A framework for operational due diligence

Abstract

Operational due diligence is an essential step in the purchase decision process when mergers and acquisition (M&A) practitioners assess whether a target company can realize future performance expectations. The aim of this paper is to strengthen the current research on operational due diligence and provide practitioners with a conceptual approach to perform successful operational due diligence. Empirical data was collected through explorative case studies with five private equity firms (acquirers) and six advisory firms (representing target companies) using semi-structured interviews and documentation. 140 past M&A cases were used as the empirical data material. Findings were validated through follow-up interviews and an explorative survey. The framework was validated through three workshops with practitioners. This paper presents six groups of operational drivers which have a direct influence on the operational part of an acquisition decision: (1) People and Organization, (2) Information Technology and Systems, (3) Costs and Capital, (4) Scalability, (5), Potentials and (6) Risk. Despite increasing numbers of M&As and the low success rate of these endeavors, very little research has focused on operational due diligence. This paper addresses this gap by presenting an operational due diligence framework useful for practitioners.