Operations Due Diligence: An M&A Guide for Investors and Business

Whether you are buying or preparing to sell a brick-and-mortar business or a virtual online business, a technology business or a service business, you need to perform a thorough due diligence to determine the current status of the business.A due diligence process has three components: Financial, Legal and Operations.Financial due diligence is an assessment of the current financial position of the business. As such it might indicate that the business had exceeded its sales goals for the last two years. It would also explain that it had accomplished this due to market improvements or because the company’s sales process caused the business to improperly project sales.Legal Due Diligence is performed to assess the legal facet of the business by exploring its current legal status. It would include any outstanding issues of ownership, pending legal actions, outstanding judgments, liabilities, employee actions, insurance claims, intellectual property rights, professional licenses, and so on.A recent study showed that less than 10% of due diligence was focused on the third component, Operations, but that over 40% of acquisitions failed because of operational performance issues. It is the Operations Due Diligence, author Grebey contends, that can ensure that you are investing in a business capable of sustaining its operations into the future.Consider the support given by the U.S. government to the automobile industry. Only an Operations Due Diligence could reveal whether it was a case of returning a sick animal to the herd rather than curing it. The automobile manufacturers were able to survive with the infusion of capital from the government; however, without changing the way they operate, their demise might have only been delayed. Time will tell, but for most investors, a “time-will-tell,” or a “wait-and-see” approach means taking a huge risk.Identifying weaknesses often provides a good reason for investing. If, for example, you identify that the business has a weak sales organization, the investment plan could be to create an opportunity by putting additional funds into the sales organization after the acquisition. If the sales team only has regional strength the merger with an organization with a national footprint might release significant value. It is the task of the Operations Due Diligence to find the unrecognized potentials in a business.An Operations Due Diligence can also be used as a management self-assessment tool with significant benefits.Managers who run their business as if it is always for sale will be constantly trying to maximize its value for investors. By assessing their own operations, managers are able to identify areas with latent risks and opportunities, and they can use this information to prioritize limited resources to target their process improvement needs. Business managers, themselves, are also investors in the sense that they are investing their professional reputations on the success of their businesses.Employees who participate in the assessment are being made aware of the need for change so they are less likely to be resistant to it.Grebey makes an important distinction between the “organizational structure” and the “operational infrastructures” when assessing a business. Organizational structure defines the elements of the business, but not how they operate. The organizational structure says there is an engineering department. The operational infrastructure defines how the engineering department operates and interacts with other departments. “Infrastructures,” by his definition, cross organizational boundaries spanning and supporting work as it progresses through all of the organizational functions of a business.He divides the operations infrastructure into eight areas: customer satisfaction, production, information management, sales and marketing, organizational, personnel, financial, and legal.It is common for a Due Diligence to be performed to assess a specific functional area of a business. Usually an investor conducts a “Management Due Diligence” or a “Technical Due Diligence” with the goal of assessing only this portion of the business. A true Operations Due Diligence should not be limited to a single operations function. Rather, it should have a broad scope that includes all of the operational areas as any business is organic not mechanical and every part affects every other.Two cautions are necessary. The first is that there is no one-size-fits-all Due Diligence; every exercise is a subjective assessment, guided by the needs and intentions of the investor. The second is the caution to watch for the “BS Quotient,” (the Blarney Stone quotient.) Kissing the Blarney Stone increases one’s capacity to flatter and stretch the truth.The Operations Due Diligence assessment report, the purpose of the exercise, should state the facts as they exist, and suggests how to seize what opportunities are revealed relative to the purpose of the exercise.While the book is deeply informative and provides a guide for performing an Operations Due Diligence it must be read with a warning. It is not sufficient to guide a novice in doing the job whether it is for internal purposes or for a purchase or merger. The book’s value lies in the insights it will provide for those commissioning an Operations Due Diligence so that they will be in the best position to ensure it is done thoroughly.And, it must be added, with the frightening lack of emphasis placed on Operations Due Diligence this book will definitely convince managers and investors of the need for the exercise.Readability Light --+-- SeriousInsights High --+-- LowPractical High +---- LowIan Mann of Gateways consults internationally on leadership and strategy

This book provides an interesting and novel approach to investigating the opportunities and risks that are present in any organization. As the author states, the primary purpose for this investigation is during the acquisition/investment process. However, the approach can just as easily be applied as an internal effort to identify current operational risks and opportunities for growth.The truly novel part of the book is in the author's approach to dissecting an organization. By looking at an organization through the nine identified infrastructure areas, a reader can ensure that the majority of risks and opportunities within an organization will be identified. The provided questions offer the reader an exceptionally robust laundry list of areas to explore within each organization. As such, the author basically provides a thorough instruction manual for how to properly assess the current state of an organization's operations and whether or not there could be potential pitfalls in the organization's future.

I find it extremely valuable and intend to hang on to it as a reference.I find that it can be adapted to a services business like the one I'm in and intend to use the checklists when we perform due diligence on our maintenance services sites. Often we get asked by clients to evaluate the state of their maintenance operations and Operations Due Diligence will help us tune up our process and help prepare new team leaders.

Index has no relation to the content. Very poor and irrelevant contentI am a PhD student. When I bought this book, I expected to receive clear explanations about the process of due diligence and its stages, on the contrary, the author only talks page after page that it is a very important book, he only tells stories that have nothing to do with the subject and then makes abstract explanations that do not provide any guidance to concretely learn about due diligence.

This book is good for senior investment bankers but not for junior ones

We buy small companies, fix them and then resell one to five years later. The list of things to look at was in depth beyond our expectations. I recommend this book to anyone buying a business.

This is a typical book from the genre of business writing that "talks very broadly and generically", makes you think you are learning something, but gives you zero actionable skills. It's all "insights", which personally I don't need, and anyone with any sort of business education should be able to do without. I bought this book hoping to have lists, processes, and real skills that I could immediately use. Unfortunately, there is nothing like that.

This book is unique because it addresses the assessment of the operations of a small business where other books on the subject seem to focus on assessing financial funds. It divides the operations into nine infrastructure areas and provides 400 due diligence questions in a readable manner that I was able to understand and apply to my own business.

The book covers the basics of ops DD, ideal for anyone interested in the process.