Operational due diligence: what to check, who to call and a question...

Operational due diligence checks whether a company's day-to-day operations can deliver the plan behind an acquisition or investment. Can the plants, warehouses or service teams produce what the forecast assumes, at the cost it assumes, without hidden safety, quality or staffing problems? It sits beside commercial due diligence, which tests whether customers will keep buying, and technology due diligence, which tests the software and systems. All three feed the wider due diligence checklist.

The term has a second meaning. Investors who put money into hedge funds or private equity funds use "operational due diligence" for checking the fund manager's own operations, such as valuation, cash controls and compliance. That version is covered near the end of this page.

A worked example: buying a contract snack manufacturer

Suppose an investor is buying a company that runs two plants making private-label snacks for grocery chains. The company, plants and numbers are hypothetical. The seller's plan rests on three operating claims:

Volume can grow 30% over three years without building a new plant.
Margins will improve once a new packaging line runs at 85% of its rated speed, which the plan assumes will happen within six months of installation.
The two plant managers will stay after the sale.

Each claim needs different evidence, and most of it comes from inside the plants.

Scope the work around the operating claims

Write down the claims the price depends on, then decide what would confirm or disprove each one.

Claim	Request from the seller	Public records to check	People to call
Capacity for 30% more volume	Output by line and shift, downtime and changeover logs	None useful	Plant managers at similar manufacturers
Packaging line ramp-up	Weekly speed and scrap data since installation	None useful	Packaging line technicians, equipment vendors' service staff
Safe, compliant plants	Injury logs, audit reports, open corrective actions	OSHA inspection data, EPA enforcement records	Former safety and environmental managers in the industry
Stable leadership and workforce	Turnover by role, overtime, labor agreements	None useful	Plant HR leads at regional manufacturers

The operational due diligence checklist

Capacity and throughput

Rated and actual output for each line over the last 12 to 24 months
Utilization by shift, and whether a third shift or weekend work is realistic
Downtime by cause, and how long changeovers between products take
The single machine or step that limits output today

Cost and quality

Yield and scrap by line and product, and rework rates
Customer complaints, returns and the results of customer audits
Quality and food safety audit reports, with the corrective actions that followed

Maintenance and capital spending

How much maintenance is planned and how much is emergency repair
The list of deferred maintenance and the age of key equipment
Capital spending in past years compared with what was budgeted

Supply chain

Share of spending with the top five suppliers, and any inputs with a single source
Supplier contracts, lead times and inventory accuracy. Vendor due diligence covers how to review critical suppliers.

People

Organization chart, and which roles depend on one person
Turnover, vacancies and overtime by role
Wages compared with local employers, and any union agreements

Safety and environmental compliance

OSHA publishes inspection and citation data that you can search by establishment, along with injury and illness data that employers submit electronically on OSHA Forms 300A, 300 and 301. OSHA data Search each plant by name and address.
EPA's Enforcement and Compliance History Online (ECHO) lets you search facilities for compliance with environmental regulations and look up EPA enforcement cases. Its Corporate Compliance Screener checks several facilities owned by one company at once. EPA ECHO
Compare what you find with the seller's own injury logs and list of open citations. A gap between the two is a finding in itself.

Systems

How production, inventory and maintenance data are recorded, and whether they come from a system or paper logs. The technology due diligence checklist covers a deeper review of software and IT.

Who to call outside the company

Documents show what happened; people who have run similar operations can tell you whether the plan is realistic.

Plant managers and operations directors at similar manufacturers, on capacity, shifts and ramp-up times
Maintenance and reliability leads, on equipment condition and what deferred maintenance usually costs
Equipment vendors' service technicians, on how lines like the new one usually perform in their first year
Customers' supply chain and quality managers, with the seller's permission, on delivery and quality performance
Former employees, on their general experience only. Do not ask for a former employer's confidential numbers. What to do when an expert cannot share confidential information covers how to handle the line.

Questions that test the claims:

When you added a shift at a plant like this, how long did it take to reach the new output target, and what broke first?
How long did your last new packaging line take to run at its rated speed?
How much of your maintenance work is planned, and what did it take to change that number?
What tends to go wrong in the first year after a plant changes owners?
For customers: how often does this supplier miss a delivery window, and what happens when it does?

How to prepare for an expert interview covers how to order questions and follow up.

Turn findings into the price

Go back to the claims and mark each one confirmed, mixed or contradicted, with the evidence beside it. Then put a number on each gap. In the example, the packaging line might be running at 62% of its rated speed four months after installation, while the plan assumes 85% by month six. If two plant managers who installed similar lines say reaching 80% took them nine to twelve months, the investor can move the margin improvement in the model from month six to month twelve and adjust the price or terms.

Weight answers by who gave them. A plant manager describing their own line is better evidence than a vendor describing its equipment. When sources disagree, see what to do when experts disagree.

Operational due diligence on a fund manager

For an investor choosing a hedge fund or private equity fund, operational due diligence asks whether the manager's operations protect the money. Typical questions: who values the holdings, and how? Who holds the cash and securities? Who can move money, and how many people must approve a transfer? Which administrator and auditor does the fund use, and will they confirm the relationship directly? What does the compliance program cover, and has the manager had regulatory problems?

A public starting point for a registered adviser is Form ADV. Both parts are public on the SEC's Investment Adviser Public Disclosure website. Part 1 covers the adviser's business, ownership, clients, employees, business practices, affiliations and any disciplinary events. Part 2 is a plain-English brochure covering business practices, fees, conflicts of interest and disciplinary information. Investor.gov: Form ADV Former fund operating and finance staff can explain what strong controls look like in practice, as long as they keep to general experience.

Your next step

List the three operating claims your price depends on. For each one, write what the seller must send, which public record you can check, and the role of someone outside the company who could tell you whether the claim is realistic.

If you need people outside your network, Instant Expert finds people who match a description such as "plant managers at contract snack manufacturers who have added a production shift." You review who it finds, it sends your invitations, and you pay only for calls that get booked. The directory pages for operations professionals in food manufacturing and food co-packing experts are a place to start.