Regaining Focus: Riveron’s Guide to Effectively Direct Diligence Efforts in Today’s Deal Landscape

In today’s deal landscape, risk mitigation is critical to closing transactions. During due diligence, workstreams are compartmentalized and assigned to specialists in legal, financial and other subject matters.

However, one focus often remains unexamined: the myriad of operationally-driven risk factors that could undermine the deal thesis. Augmenting the financially-focused due diligence process with operational subject matter experts can identify holes in the growth model, help to indemnify the company against downside, and highlight upside opportunities to enhance & accelerate synergy capture.

Today’s buyers are looking to not just close a transaction, but to prove that the specific deal they chose achieves a higher long-term ROI than the next. As most investment theses assume a future exit at a set point of return, the operations fundamentals that govern growth and improved profitability are critical to safeguarding or enhancing deal value. In a top-down due diligence approach focused exclusively on financial and legal functions, this can run the risk of overlooking operations-related “deal killers” that may erode or destroy profitability over the long term.

Enter operational due diligence. The value proposition is simple: significant resources are expended up front to validate the finances and structure of a target company, so why do buyers often wait until after the close to assess equally consequential operational concerns? The better alternative is a phased approach, whereby financial diligence and risk-based operational diligence are run in parallel prior to deal closing.

Broadly, operational due diligence seeks to identify, prioritize and propose solutions for operationally-driven risk factors that could affect future EBIDTA and cash flow. In collaboration with a buy side diligence team, Riveron works to develop a forward-looking assessment of target’s probable operational risks and improvement opportunities. This approach differs from financial due diligence in two key areas. First, it takes a more holistic view of a target’s potential, focusing on people, processes and systems as opposed to strict dollars and cents. Second, the deliverable is not a verification of historical earnings, but rather a roadmap of actionable operational improvement workstreams, prioritized by cost, impact and complexity. And finally, the analysis is intended to quantify potential future EBITDA effects, addressing tomorrow’s problems today.

Despite this divergence in focus, operational due diligence is intended to complement and enhance financial due diligence by delivering recommendations that are both operationally advantageous and financially quantifiable. As both processes run in parallel, a robust diligence picture emerges with a marginal increase in time & effort by leveraging common data requests and interviews. The end result is a cohesive set of operational and financial findings that provide tangible insight into the strategic impact of a prospective acquisition.

To illustrate the point, a large transportation manufacturer was considering the purchase of a key competitor in an effort to gain share in a specific market segment. Riveron was tasked with conducting an operational gap assessment and building an integration playbook to remediate any issues uncovered. By combining financial and operational due diligence, Riveron helped to identify significant additional operations and supply chain savings accretive to deal EBITDA; the buyer not only validated their confidence in the target’s earnings but enhanced overall deal value with previously undiscovered upside.

In summary, the benefits of a truly balanced due diligence effort are hard to ignore for any prospective buyer in today’s deal environment. Conducting operational and financial due diligence in parallel reinforces a business’ ability to assesses and avoid risk, identify potential upside and fast-track achievement of performance targets that are critical to deal value.