The Missing Link in Most M&A Due Diligence

To be effective, an M&A due diligence requires assessments of the legal, financial, and operational aspects of a company. The financial appraisal is largely based on an analysis of the company’s past performance, while the legal appraisal looks at the company’s current structure and outstanding liabilities. None of these, however, discuss in detail the future sustainability of the business. Determining the long-term sustainability of a business is the Operations Due Diligence (ODD) role 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 a major cause of M&A failure.

Given the high rate of failures in mergers and acquisitions, it is difficult to understand why an investor would consider putting millions of dollars into a business based solely on conducting financial and legal evaluations without also conducting a company-wide operations evaluation to identify any potential risks. latent risk that could affect the long-term sustainability of the business. An effective ODD should be conducted as a company-wide assessment to uncover any risks that may affect the future success of the business within any of its areas of operations infrastructure. By not conducting an evaluation of the operations, the investor could be entering into a deal with huge potential risks…and taking a huge leap of faith that the company has the infrastructure to support its current operations, as well as those necessary to support your Proforma. .

The problem occurs because most investors have a CPA and an attorney to help them perform their M&A due diligence but, unlike financial and legal evaluations that are based on well-established principles of law and accounting, there are no similar principles to guide an operations evaluation. . There are also no board-certified professionals to perform these tasks, leading many investors to choose to “go it alone.” These investors approach the SDGs with a high-level view of the business and tend to skim the details in many areas. They may delve into one or two areas (usually areas where they’ve been burned out before) while ignoring or not having a broad view of the company that includes the entire operations infrastructure. Unfortunately, most investors aren’t even able to define what constitutes effective operations due diligence and aren’t prepared to conduct a true enterprise-wide operations risk assessment, so it’s understandable that this is where they commit. their biggest mistakes… committing the lack of effective operations. due diligence one of the main causes of the failure of mergers and acquisitions.