Operational due diligence is the part of the M&A process that is, with surprising frequency, conducted as if it were the part that did not matter. The financial diligence is conducted by senior accountants over many weeks. The legal diligence is conducted by senior lawyers over the same many weeks. The operational diligence is, in too many mid-market processes I have observed, conducted in the final week, by a small team, with a scope that has been compressed by the deal timeline and a depth that has been constrained by what the seller is willing to permit.
This is not because the acquirers do not understand the importance of operational diligence. It is because operational diligence is a different kind of work from financial or legal diligence — it requires people who can read an operating environment, not just an audit, and the process is rarely structured to make their work easy. The financial and legal teams have well-defined data rooms and well-defined questions; the operational team has, often, a partial site visit, a redacted operating dashboard, and three hours with the COO.
What operational diligence actually requires
Operational diligence done well requires three things the typical mid-market deal process does not naturally provide. The first is time on site, in the operating environments themselves — the manufacturing floors, the distribution centers, the customer service operations, the back-office functions where the work actually gets done. A diligence team that has not been on site is a diligence team that has read about the operations, not assessed them. The second is conversations with the operating leaders, conducted with enough depth to surface the problems that the operating leaders are aware of but that have not been escalated to the dashboard the buyer is permitted to see. The third is a willingness, on the buyer's part, to invest in the diligence even when the seller is offering a compressed timeline that does not naturally permit it.
The buyers who do this well are typically the buyers who have been burned previously, or who have access to advisors who have been burned previously and have learned the patterns. The patterns are not subtle. The operating problem that absorbs the buyer's first eighteen months of ownership was, with rare exceptions, visible during the diligence to a competent operational diligence team that had been given the time and the access to find it.
The compressed diligence problem
Sellers, understandably, prefer compressed diligence. A compressed timeline favors the seller for a series of structural reasons that are well-understood by the bankers running the process. The buyer, equally understandably, is reluctant to insist on the time required for thorough operational diligence when the alternative is to lose the transaction. The result, in many of the engagements where Halverson Reed has been retained for post-close operational improvement, is that the buyer has acquired a business about which the buyer's operational understanding is meaningfully incomplete, and the early months of ownership are spent learning what better diligence would have surfaced.
There is no universal answer to this. There is, however, a discipline that distinguishes the buyers who learn the patterns from those who do not. The discipline is to retain operational diligence advisors early in the process, to give them a clear scope, to insist on the time and access required for them to do the work, and to be prepared to walk from the transaction if the diligence reveals operational problems whose remediation cost would meaningfully affect the transaction's economics. The buyers who do this consistently are the buyers who acquire businesses that perform, after close, in the way the underwriting case predicted. The buyers who do not are the buyers who, periodically, acquire businesses whose operational realities surprise them, expensively, in the year after close.