with pre-made operational due diligence playbook, the part of which is listed below.

DealRoom due diligence software

While there is no typical operational due diligence - as there is for financial due diligence - the following represents a decent checklist for anybody about to begin the process:

1. Initial assessment of the target company operations

  1. how well do the operations of the target company fit with those of the buyer?
  2. What synergies/conflicts exist between the buyer and the target company?
  3. Are there any ‘quick wins’ that can generate value?
  4. What kind of (capital) investment will be required to bring the target company operations to the desired level?
  5. How sustainable are the operations? (i.e. are they running near capacity, using old technology, too expensive to be sustainable, etc.)

2. Document review

  1. Check internal procedures
  2. Check company compliance 
  3. Check relevant licences and subscriptions
  4. Conduct review of technology underpinning operations
  5. Conduct review of intellectual property (if applicable)
  6. Benchmark KPIs of the operation against industry competitors

3. On-site visit 

  1. Make an overall assessment of the company’s as-is operations (“if we were to buy this company today, what would change in these operations?”)
  2. In what condition is the factory/office/logistics center and its technology/equipment/machinery?
  3. Interview operations managers
  4. Interview relevant players upstream and downstream in the supply chain (e.g. suppliers, distributors, service providers, etc.)
  5. Are there any backlogs or bottle becks immediately apparent at the target company site?
  6. How easy would planned performance improve strategy be to implement given the current operations?
  7. Assess the culture at the on-site operations. Is it structured or ad hoc? Is there one manager or is everybody making autonomous decisions? Are there any health and safety issues that need to be addressed?

4. Projections

  1. Use information gathered until now to make projections about the value added that your company can bring. Can it generate more value from the same machinery/technology? Is there any value in having this extra capacity?
  2. Work with commercial and finance teams to build a budget based on the operations of the target company.
  3. Work with the finance team to estimate synergies that could be generated from a merger or acquisition with the target company.

The full checklist could be found in our M&A templates gallery.

Conducting operational due diligence with DealRoom

Whatever your operational due diligence needs, DealRoom’s platform is versatile enough to cater to firms of every size in every industry.

The process has also been designed so that anybody can set up their due diligence software within a few clicks:

1. Request a free trial account at dealroom.net/signup

dealroom signup

2. Choose an operational due diligence template from the playbooks gallery

DealRoom has a range of templates for different due diligence functions - each one created based on feedback from experts in the field, and specially tailored to a particular kind of due diligence.

dealroom templates

3. DealRoom provides prompts for information through its unique Requests feature.

The uploaded documents are then stored in a safe environment and linked to the relevant requests.

due diligence process

It is that simple. Whether you’re operating on the sell-side on an oil and gas industry deal, the buy-side on a fintech deal, or as an intermediary in a merger between two manufacturing companies, DealRoom will add significant value to your due diligence efforts.

Conclusion

Operational due diligence is a thorough investigation of the target company, what it does, and how well it does it.

The nature of this aspect of due diligence is that every company will generate its own set of questions specific to it.

That spontaneity demands that everybody conducting operational due diligence uses a virtual data room to give structure to a process that can easily become unwieldy. 

request a demo

Operational due diligence may be the most forward-looking kind of due diligence that exists.

The aim here is not to look over several years of past performance, but rather to project into the future and assess how value creation will be sustained into the future with the target company’s operations.

Hundreds of DealRoom clients conduct their operational due diligence using our M&A platform, allowing them to take advantage of our operational due diligence template.

In this article, we look at how to conduct operational due diligence, as well as providing a checklist of the items that require attention to ensure this part of your company’s due diligence process passes successfully.

What is operational due diligence?

Operational due diligence is the investigative analysis conducted by a buyer of the operations of a target business. In the broadest terms, the operations of the business consist of how the business turns inputs into outputs. The role of operational due diligence is to assess this process and its future sustainability for the buyer in an M&A transaction.

Buy-side operational due diligence

As with any aspects of due diligence in the M&A process, most of the discussion tends to center on the buy-side.

Buyers look at the operational side of a target company and think

“if this was ours now, how could we make it work?”

As mentioned at the outset of this article, operational due diligence is forward-looking for the buy-side. It’s not looking at the past five years of production (in the same way that financial due diligence looks at past financial results).

Rather, it’s seeing if the operations of the target company will be sustainable in the coming years.

Sell-side operational due diligence

Because operational due diligence is forward looking, in some ways it resembles a strategy for a company’s operations.

In this regard, it pays any company on the sell-side to conduct its own operational due diligence - a kind of critical analysis of how the company’s operations are functioning. This is something a company should be performing, even if a sale of the business isn’t immediately on the horizon.

  • Do your machines require investment?
  • Are you going to need to extend your capacity?
  • Could your operations run more efficiently in some way?

All questions that have the potential to generate significant value for a business.

The operational due diligence checklist

Operational due diligence is where a virtual data room or complex diligence management software such as DealRoom comes into its own.

The nature of operations is that all manner of seemingly unstructured and yet, completely warranted questions can be asked during this type of due diligence that it pays to ask them on a platform that gives them some structure.

The unique request function in DealRoom is custom-built for better operational due diligence. Here is how the requests could be organized. Btw you can utilize and pre-fill your workspace with pre-made operational due diligence playbook, the part of which is listed below.

DealRoom due diligence software

While there is no typical operational due diligence - as there is for financial due diligence - the following represents a decent checklist for anybody about to begin the process:

1. Initial assessment of the target company operations

  1. how well do the operations of the target company fit with those of the buyer?
  2. What synergies/conflicts exist between the buyer and the target company?
  3. Are there any ‘quick wins’ that can generate value?
  4. What kind of (capital) investment will be required to bring the target company operations to the desired level?
  5. How sustainable are the operations? (i.e. are they running near capacity, using old technology, too expensive to be sustainable, etc.)

2. Document review

  1. Check internal procedures
  2. Check company compliance 
  3. Check relevant licences and subscriptions
  4. Conduct review of technology underpinning operations
  5. Conduct review of intellectual property (if applicable)
  6. Benchmark KPIs of the operation against industry competitors

3. On-site visit 

  1. Make an overall assessment of the company’s as-is operations (“if we were to buy this company today, what would change in these operations?”)
  2. In what condition is the factory/office/logistics center and its technology/equipment/machinery?
  3. Interview operations managers
  4. Interview relevant players upstream and downstream in the supply chain (e.g. suppliers, distributors, service providers, etc.)
  5. Are there any backlogs or bottle becks immediately apparent at the target company site?
  6. How easy would planned performance improve strategy be to implement given the current operations?
  7. Assess the culture at the on-site operations. Is it structured or ad hoc? Is there one manager or is everybody making autonomous decisions? Are there any health and safety issues that need to be addressed?

4. Projections

  1. Use information gathered until now to make projections about the value added that your company can bring. Can it generate more value from the same machinery/technology? Is there any value in having this extra capacity?
  2. Work with commercial and finance teams to build a budget based on the operations of the target company.
  3. Work with the finance team to estimate synergies that could be generated from a merger or acquisition with the target company.

The full checklist could be found in our M&A templates gallery.

Conducting operational due diligence with DealRoom

Whatever your operational due diligence needs, DealRoom’s platform is versatile enough to cater to firms of every size in every industry.

The process has also been designed so that anybody can set up their due diligence software within a few clicks:

1. Request a free trial account at dealroom.net/signup

dealroom signup

2. Choose an operational due diligence template from the playbooks gallery

DealRoom has a range of templates for different due diligence functions - each one created based on feedback from experts in the field, and specially tailored to a particular kind of due diligence.

dealroom templates

3. DealRoom provides prompts for information through its unique Requests feature.

The uploaded documents are then stored in a safe environment and linked to the relevant requests.

due diligence process

It is that simple. Whether you’re operating on the sell-side on an oil and gas industry deal, the buy-side on a fintech deal, or as an intermediary in a merger between two manufacturing companies, DealRoom will add significant value to your due diligence efforts.

Conclusion

Operational due diligence is a thorough investigation of the target company, what it does, and how well it does it.

The nature of this aspect of due diligence is that every company will generate its own set of questions specific to it.

That spontaneity demands that everybody conducting operational due diligence uses a virtual data room to give structure to a process that can easily become unwieldy. 

request a demo

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