Operational Due Diligence: A Strategic Guide to Assessing Business Fundamentals

Operational Due Diligence

In any investment, what lies beneath the surface often determines the outcome. While financial statements tell one story, the real risks often live in the operations—supply chains, systems, people, and processes. That’s why operational due diligence (ODD) has become a critical step in modern transactions, especially in private equity, M&A, and strategic partnerships.

This article breaks down what operational due diligence involves, why it matters, and how to conduct a structured review to uncover hidden weaknesses before they impact valuation or post-deal performance.

What Is Operational Due Diligence?

Operational due diligence is the process of evaluating a company’s internal operations to assess whether they are sustainable, scalable, and aligned with business goals. It looks beyond the balance sheet to examine day-to-day functions like:

  • Supply chain management

  • Technology infrastructure

  • Compliance systems

  • HR policies and key personnel

  • Internal controls and workflows

The goal is to identify inefficiencies, red flags, or areas requiring investment post-deal.

Why Operational Due Diligence Matters

Failing to assess operational risks can result in:

  • Costly integration issues post-acquisition

  • Missed CAPEX requirements

  • Culture clashes or talent loss

  • Poor scalability and customer service disruptions

  • Unexpected regulatory or cybersecurity liabilities

According to a 2024 survey by PwC, nearly 40% of deal failures were linked to operational issues that were overlooked during the diligence process.

Key Components of Operational Due Diligence

1. People and Talent

  • Are leadership roles clearly defined?

  • Is there a succession plan?

  • Are compensation and incentive structures aligned with performance?

2. Processes and Systems

  • Are internal workflows documented and efficient?

  • What ERP, CRM, or IT tools are in place?

  • Are they secure, scalable, and interoperable?

3. Compliance and Controls

  • Are internal policies aligned with legal standards (e.g. GDPR, SOX)?

  • Is there a history of violations or audit findings?

  • What’s the strength of the cybersecurity framework?

4. Supply Chain and Operations

  • Are key suppliers reliable and diversified?

  • Are operations vulnerable to external shocks (e.g. geopolitical, logistics)?

  • How resilient is inventory and procurement planning?

How Virtual Data Rooms Support Operational Due Diligence

A virtual data room (VDR) streamlines operational due diligence by providing:

  • Structured document repositories for process manuals, vendor contracts, and compliance audits

  • Secure access control for external advisors and internal teams

  • Audit trails to track who reviewed what and when

  • Q&A workflows to clarify issues without email threads

Tips for Conducting Effective Operational Due Diligence

  1. Start early – Begin ODD as soon as access is granted to the data room.

  2. Engage cross-functional experts – HR, IT, legal, operations.

  3. Use benchmarks – Compare with industry standards.

  4. Quantify findings – Assign cost estimates to risks.

  5. Create an integration roadmap – Highlight immediate post-deal actions.

Conclusion

Operational due diligence is no longer a luxury—it’s essential for informed decision-making in any significant investment or acquisition. It ensures that what’s under the hood aligns with your expectations and that any operational weaknesses are addressed before they affect long-term value.