To be effective, an M&A due diligence requires assessments of the legal, financial, and operational aspects of a company. The financial evaluation is largely based on an analysis of the company’s past performance, while the legal evaluation looks at the current structure and outstanding liabilities of the company. None of these, however, look in detail at the future sustainability of the business. Determining the long-term sustainability of a business is the role of Operations Due Diligence (ODD) that requires an assessment of the infrastructure that supports the sustaining operations of the business. Unfortunately, ODD is often the weak link in the M&A process and one of the leading causes of M&A failure.
Given the high failure rate in M&A, it’s hard to understand why an investor would consider putting millions of dollars into a business based solely on performing financial and legal assessments without also conducting a company-wide operations assessment to identify any latent risk that could affect the long-term sustainability of the business. An effective ODD should be conducted as an enterprise-wide assessment to uncover any risks that may affect the future success of the business within any of its infrastructure areas of operations. By not conducting an evaluation of the operations, the investor could be entering into a deal with enormous potential risks… and taking a great leap of faith that the company has the infrastructure to support its current operations, as well as those necessary to support it. his Proforma. .
The problem occurs because most investors have a CPA and attorney to help them perform their M&A due diligence but, unlike financial and legal assessments that are based on well-established principles of law and accounting, they do not Similar principles exist to guide an evaluation of operations. . There are also no board-certified professionals to perform these tasks, leaving many investors opting to “go it alone.” These investors approach ODD with a high-level view of the business and tend to skip the details in many areas. They can dig into one or two areas (usually areas where they’ve been burned before) while ignoring or not having a broad view of the business that includes the entire operations infrastructure. Unfortunately, most investors aren’t even capable of defining what constitutes effective operations due diligence and aren’t prepared to perform a true enterprise-wide operations risk assessment, so it’s understandable that they make their biggest mistakes. … commit the lack of effective operations. due diligence one of the main causes of failed mergers and acquisitions.
