Operational Due Diligence
The numbers can be real and the business still not survive.
A quality of earnings report tells you whether the numbers are real. It does not tell you whether they keep happening once the owner is gone. We answer the second question.
Definition
What is operational due diligence?
Operational due diligence examines how a business actually runs, rather than what it earned. It tests whether performance is built into the company or into the owner: who makes the decisions, what is written down, which relationships are personal and what breaks on the first Monday after close.
The gap
What a quality of earnings will not tell you
Financial and operational diligence answer different questions. You need both, and most lower-middle-market deals only buy the first.
| The question | Quality of earnings | Operational diligence |
|---|---|---|
| Did they really earn it? | Yes | No |
| Will they keep earning it without the owner? | No | Yes |
| Are the customer relationships the company’s or the seller’s? | No | Yes |
| Could a competent stranger run the work from what is written down? | No | Yes |
| What will it cost to fix after close? | No | Yes |
This is not a criticism of the accountants. A quality of earnings is precise, necessary and does exactly what it says. It was simply never designed to measure owner dependency, and owner dependency is what decides whether an owner-led business survives its own sale.
The core question
How much of the performance is the owner?
In an owner-led business the honest answer is usually “more than the seller thinks”. That is not dishonesty. It is that an owner genuinely cannot see the decisions they make without noticing.
Where the decisions actually stop
Not the org chart. The real one. Who signs off on pricing, scope, hiring and anything unusual, and how often that turns out to be one person.
What lives only in someone’s head
The processes nobody wrote down, the customer quirks nobody documented and the workarounds that exist because a system does not do what people need.
Whose relationships these are
Customer concentration is the number everyone checks. Whether the customer stays when the owner goes is the question nobody asks.
How deep the bench is
Whether anyone below the owner has ever owned a result and been answerable for missing it. This is the best single predictor of whether a handover works.
We have been there on the Monday morning.
Twelve acquisitions integrated, and years spent working inside owner-led businesses documenting how they actually run. That is a different vantage point from a spreadsheet. We know what normally breaks after close because we have been the people who had to fix it.
The deliverable
What you walk away with
A read you can act on before you commit, not a document that restates what you already sent us.
A ranked list of operational risks
What is most likely to break, what it would cost and what could be mitigated before signing rather than discovered afterward.
An owner-dependency read
A specific answer to how much of this business is the person selling it, and what has to be true for the handover to work.
What to change in the deal
Where the findings should show up in the purchase agreement, the transition period or the earn-out, while there is still time to change them.
The first ninety days
If you proceed, the integration approach the findings point to, so you are not starting that thinking after the close.
Timing
The things that break after close are visible during diligence, if somebody is looking at the operations.
We come in after the letter of intent and alongside financial diligence, before the purchase agreement is final. Early enough that what we find can still change what you agree to, which is the entire point.
FAQ
Questions we get
Is this the same as a quality of earnings?
No, and it does not replace one. A quality of earnings verifies the numbers. Operational diligence tests whether the business that produced them survives the owner leaving. Buyers who skip the second one tend to find out in month four.
Do you work with our accountant and attorney?
Yes, and we are usually introduced by them. They run the transaction and verify the financials. We look at the operations, which their scope does not cover. We do not broker the deal, produce the valuation or practice law.
How long does it take?
It is scoped to the deal and the diligence window rather than sold as a fixed package, because a twelve-person business and a hundred-person business are not the same job. We scope it before we start, so you know what it costs before you commit.
What if we find something bad?
That is the point. Most findings do not kill a deal, they change its price, its terms or its first ninety days. Knowing before you sign is worth considerably more than knowing afterward.
Do you do this for sellers too?
Yes. Running the same review on your own business before a buyer does is how you stop being surprised in your own diligence, and that work lives on our sell side.
We are buying a very small business. Is this overkill?
Usually the opposite. The smaller the business, the more of it tends to be the owner, so the gap between what the numbers say and what you will own on Monday is widest exactly where people skip this.
Have a target in mind?
The free Deal Risk Check flags the biggest operational risk in your deal in a few minutes. If it turns up something real, we will tell you what a full review would cover and what it would cost.
Advisors: here is how the referral works. Or see what the work produced.