Operational due diligence (ODD) is the process by which a potential purchaser reviews the operational aspects of a target company during
mergers and acquisitions
Mergers and acquisitions (M&A) are business transactions in which the ownership of a company, business organization, or one of their operating units is transferred to or consolidated with another entity. They may happen through direct absorpt ...
,
private equity
Private equity (PE) is stock in a private company that does not offer stock to the general public; instead it is offered to specialized investment funds and limited partnerships that take an active role in the management and structuring of the co ...
investments, or capital raising. Its purpose is to ensure that the business model and operations of the target are suitable to the goals of the buyer.
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Process
The ODD review looks at the main operations of the target company and attempts to confirm (or not) that the
business plan
A business plan is a formal written document containing the goals of a business, the methods for attaining those goals, and the time-frame for the achievement of the goals. It also describes the nature of the business, background information on ...
that has been provided is achievable with the existing operational facilities plus the
capital expenditure
Capital expenditure or capital expense (abbreviated capex, CAPEX, or CapEx) is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. It is considered ...
that is outlined in the business plan. Additionally the ODD review will consider whether there is the potential for additional value to be wrought out of the target company by improving its operational function and also whether there are serious
operational risk
Operational risk is the risk of losses caused by flawed or failed processes, policies, systems or events that disrupt business operations. Employee errors, criminal activity such as fraud, and physical events are among the factors that can tri ...
s about which the potential buyer should be concerned (thereby allowing the buyer to consider aborting the deal or renegotiating the price). The approach for ODD varies by industry.
Reviewers
An ODD review is often performed by a third party such as a professional services firm. Often the ODD is requested by the bank or other
financier
An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital the investor usually purchases some species of property. Types of in ...
that is supporting the acquisition and is interested in the downside risks.
ODD activities are often focused on analyzing the supply chain, engineering, and manufacturing operations of a target acquisition in detail.
Other types
ODD is only one form of
due diligence
Due diligence is the investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement or contract with another party or an act with a certain standard of care.
Due diligence ...
. Others include:
* FDD, financial due diligence, where the target company's financial status is reviewed,
* CDD, commercial due diligence, where a target company's commercial status – the market position of its products and/or services – is reviewed,
* ITDD, IT due diligence, where a target company's
IT environment is reviewed,
* ICDD, intellectual capital due diligence, where a company's intellectual capital is analyzed and assessed,
* HCDD,
human capital
Human capital or human assets is a concept used by economists to designate personal attributes considered useful in the production process. It encompasses employee knowledge, skills, know-how, good health, and education. Human capital has a subs ...
due diligence, where a company's human capital is analyzed and assessed
* IDD, integrity due diligence, where a company's exposure to legal, corruption and
regulatory risk is analyzed and assessed.
See also
*
Bolt-on acquisition
References
{{reflist
External links
Due Diligence
Mergers and acquisitions
Business terms