The Missing Link in Most Merger and Acquisition Due Diligence

To be effective an M&A due diligence requires assessments of the legal, financial, and operations facets of a business. The financial assessment relies heavily on a past performance analysis of the business while the legal assessment looks at the current structure and outstanding liabilities of the business. Neither of these, however, looks in any detail at the future sustainability of the business. Determining the longterm sustainability of a business is the role of Operations Due Diligence (ODD) which 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 rate of M&A failures, it’s hard to understand why any investor would consider putting millions of dollars into a business based solely on performing the financial and legal assessments without also performing an enterprise wide operations assessment to identify any latent risks that could impact the long-term sustainability of the business. An effective ODD must be performed as an enterprise wide assessment to discover any risks that could impact the future success of the business within any of its operations infrastructure areas. By not performing an operations assessment the investor could be entering into a deal with tremendous potential risks… and taking a great leap of faith that the business has the infrastructure in place to support its current operations as well as those needed to support its Proforma.

The problem occurs because most investors have a CPA and attorney to help them perform their M&A due diligence but, unlike the financial and legal assessments which are founded on the well established principles of law and accounting, there are no similar principles to guide an operations assessment. Nor are there board certified professionals who perform these tasks resulting in many investors choosing to “go it alone”. These investors approach ODD by taking a high level view of the business and tend to skip the details in many areas. They may deep dive into one or two areas (typically areas where they have been burned before) while ignoring or failing to take an enterprise wide view that includes the entire operations infrastructure. Unfortunately, most investors aren’t even able to define what constitutes an effective operations due diligence and are ill prepared to perform a true enterprise wide operations risk assessment so this is understandably where they make their greatest mistakes… making the lack of effective operations due diligence one of the leading causes of M&A failure.