The missing link in most M&A due diligence

To be effective, M&A due diligence requires assessments of the legal, financial, and operational facets of a business. 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, analyze in detail the future sustainability of the business. Determining the long-term sustainability of a business is the role of operations due diligence (ODD), which requires an assessment of the infrastructure that supports the company’s maintenance operations. 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 M&A failures, it is difficult to understand why any investor would consider investing millions of dollars in a business based solely on conducting financial and legal evaluations without also conducting an enterprise-wide operations assessment to identify latent risks. that could affect the long-term sustainability of the business. An effective ODD should be performed as a company-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 operations assessment, the investor could be entering into a deal with tremendous potential risks … and taking a huge leap of faith that the company has the infrastructure to support its current operations, as well as the necessary to support its Proforma. .

The problem occurs because most investors have a certified public accountant and an attorney to help them conduct their M&A due diligence but, unlike financial and legal evaluations that are based on well-established principles of law and In accounting, there are no similar principles to guide an operations evaluation. . There are also no board-certified professionals performing these tasks, leading many investors to choose to “go it alone.” These investors approach ODD taking a high-level view of the business and tend to omit details in many areas. They can delve into one or two areas (usually areas where they have been burned before) while ignoring or not taking a broad view of the business that includes the entire operations infrastructure. Unfortunately, most investors can’t even define what constitutes effective operations due diligence and are unprepared to conduct a true business-wide operations risk assessment, so it’s understandable that they make their biggest mistakes … Due diligence is one of the leading causes of merger and acquisition failure.