The Importance of Streamlined Operational Due Diligence

March 19, 2024 | by Keith Yeater

It’s a common yet unfortunate situation: private equity investors spot a promising manufacturing business for acquisition. Initially, the numbers look good, and growth prospects seem feasible. Ideally, they would have enough time for thorough research. But reality isn’t perfect. So, they take a leap of faith and go ahead with the acquisition, hoping for good returns. However, their excitement fades as they dig into the day-to-day operations.

Instead of finding a thriving business, they come across a mess of inefficiencies, old processes, and undisclosed problems. The core of the business is deteriorating. To make things worse, fixing these issues and getting operations back on track takes much longer than expected, almost as long as the time spent on prep for resale. Flawed practices hold back the new owners, pushing them further behind and forcing them into a tough battle to safeguard their investment.

This story highlights the crucial role of operational due diligence (ODD) in mergers and acquisitions. ODD means customizing and testing the investment plan continuously. It goes beyond financial and market assessments, aiming to understand how the target company operates internally.

But in real terms, carrying out ODD quickly and effectively is crucial. Here’s why.

Why Speed Matters in Operational Due Diligence

1. Avoiding Nasty Surprises: Acting fast with operational due diligence helps spot potential red flags and risks before they turn into major problems after the acquisition. Identifying these challenges early on allows for informed decision-making and reduces the risk of unpleasant surprises down the line.
2. Seizing Opportunities: The more competitive the landscape, the more important agility becomes. A streamlined due diligence process lets you grab opportunities and move quickly in competitive markets, making sure you don’t miss out on good deals due to lengthy assessments.
3. Keeping the Deal Going: Lengthy due diligence procedures can lead to deal fatigue, causing parties to lose interest or confidence in the transaction. By speeding up operational due diligence, both you and the seller can keep the deal momentum going and speed up the integration process post-acquisition.

Benefits of Streamlined Operational Due Diligence

1. Making Informed Decisions: Quick due diligence gives you timely insights, empowering you to make well-informed decisions based on a comprehensive understanding of the target company’s operations.
2. Minimizing Risks: Rapid due diligence shortens the exposure to potential risks and uncertainties, allowing you to proactively address operational issues and implement corrective measures.
3. Creating More Value: By swiftly identifying hidden value drivers and operational inefficiencies, you can map out a clear path to creating value after the acquisition. This maximizes the potential for improving earnings before interest, taxes, depreciation, and amortization (EBITDA) and achieving sustainable growth.

Quick and efficient due diligence not only protects you from unforeseen troubles but also positions you to take advantage of opportunities and create meaningful value after the acquisition. It’s a strategic must to avoid the cautionary tale we started with and–at the same time–ensure you’re not missing out on truly golden acquisitional opportunities.