Operational Due Diligence (ODD) Guide for M&A Professionals

Last Updated on May 6, 2025

TL;DR

• Operational Due Diligence (ODD) is critical in M&A, private equity, and corporate transactions to assess business viability beyond financials.
• Key areas assessed include operational efficiency, IT infrastructure, workforce evaluation, compliance, and customer positioning.
• Common mistakes in ODD include overlooking IT risks, underestimating cultural integration, and failing to prepare for post-merger issues.
• Industry-specific considerations matter, different sectors have unique risks and compliance needs.

There’s a dangerous assumption in M&A, the idea that if the financials check out, the deal is solid. But ask any seasoned dealmaker, and they’ll tell you the real problems begin after the ink dries.

A poorly executed Operational Due Diligence (ODD) process is one of the top reasons acquisitions fall apart. Operational inefficiencies, hidden compliance risks, outdated IT systems, or cultural mismatches can quickly turn a promising investment into a financial nightmare.

M&A professionals don’t have the luxury of getting this wrong. The challenge? Conducting thorough ODD is complex, time-consuming, and highly technical, and many teams still rely on manual processes that slow them down.

But what if there was a way to automate the tedious parts, enhance security, and collaborate seamlessly with stakeholders in real time? That’s where Virtual Data Rooms (VDRs) like SmartRoom come in.

This guide explores how to conduct effective Operational Due Diligence, the most common pitfalls to avoid, and how technology can make the process smarter, faster, and more secure.

What is Operational Due Diligence?

Operational Due Diligence (ODD) is the process of evaluating a company’s operational aspects to assess its viability beyond financial metrics.

Before diving into operational specifics, it’s helpful to ground yourself in the M&A due diligence fundamentals to understand how ODD fits into the larger transaction framework.

At its core, operational due diligence involves a thorough analysis of a target company’s operations, examining everything from supply chain efficiency to human resources practices. This comprehensive evaluation helps acquiring companies understand not just what a business looks like on paper, but how it functions in reality. For instance, while financial statements might show healthy profits, ODD might reveal operational risks like outdated IT systems or inefficient processes that could impact future growth.

The responsibility for conducting operational due diligence typically falls on a diverse team of professionals. Private equity firms often lead these assessments, bringing in specialists who understand both the target company’s industry and operational aspects. These teams frequently include:

• Operations experts who evaluate business operations and supply chain management
• IT specialists who assess technology infrastructure and cybersecurity measures
• HR professionals who review organizational structure and employee benefits
• Industry consultants who provide insights on market trends and industry best practices
• Risk management specialists who identify potential operational risks

What makes ODD particularly valuable is its ability to uncover issues that might not appear in standard financial due diligence. For example, while reviewing employment contracts might seem mundane, it could reveal contingent liabilities or compliance issues that could significantly impact the target company’s value. Similarly, environmental site assessments might identify potential environmental risks that could require costly remediation.

The insights gathered through operational due diligence directly inform strategic planning and help acquiring companies make informed decisions about valuations and deal structures. It’s not uncommon for ODD findings to influence purchase prices or even lead to the restructuring of deals based on discovered operational improvements needed.

Key Areas Assessed in Operational Due Diligence

• Financial Stability & Performance: Assessing financial health in relation to operations.
• Operational Efficiency: Evaluating resource utilization and process effectiveness.
• Technology & IT Infrastructure: Reviewing system integration and cybersecurity measures.
• Human Capital & Workforce: Analyzing organizational structure and employee satisfaction.
• Regulatory & Compliance Framework: Ensuring adherence to relevant laws and regulations.
• Market Position & Customer Relations: Understanding market share and customer engagement.

When conducting operational due diligence, professionals must examine several crucial areas that impact a target company’s overall health and potential. This comprehensive evaluation helps create a realistic business plan and identifies areas requiring risk mitigation measures.

Financial Stability & Performance

Going beyond just reviewing income statements and cash flow statements, this area involves understanding the target company’s financial position in relation to its operational processes. For instance, a manufacturing company might show strong financial performance, but their waste management practices could be increasing operational costs unnecessarily. This deeper analysis often reveals opportunities for operational improvements that weren’t apparent in initial financial due diligence.

To complement your ODD efforts, ensure you’re also covering the financial due diligence essentials that help verify the numbers behind operational performance.

Operational Efficiency

The assessment of operational efficiency involves examining how well a target business utilizes its resources. This includes evaluating their supply chain management, which often reveals surprising inefficiencies. Many companies we’ve analyzed appeared profitable on paper, but their operational processes showed significant room for improvement. These findings frequently lead to discovering:

• Hidden bottlenecks in production processes
• Inefficient inventory management practices
• Outdated manual processes that could be automated
• Supply chain vulnerabilities
• Quality control issues that impact customer satisfaction

Technology & IT Infrastructure

Technology infrastructure evaluation has become increasingly critical in today’s digital landscape. The review of IT systems goes beyond just checking if computers work – it involves a thorough analysis of:

• System integration capabilities and limitations
• Data management practices and security protocols
• Business continuity plans
• Legacy system dependencies
• Cybersecurity measures and incident response procedures

To deepen your understanding of how to evaluate cybersecurity risks during a deal, check out these cyber due diligence best practices tailored for M&A professionals.

Human Capital & Workforce

Human resources and workforce evaluation represents another vital component of the ODD process. This involves assessing the management team’s effectiveness, reviewing employment contracts, and evaluating the organizational structure. The target company’s activities often reveal patterns in employee turnover or satisfaction that could impact long-term success.

Regulatory & Compliance Framework

Regulatory compliance and legal structure assessment helps identify potential legal risks and ensures adherence to relevant laws. This becomes particularly crucial when the target company’s industry faces strict regulatory requirements or when dealing with cross-border transactions.

A comprehensive approach to compliance also includes reviewing the key components of legal due diligence to surface contractual or regulatory landmines.

Market Position & Customer Relations

The evaluation of customer relationships and market positioning provides insights into the target company’s business model sustainability. This includes analyzing:

• Customer concentration risks
• Market share trends
• Competitive positioning
• Sales pipeline health
• Customer satisfaction metrics

Each of these areas contributes to building a comprehensive understanding of the target company’s operations, helping acquiring companies make informed decisions about the transaction’s viability and necessary risk management strategies.

The Step-by-Step Process of Conducting Operational Due Diligence

• Pre-Due Diligence Planning: Define scope and objectives.
• Data Collection & Analysis: Gather and assess relevant documents and KPIs.
• On-Site Assessments & Interviews: Engage with key personnel and review operations.
• Risk Identification & Mitigation Strategies: Identify red flags and develop mitigation plans.
• Final Report & Decision Making: Compile findings to inform strategic decisions.

Conducting operational due diligence (ODD) is a structured process that requires careful planning, thorough analysis, and collaboration among stakeholders. Below is a step-by-step breakdown of how the ODD process typically unfolds:

1. Pre-Due Diligence Planning:
   • Define the scope and objectives of the ODD process, aligning them with the strategic goals of the acquiring company.
   • Identify key stakeholders, including M&A advisors, private equity teams, and internal finance teams, to ensure everyone is on the same page.
   • Develop an operational due diligence checklist tailored to the target company’s industry and business model. Creating a tailored checklist is easier when you start with a robust due diligence questionnaire template designed for M&A workflows.
2. Data Collection & Analysis:
   • Gather relevant documents, such as financial statements, organizational charts, supply chain details, and IT system documentation.
   • Assess key performance indicators (KPIs) and benchmark them against industry standards to evaluate the target company’s operational efficiency.
   • Conduct a thorough analysis of the target company’s operations, including its business continuity plan, risk management strategies, and regulatory compliance status.
3. On-Site Assessments & Interviews:
   • Engage with key personnel, including the management team and department heads, to gain insights into the target company’s activities and operational processes.
   • Review physical operations, such as supply chain logistics and IT infrastructure, to identify potential operational risks or inefficiencies.
   • Conduct environmental site assessments if relevant to the target company’s industry.
4. Risk Identification & Mitigation Strategies:
   • Detect red flags, such as gaps in cybersecurity measures, contingent liabilities, or cultural mismatches that could impact post-merger integration.
   • Develop risk mitigation measures to address identified issues, ensuring the acquiring company is prepared for potential challenges.
5. Final Report & Decision Making:
   • Synthesize findings into a comprehensive report that highlights operational risks, opportunities for improvement, and actionable insights.
   • Use the report to inform deal structuring, strategic planning, and post-merger integration efforts.

Common Pitfalls & Mistakes in Operational Due Diligence

While operational due diligence (ODD) is a critical step in the M&A process, it’s not without its challenges. Many professionals fall into common traps that can undermine the effectiveness of the ODD process. Here are some frequent pitfalls and mistakes to avoid:

• Overlooking Hidden Operational Inefficiencies: Failing to dig deep into the target company’s operational processes can result in missed inefficiencies, such as outdated workflows or poor supply chain management. These issues can escalate post-acquisition, leading to unexpected costs and disruptions.
• Underestimating IT and Cybersecurity Risks: In today’s digital age, ignoring the target company’s IT systems and cybersecurity measures is a significant risk. Weak data security or incompatible tech stacks can create vulnerabilities that jeopardize the entire deal.
• Failing to Assess Cultural Integration: Cultural mismatches between the acquiring and target companies are often overlooked. Poor cultural alignment can lead to employee dissatisfaction, talent attrition, and failed integration efforts.
• Inadequate Attention to Compliance and Legal Risks: Neglecting to thoroughly evaluate regulatory compliance and potential legal risks can result in costly penalties or litigation. This is especially critical in industries like healthcare or finance, where compliance with relevant laws is non-negotiable.
• Ignoring Post-Merger Integration Challenges: ODD doesn’t end at the deal closing. Failing to plan for post-merger integration, such as aligning business operations or harmonizing IT systems, can derail the anticipated benefits of the acquisition.

Industry-Specific Considerations in Operational Due Diligence

Operational due diligence (ODD) must be tailored to the unique characteristics and regulatory requirements of the target company’s industry. A generic approach can overlook critical operational risks and opportunities. Below, we explore key considerations for conducting ODD in various industries.

Private Equity & Venture Capital

In private equity and venture capital deals, the focus is often on scalability and growth potential. Operational due diligence here involves assessing whether the target company’s business model and operational processes can support future growth. Key areas include evaluating the management team’s capabilities, identifying gaps in IT systems, and analyzing financial health through cash flow statements and income statements. For startups, understanding burn rates and runway is crucial to ensure the target company can achieve its strategic objectives.

Healthcare & Life Sciences

The healthcare and life sciences sector is heavily regulated, making compliance a top priority during ODD. Analysts must verify adherence to regulations like HIPAA and FDA guidelines, especially for companies involved in medical devices or pharmaceuticals. Supply chain efficiency is another critical area, as delays or disruptions can have severe consequences. Additionally, robust cybersecurity measures are essential to protect sensitive patient data, and environmental site assessments may be required for manufacturing facilities to address potential environmental risks.

Finance & Banking

In finance and banking, particularly in fintech mergers, risk management is a central focus. Operational due diligence should evaluate the target company’s risk management strategies and ensure compliance with financial regulations. Assessing the compatibility and scalability of IT systems is also vital, as technology plays a pivotal role in this sector. Potential legal risks, such as non-compliance with anti-money laundering (AML) laws, must be thoroughly examined to avoid costly penalties post-acquisition.

Technology & SaaS

For technology and SaaS companies, the quality of the product and the underlying technology are paramount. Operational due diligence should include a review of the target company’s code quality, tech stack compatibility, and data security practices. Understanding the competitive landscape and market trends is also essential to assess the company’s long-term viability. Additionally, evaluating the scalability of the target company’s infrastructure and its ability to support future growth is critical for informed decision-making.

Conclusion

A successful M&A deal isn’t just about checking boxes, it’s about making informed decisions that protect your investment. Operational Due Diligence is the backbone of that process, ensuring you’re not just buying numbers on a spreadsheet, but a sustainable business with real growth potential.

Implementing thorough Operational Due Diligence ensures informed decision-making and successful integrations.

Modern M&A teams are embracing automation, AI-powered insights, and secure data sharing to make due diligence faster and smarter. If you’re serious about reducing risk and maximizing deal success, the right Virtual Data Room (VDR) can be a game-changer.

So, the question isn’t if you should improve your ODD process, it’s how soon you’ll make the shift. For a real-world example, see how SmartRoom helped HG maximize deal value by streamlining their due diligence process with secure, automated collaboration tools.

Ready to see how SmartRoom VDR can revolutionize your due diligence process and streamline your ODD process? Book a demo today.