Operational Due Diligence: Meaning, Importance & Checklist

Due diligence is a fundamental part of any corporate transaction. Whether it's in mergers and acquisitions, private equity investments or capital raising, operational due diligence (ODD) in some form or another is going to come into play.

Here, we explain what this process is and why it's so important. We also provide details of a framework and checklist to follow for those that need help right away.

What is operational due diligence? 

Operational due diligence is a type of due diligence that investigates the business model and operations of the target to ensure it’s a good fit for the buyer. 
 
This could include review of: 

• All operating processes
• Supply chain, logistics and procurement efficiencies
• In-house and departmental efficiencies
• Human resourcing, workforce strategy and employee retention
• Digitalization SWOT analysis
• Cost optimization and risk management

 

Why operational due diligence is important

Operational due diligence is important for assessing synergies between the acquiring and target companies. It’s also a useful tool for helping buyers to kick-start the value creation process, in readiness for post-deal operational improvements or integration.

It's a great idea for the company that is being acquired to do in-house due diligence first. A large proportion of deals fail due to issues surfaced during the due diligence process, so if the sell-side can perform due diligence before the buy-side is involved, issues can be resolved quickly and quietly.

This can make the sell-side a much more appealing business proposition, which in turn can increase the value of the deal.

Operational due diligence and private equity

ODD is not just performed in relation to M&A transactions. It’s also a valuable component of private equity and real estate investment due diligence. Investment managers and hedge fund administrators need to review all potential operational risks as part of their recommendation process.

While private equity managers often possess significant expertise in investment matters, they do not always have the requisite knowledge in operational functions like technology or data security. This can lead to losses if ODD is not performed.

Operational due diligence framework

Your operational due diligence framework should comprise the following components with a view to assessing future value and synergy realization, and mitigating risks:

1. People and organization
2. Technology and systems
3. Politics and regulations
4. Efficiency and quality
5. Data and documentation
6. Cost and capital

Your ODD should answer one or more of the following questions:

1. What are the operational upsides and what is the full potential of the target?
2. Which post-merger synergies can be expected?

As an outcome of your investigations, a proper value creation plan should be created, comprising:

• a prioritized set of value creation opportunities
• a plan of action, describing how to capture the upsides and to mitigate the execution risks.

Operational due diligence checklist

Our operational due diligence checklist covers everything you need to prepare or review (depending on whether you're sell or buy-side) during an M&A deal.

The best advice we can give to any business considering a sale is to prepare well in advance. However, if you are selling a business in a hurry, Ansarada’s M&A: Company Sale/Exit Pathway is ideal.

A digitized template for M&A, it contains all the critical data points that ensure a company is healthy and ready for sale. All you need to do is upload your documentation into the secure platform. Then, when it’s time for your business exit, all your information is correctly structured and ready to go.

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