In Mergers and Acquisitions (M&A), making well-informed decisions is crucial to the success of a business. Operational due diligence plays a key role in this process by thoroughly analyzing the target company’s operations. This article explores how a comprehensive assessment can minimize uncertainties and guide the transaction toward a successful integration.

Operational due diligence: What it is and key areas of analysis

Due diligence is a critical step in mergers and acquisitions. Among its various forms, operational due diligence (ODD) stands out due to its direct impact on a company’s efficiency, profitability, and long-term viability.

Definition of operational due diligence

Operational due diligence is a detailed and systematic assessment of a target company’s operations. Its primary objectives are to evaluate business activities, determine the company’s current value, and identify operational risks and value-creation opportunities. This analysis ensures that decisions made before finalizing the transaction are well-informed, reducing uncertainties and increasing the likelihood of a successful deal.

Key areas of operational due diligence

Before diving into specific areas, operational due diligence begins with a comprehensive business assessment, examining the company’s organizational model, workflows, and key performance indicators. This initial overview helps establish a diagnostic framework that guides the analysis priorities for each area. ODD primarily focuses on six key areas.

Figure 1 – Example of areas analyzed in operational due diligence

Operational processes

The assessment of operational processes aims to provide a detailed understanding of facilities, production lines, and workflows. In addition to mapping out how activities are executed, it evaluates critical aspects such as operating costs, raw material management, asset utilization and efficiency, and quality indicators. This is one of the most crucial areas of analysis.

Human resources

The human resources component goes beyond reviewing the organizational structure and payroll expenses. It also examines compensation policies, training and specialization needs, and the impact of turnover and absenteeism on overall organizational performance. These insights help identify challenges and opportunities for talent management improvements.

Supply chain

The supply chain analysis evaluates the distribution network, logistics efficiency, transportation methods, and associated costs. Additionally, it examines warehouse networks, inventory management, and supplier relationships, including dependencies and contractual obligations. This approach helps assess the resilience of the supply chain.

Physical infrastructure

Regarding physical infrastructure, the focus is on understanding whether buildings, equipment, and facilities align with current and future operational needs. Factors such as asset condition, maintenance plans, and resource consumption are analyzed to identify obsolescence risks or high maintenance costs. At the same time, CAPEX investments are also assessed regarding their strategic impact on sustainable growth.

Technology and information systems

The technology component is analyzed from multiple perspectives, including IT asset inventories, network architectures, and management systems, identifying potential integration challenges. Additionally, digital transformation initiatives are evaluated to understand how the company is preparing for the future.

Compliance and regulations

Finally, the compliance review assesses the company’s ability to meet regulatory requirements, covering aspects such as employee health and safety, sustainability practices (ESG), and the protection of sensitive data.

Operational due diligence outputs

Operational due diligence goes beyond a static analysis of operations. Its goal is to generate actionable insights that guide strategic decision-making during a merger or acquisition. The outputs produced are essential for assessing business viability, identifying risks, and uncovering value-creation opportunities, providing a solid foundation for negotiations and integration planning. These outputs are generated for each analyzed area, including operational processes, supply chain, human resources, etc.

Business analysis

The first key deliverable is a detailed assessment of the company’s current state, outlining existing processes and assets, analyzing operating costs, and evaluating key performance indicators across different areas. This diagnostic provides a clear picture of the company’s operational status and is the foundation for subsequent analyses.

Simulation model development

Whenever applicable, operational due diligence includes developing simulation models to assess future scenarios, particularly growth strategies or synergies. These models evaluate the impact of sales growth, as well as restructuring or operational integration scenarios. This approach allows stakeholders to test different hypotheses, anticipate challenges, determine necessary investments, and project future business performance based on specific data—facilitating informed strategy development while minimizing risks.

Identification and assessment of operational risks

Risk analysis is a critical component of operational due diligence. It involves identifying potential operational risks and classifying them based on their impact and likelihood of occurrence. This output ensures that all relevant risks are recognized in advance, covering areas such as the supply chain, physical infrastructure, and information system security. By identifying these risks early, companies can develop appropriate mitigation plans and reduce the likelihood of unexpected issues after completing the transaction.

Identification of improvement opportunities

Finally, operational due diligence seeks to identify value-creation potential. This analysis quantifies the possible benefits of implementing operational improvements in each area, such as optimizing production processes, enhancing supply chain efficiency, modernizing infrastructure, or upgrading technology systems. While not the primary focus of due diligence, this output helps highlight opportunities for improvement and guide post-transaction initiatives, ensuring that value generation begins immediately.

Objectives of operational due diligence

Operational due diligence provides a solid foundation for well-informed decisions and clearly defined strategies. Its main objectives include:

• Supporting the determination of the assets or business’s actual value: Contributing to a fair company valuation based on detailed data, ensuring that negotiations are backed by reliable insights and that the assigned value accurately reflects operational realities.
• Identifying and quantifying potential risks: Detecting legal or operational issues that could impact the investment decision, allowing for proactive risk management and mitigation strategies.
• Assessing business viability: Evaluating the operation’s sustainability and profitability by considering both current performance and future prospects, ensuring strategic decisions are well-grounded.
• Enabling informed decision-making: Providing comprehensive, reliable, and detailed information that minimizes uncertainties during the M&A process.
• Facilitating post-transaction integration: Anticipating challenges related to processes, systems, and team integration, ensuring a smooth and efficient transition following deal completion.

Stages of the operational due diligence process

The operational due diligence process follows a structured approach to ensure a thorough and detailed analysis of the target company’s operations. Each stage is carried out closely with the company requesting due diligence, ensuring alignment with its needs and expectations.

Figure 2 – Stages of operational due diligence

Preparation and collection of general information

In this initial phase, the specific objectives of the operational due diligence are defined, and the necessary resources are prepared. General information about the target company is gathered, including financial, operational, and organizational documents. Whenever possible, a visit is made to the premises and interviews with managers are conducted. Based on this data, a preliminary analysis is performed, and its conclusions are presented to the company requesting the due diligence to align expectations and clarify any questions. Finally, a detailed plan for the next phase is developed. This stage typically lasts between 1 and 2 weeks.

Area-specific analysis

After the initial data collection, an in-depth examination of key operational areas begins, covering processes, human resources, supply chain, infrastructure, and technology. This phase includes data collection, current state evaluation, scenario modeling, and the identification of risks and improvement opportunities.

Findings from each area are then presented and discussed with stakeholders to ensure alignment and validation. While each area is analyzed independently, the process maintains an integrated perspective to ensure that all critical aspects are considered. This phase typically takes about one week per area, totaling between five and seven weeks, depending on the scope of the analysis.

Consolidation and final presentation

The final phase consolidates all collected and analyzed information into a comprehensive report. This document includes key findings, risk assessments, value-creation opportunities, and recommendations for the merger or acquisition process. The final presentation to stakeholders ensures that all critical insights are clearly understood, enabling informed decision-making.

Still have some questions about operational due diligence?

What is operational due diligence?

Operational due diligence is a detailed and systematic assessment of a target company’s operations. It aims to provide a more accurate business valuation, identify operational risks, uncover value-creation opportunities, and assess improvement potential—ensuring well-informed decisions before finalizing a deal. This analysis is commonly conducted in mergers and acquisitions, corporate restructurings, or strategic investments to verify that the target company’s operations are sustainable and aligned with the buyer’s or investor’s expectations.

How long does operational due diligence take?

The duration of an operational due diligence process depends on factors such as business complexity, industry specifics, data availability, and the depth of analysis required. Generally, it can take anywhere from one to three months, but the process may take longer for companies with extensive operations or in highly regulated industries.

What are the differences between operational due diligence and Value Stream Analysis?

While both processes assess a company’s operational performance, operational due diligence and Value Stream Analysis (VSA) have distinct objectives and approaches:

• Access to data and Gemba: In operational due diligence, access to the Gemba (the actual workplace) and specific internal data is often limited. In contrast, Value Stream Analysis involves direct engagement with processes and personnel, allowing for a more hands-on diagnostic.
• Focus of the analysis: Operational due diligence aims to assess the company’s current value, translating operational insights into financial impact—particularly on EBITDA and investment decisions. VSA, on the other hand, focuses on identifying inefficiencies in the value chain and designing process improvement solutions.
• Final objective: Operational due diligence supports business valuation, risk analysis, and potential assessment without aiming to create an operational transformation plan. Meanwhile, Value Stream Analysis is designed to pinpoint improvement opportunities and develop an implementation roadmap for process optimization.