Strategic & Operational Due Diligence
Operations Due Diligence (ODD) assessments look at the main operations of a target company and attempts to confirm (or not) that the business plan that has been provided is achievable with the existing operational facilities plus the capital expenditure that is outlined in the business plan.
Additionally, the ODD assessment will consider whether there is the potential for additional value to be wrought out of the target company by improving its operational function and whether there are serious operational risks about which the potential buyer should be concerned (thereby allowing the buyer to consider aborting the deal or renegotiating the price).
Objectives of operations due diligence
A properly conducted ODD review can provide an array of valuable background.
It can help to assess the full potential for operational savings and efficiency improvements while identifying and quantifying potential risks within the target company and agree reasonably targets.
Operational due diligence should be carried out with the following essential objectives:
- To gain a comprehensive understanding of a target’s operations and risks, including the cost base and CAPEX requirements to meet the objectives.
- Identify performance gaps and potential improvement opportunities, e.g. cost reduction and/or revenue enhancement.
- Know how to evaluate and prioritize the potential savings from operational improvements in order to form the investment case and conduct purchase price negotiations.
- Gain an understanding of how to develop and implement a plan to create maximum value and how to prioritize value creation opportunities.
- Understand how to assess progress, completion and contingency plans.
- Determine if the expected synergies can be realized and remain sustainable in the future.
- Check that there are no hidden problems that might threaten the deal or, the stability of the investor’s business.
- Use the operational due diligence review to create an achievable business plan and to prepare the post-acquisition integration plan.
Outcome from operational due diligence
The outcome generated from operational due diligence differs from client to client and depends on the buyer’s assignment.
Overall, it’s good to have an integrated due diligence process covering operational and commercial due diligence alongside the standard financial and legal due diligence processes, respectively. The investor needs to confirm three essentials:
To determine the target company’s viability, as outlined in its business plan.
Explore the potential for adding value and synergy.
Successfully manage the post-acquisition integration.
This integrated approach enables the buyer to gain a coherent idea of the direction of the company, a holistic view of the transaction opportunity, and the potential for the growth and development of the acquired business.
Here are some of the integrated outcomes of the operational and commercial due diligence process one can expect from DDP:
- Target’s operational risk assessment.
- Business and strategic plan review.
- Operational and financial planning.
- Working capital assessment.
- Manufacturing and operations evaluation.
- Supply chain operations assessment.
- Procurement and supply review.
- Technology capability, risk and process capacity planning.
- Sales and marketing effectiveness assessment.
- Merger and acquisition planning.
- Human resources assessment.