Operational Due Diligence: What Buyers and Investors Need to Know About an Industrial Company Before Signing

Anyone buying a used car reads the registration documents, the service record and the mileage. But they only buy it after a test drive. Whether the gearbox sticks or the brakes pull is not in any document.

In company acquisitions it is often the other way round. The data room is carefully prepared: annual accounts, business plan, contracts, tax records. Auditors, tax advisers and lawyers work through it thoroughly. Whether production can carry the plan, whether order fulfilment can deliver the promised volumes and dates, and whether the management team can implement the value creation plan – that is not in the data room. These are the questions that operational due diligence answers.

What the classic due diligences cover – and what they don’t

Financial due diligence examines the quality of earnings, working capital, net debt and the plausibility of the plan. Tax due diligence clarifies tax risks, legal due diligence contracts, liabilities and rights. Often a commercial due diligence is added to assess the market, competition and customer structure.

All four look at what is recorded in figures and documents. What they rarely assess is the performance behind them: How stable are the core processes? How high is delivery reliability, and who is responsible for it? How large is inventory relative to output? Are there KPIs outside accounting that management uses to steer? And how much of the plan depends on a few individuals?

In our engagements we repeatedly see that this is exactly where the causes of declining earnings power lie – and that they only show up in the figures once they have long taken hold. For a buyer, this is the difference between a business case that works out and one that has to be corrected during the holding period.

The three questions of operational due diligence

Operational due diligence answers three questions:

1. Does the business model hold? Is the company clearly positioned, does it earn money with its products and customers, and can it enforce its prices? The development of contribution margins by product group over several years is one of the most reliable indicators.
2. Do the core processes deliver what the plan assumes? Growth in the plan requires capacity, delivery reliability and material availability. Where order fulfilment is already at its limit today, planned revenue turns into delays.
3. Can the organisation implement the value creation plan? Measures need owners, KPIs and a management system that follows them up. Without that, the plan remains a document.

The Corporate Health Check as the tool

Our tool for these questions is the Corporate Health Check. It assesses a company across the ten dimensions of the 10-P model – from positioning, product and price to processes, people and performance.

A structured catalogue of more than 130 questions guides through all ten dimensions. Each question is rated on a maturity scale from 0 to 4 and weighted by its importance. This produces a health score for each dimension. Together with hard indicators such as equity ratio, debt and liquidity runway, it places the company in one of the four states: transformation, optimization, restructuring or turnaround.

The assessment draws on three sources: the documents in the data room, interviews with management and key people, and a site visit to production, warehouse and order fulfilment. Every rating is backed by a source. What cannot be substantiated is not estimated but reported as an open question – in a transaction process, often a finding in itself.

What is on the table at the end

The result is not a report filed away in the data room, but a basis for decisions:

• Health score and profile across the ten dimensions – as a spider chart that shows strengths and weaknesses at a glance.
• State of the company – and with it the answer to what matters first after closing: realignment, more output from existing structures, rapidly working off the backlog of problems, or securing the company’s survival.
• Risks linked to the plan – which assumptions of the business case are covered operationally and which are not.
• Five to eight prioritised fields of action – grouped by cause, not by symptom, with findings, target state and immediate measures. They form the basis for the value creation plan and the first 100 days.

For the buyer, this means negotiating not only the price but knowing where time and resources will be needed after closing. For the seller, the same check carried out before the sale process can show where the company can still unlock value before a buyer prices it in.

Limits

The Corporate Health Check is not a financial, tax or legal due diligence in the auditing sense and does not replace them. It complements them with the operational view and checks the plausibility of the financial plan from the operating performance. Its validity depends on access: without interviews with management and access to production, it too remains an analysis of paper. How much time it takes depends on the size and data situation of the company and is set out in advance in the proposal.

Conclusion

The data room shows how a company has performed in the past. Whether it can carry the plan for the coming years is decided in production, order fulfilment and leadership. Checking this before signing means buying not just figures but knowing what you are taking on – and where the work starts after closing. What we contribute before, during and after a transaction is described on our equity stakes page.

Would you like to know how a company stands operationally before you decide? The Quick Health Check takes five minutes to complete and shows which state your company is in and which fields of action offer the greatest leverage – as a five-page profile, reviewed by an experienced consultant and free of charge. Start the Quick Health Check.

‍

Further articles:

The Four States of a Company: Where Does Yours Stand? (link)

What Your Contribution Margins of the Last Five Years Reveal (link)

Defining KPIs: How a Business Goal Becomes a KPI That Management Trusts (link)