OPERATIONAL DUE DILIGENCE for a Business Acquisition

Contact Neufeld Legal PC for corporate transactional and legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Operational due diligence is a critical part of the business acquisition process that involves a deep dive into the non-financial aspects of a target company. Unlike financial due diligence, which focuses on numbers, operational due diligence examines how the business operates on a day-to-day basis to assess its health, efficiency, scalability, and risks. The goal is to verify that the business is as functional as the seller claims and to identify any potential problems or opportunities that may not be apparent from the financial statements alone. Operational due diligence is used in conjunction with the other areas of due diligence, including legal due diligence, to assess the viability of the target business and those concerns that need to be addressed prior to completing the proposed transaction.

Key areas of operational due diligence include, but are not limited to:

• Human Resources and Management:

  • Leadership and Team: Evaluate the competence and experience of the management team. Assess the stability of key personnel and identify any key-person risk, which is the risk that the business's success is overly dependent on a single individual.

  • Workforce: Analyze the organizational structure, employee turnover rates, compensation, benefits, and labor relations. This helps identify potential issues with employee morale, culture, or compliance with employment standards laws.

• Operations and Processes:

  • Efficiency: Examine core operational processes, such as production, sales, marketing, and customer service. The goal is to identify any bottlenecks, inefficiencies, or outdated workflows.

  • Supply Chain: Review relationships with key suppliers and vendors. Assess the company's dependency on a few suppliers and analyze supply chain risks, such as potential disruptions or rising costs.

  • Inventory: Evaluate inventory management practices to ensure that the inventory is valued correctly and that there's no excessive or obsolete stock.

  • Facilities and Equipment: Inspect the condition of physical assets like machinery, equipment, and real estate. Check for required maintenance and potential capital expenditure needs.

• Technology and IT Systems:

  • Infrastructure: Assess the stability, security, and scalability of the company's IT infrastructure. Are the systems outdated? Can they support future growth?

  • Software and Data: Review the software and platforms the business relies on, and evaluate its data management and cybersecurity practices. This is crucial for protecting sensitive customer and company data.

• Legal and Regulatory Compliance:

  • Licenses and Permits: Verify that all necessary licenses, permits, and certifications are current and in good standing.

  • Compliance: Ensure the business is compliant with all relevant industry regulations, environmental standards, and safety protocols. Non-compliance can lead to significant fines or operational shutdowns.

Operational due diligence is essential for four main reasons:

• Validate the Business Model: It confirms that the business's claimed operational strengths and efficiencies are real.

• Uncover Hidden Risks: It can reveal problems that don't appear on financial statements, such as a high rate of employee turnover, reliance on a single customer, or outdated technology.

• Identify Synergies and Value-Add: It helps the buyer identify opportunities to improve the business post-acquisition by streamlining processes, cutting costs, or integrating the new business with existing operations.

• Inform the Purchase Price: The findings from operational due diligence can significantly impact the final purchase price or lead to specific terms in the acquisition agreement to mitigate identified risks. For instance, if you discover the manufacturing equipment is nearing the end of its life, you might negotiate a lower price to account for future replacement costs..

When it comes to the legal component of corporate mergers & acquisitions, beginning with legal due diligence, that is when the law firm of Neufeld Legal P.C. comes into play. Such that when you are seeking knowledgeable and experienced legal representation in orchestrating and completing business mergers, acquisitions and divestitures, contact us at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.