Operational Due-Diligence

Operational Due Diligence (ODD) is a type of Due Diligence used during Merger and Acquisition activities.  Operational Due Diligence has a specific focus that provides insight on the operational performance for the potential buyer.  The Purchaser will have a firm  exercise due diligence to assess the Operational activities in reference to a strategic business plan.  

EHIIP Consulting works with Private Equity firms to provide M&A Operational Due Diligence and forward looking projections of the potential acquisition.  The Operational Due Diligence provides an understanding of current operational activities and risk.  The Diligence also provides a strategy for future operational capability and future growth.  The potential of the investment will then be presented in financial form in the strategic plan for the buyer. 

Why use the Operational Due Diligence Process?

M&A Activities – Investors or businesses looking to purchase or invest in a new company need to verify the specific facts related to the potential investment.  Many buyers perform Due Diligence at a customer and financial level on a frequent basis, but need help from an m&a due diligence consultant focused on operations.  

Potential ROI – Operational Due Diligence packages provided by EHIIP Consulting include an operational strategic plan.  This strategic plan is a roadmap for increased value as an investment asset.  This can provide assistance for Private Equity firms concerned about the purchase multiple at the time of acquisition.  This roadmap can also show investors the potential EBITDA gains based on operational improvements.  

Increased Private Equity Investment – Portfolio companies sometimes need more funding based on their performance.  Determining the cash flow needs, capital plan, and overall timeline to recovery can be improved with a strategic plan for operational improvement.

Operational Due Diligence Process

1) Financial Review – The initial step in the on site due diligence process is reviewing current financial statements.  Financial statements provide guidance for the consultants to discover the areas most important to examine during the process.  The financial documents will also lead to a better understanding and connection to the overall business strategy for the organization.

2) Strategy Review – A review of the immediate and any forward facing business strategies are the second step in the process.  Reviewing the strategies along with the executive leadership team will continue to build a strong understanding of the company.  This interaction with the executive team provides a basic evaluation of their strategy understanding and the connection to the operational performance.

3) Operational Investigation – Spending time on site within the manufacturing processes is the most important time spent on any operational due diligence evaluation.  The key to understanding the current condition are facts and data through observation.   The data will be critical to being able to create an achievable target condition for the organization in the future.  

4) Identify Operational Risks and Gaps – Each process will be evaluated against the Business strategy in order to identify risks and gaps within operations.  The risks and gaps will be the most important part of the due diligence package.  Each process gap will provide significant guidance towards the actionable strategic plan. 

5) Operational Strategic Plan – The last piece of the Operational Due Diligence Package is providing a roadmap for operational improvements within the manufacturing operations.  A Lean Strategy will be provided by the due diligence consultant with recommendations for value creation in the target investment. 

6) Communicate/Deliver Due Diligence Package – The Operational Due Diligence Package will contain a review of all processes predetermined by the private equity firm.  The Diligence package will be reviewed together with the evaluator and the potential purchaser either in person or via phone call.  This will ensure the best level of understanding and clarity.

What is an M&A Operational Due Diligence Consultant?

EHIIP Consulting has been Providing Operational Due Diligence for Private equity Firms since 2011.  Our m&a consultants are operational professionals with intense backgrounds in Lean Manufacturing methodologies.  EHIIP feels that Lean provides the best background to provide Private Equity firms with a clear strategy based on the due diligence activities and learning.  Including a consultant from EHIIP to the strategic due diligence activities increases the capability to structure the deal for ultimate success.   

Operational Due Diligence checklist

The Operational Due Diligence checklist is a flexible list based on the situation.  The list applies to both Private Equity firms and internal M&A acquisitions.  The diligence checklist is a list of assessment areas that could be reviewed depending on the company and the purchaser.  The assessment areas for the target company will need to be determined based on the needs of the purchaser.  

-Operational strategy evaluation

-Engineering evaluation

-Capacity studies (all necessary processes)

-Capability of equipment and processes

-Supply Chain performance

-Operational Management (leadership capability)

-Site Assessments

Operational Due Diligence Timeline of Daily Activities

The Timeline for Due Diligence is dependent on many different variables of the target acquisition.  Typical Timelines are between 4 and 10 days for a complete Operational Due Diligence Package.  Each step in the process is identified below with approximate times.

Prior to On-Site Due Diligence Visit (½ -1 Day)

-Basic business information about the company to be provided to evaluator for review

-Financial Documents should be provided to evaluator for review

-Any Strategy Documents to be shared with evaluator for review

On-Site Executive Leadership Review (½-1 Day)

-Leadership review of Financial Documents and Performance Indicators

-Leadership review of Company Strategic Direction 

On-Site Operational investigation (1-3 Days)

-Capacity Studies of Manufacturing 

-Operational mapping of processes

-Verification of Performance Indicators

Creation and communication of Operational Due Diligence Package (2-5 Days)

-Evaluator creates Due Diligence Package

-Communication meeting

Operational Due Diligence



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