The concept of due diligence is a common and important one when it comes to any kind of business acquisition, and there are a few sub-categories of due diligence that it pays to focus on. One great example is known as operational due diligence - what is this, and what should your operational due diligence checklist include if you're buying a business?
At Utah Business Consultants, we're happy to offer a wide range of services for potential business buyers around Salt Lake City, Utah, from business listings to help with due diligence and more. Here are some important basics on what operational due diligence is during a business purchase, plus some items that should likely be on your operational due diligence checklist if you're in this position.
What is Operational Due Diligence?
Broadly speaking, operational due diligence (ODD) is a buyer's analysis of a company's operations and processes to determine the feasibility and risks of acquiring it. This is done as part of the due diligence process, which involves thoroughly investigating a potential business before finalizing the purchase.
ODD can cover various aspects of a company's operations, such as its financials, technology systems, human resources, and supply chain. It aims to identify any potential issues or challenges that may arise after the acquisition, allowing buyers to make an informed decision on whether to proceed with the purchase or not. It may also cover elements like management teams, processes, and customer relationships.
Core Areas to Assess
As part of your operational due diligence checklist, there are a few key areas that should typically be included:
- Business plan and general operations: This includes a review of the company's business plan, financial projections, and overall operations. It is important to understand the company's goals, strategy, and how it plans to achieve them.
- Human resources: A thorough assessment of the human resources department should be conducted. This may include reviewing employee contracts, organizational structure, leadership entities, compensation plans, and any potential HR issues.
- Information technology systems: The due diligence process should also involve assessing the company's IT infrastructure, software systems, and data security protocols. This can help uncover any potential vulnerabilities or risks.
- Supply chain management: An in-depth evaluation of the supply chain is crucial as it impacts the efficiency and cost-effectiveness of the business. This may include analyzing suppliers, contracts, inventory management systems, and logistics processes.
- Intellectual property: Due diligence should also cover reviewing the company's intellectual property portfolio, such as patents, trademarks, copyrights, and trade secrets. This can help identify any potential infringement issues or gaps in protection.
- Environmental impact: Companies have a responsibility to minimize their environmental impact. As part of due diligence, it is important to review any potential environmental risks associated with the business operations and ensure compliance with applicable regulations.
- Legal compliance: Non-compliance with laws and regulations can result in significant financial and reputational damage. The due diligence process should involve thoroughly reviewing the company's legal history, ongoing litigation cases, and ensuring compliance with all local and federal regulations.
Red Flags and Dealbreakers
While this list will naturally vary based on the specifics of your acquisition, here are some common red flags within the operational due diligence process that might give you pause - or might even serve as a dealbreaker altogether:
- Target company blocking due diligence efforts: If the target company is hesitant or resistant to provide necessary information for the due diligence process, this could be a major red flag. It may indicate that they have something to hide or are not truly committed to the acquisition.
- Inconsistent financials: If there are discrepancies or inconsistencies in the target company's financial statements, it may indicate poor record keeping practices or potential fraud.
- High employee turnover: A high rate of employee turnover can be indicative of underlying issues within the company's culture and management.
- Lack of cogent business plan: A well-developed and coherent business plan is essential for the success of any company. If the target company lacks a clear and comprehensive plan, it may be a cause for concern.
- Unreliable or outdated technology: Technology plays a crucial role in today's business landscape, and companies that are not keeping up with advancements may struggle to compete in the long run.
Other Tips and Tools for Operational Due Diligence Checklists
In addition to everything we've gone over so far, here are a few other considerations when performing operational due diligence:
- Start early: Due diligence can be a time-consuming process, so it's important to start as early as possible. This allows for enough time to thoroughly investigate all areas of the target company and address any potential red flags.
- Utilize technology: As mentioned earlier, technology is a key aspect of modern business operations. Utilizing tools such as data analytics and automation can help gather information more efficiently and accurately during the due diligence process.
- Use checklists: Creating a checklist specific to your due diligence objectives can help ensure that no important areas are overlooked. You can also refer back to the checklist throughout the process to track progress and identify any gaps.
- Consider hiring outside experts: In some cases, it may be beneficial to bring in outside experts with specialized knowledge or experience to help with the due diligence process. This could include financial analysts, lawyers, or industry consultants.
At Utah Business Consultants, we're here to help with any need while acquiring a business, including operational due diligence. Contact us today for help with business purchases or sales around SLC and nearby parts of Utah!
