Operational Due Diligence: The Ultimate Checklist

Hey - I've put together a guide that covers operational Due Diligence. Hopefully it's valuable to at least someone out there!

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What is operational due diligence?

Any business is simply a collection of repeatable systems and processes. Managing how well these systems perform is called operations.

You want to buy a business with good operations - or at least be confident that you can step in and improve them.

That's where an operational DD comes in. Simply put, your operational DD is all about identifying and analyzing the existing systems and processes in your potential acquisition.

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The goal of an operational DD is to map out the entire value chain from customer acquisition to service or product delivery - ending with offboarding. This excercise will give you a level of understanding of a business that you won't get simply by looking at financial statements.

Start by identifying the key processes:

1. Customer Acquisition (How the business gets new customers)

- Start by investigating how the business gets new customers. Is there a reliable and repeatable process?

- Look for predictable, measurable methods: organic website traffic, paid ads, cold calling, email campaigns, direct mail. All these acquisition methods are predictable.

- Remember: Word of mouth is great, but it's not reliably scalable.

- Rule of thumb: If it can be measured, it can be managed. Arbitrary or random customer acquisition? That's a red flag.

PRO TIP: Put yourself in a potential customer's shoes and go through the entire journey. Google "Best [business type] near me" - does the company appear? Are they running ads? How do they compare to the competitors? Analyze their acquisition funnel: landing pages, contact methods, response times. Call them! How quickly do they answer? What's their pitch like?

The goal in this initial stage is for you to get a feel for how they're acquiring new business - and identify any potential red flags or optimization possibilities. But don't just take the owner's word for it - actually go through the process yourself!

Dig Deeper

Once you've mapped out the primary acquisition process, dive into the details. Here are some questions to answer;

1. How long is the typical sales cycle?

2. What's the average deal size?

3. Which products or services are easiest/hardest to sell? What are the high-ticket and high-margin items? Are they making a conscious effort to sell more of those products?

4. For cold outreach, how do they source their leads? How do their conversion rates compare to industry standards?

There are many different ways to figure out the answer to these questions, but lean on hard data wherever you can. Ask for customer invoices for the past 1-2 years and analyze them yourself. Your last resort should be trusting the owner's word - not your first.

2. Order Fulfillment: Production / Service Delivery

The next step after customer acquisition is order fulfillment. This step is often overlooked because marketing is fun, but dealing with customers isn't. Make no mistake though - this step is absolutely critical.

Here, you want to understand how good the business is at making their customers happy. Here's how:

- Start with the customer onboarding process. How long does it take and how many steps does it involve?

- Who is involved in fulfillment? Is it a separate department or is it handled by salespeople?

- Are there any obvious bottlenecks? Meaning, is onboarding getting backed up because they can't handle the order flow, or is it idle due to insufficient sales?

(PRO TIP: The onboarding pipeline will tell you if the business is working at capacity or not.)

- How do they collect customer feedback and reviews? Is there a process to produce case studies and testimonials?

- How often do they communicate with customers? Is there a nurturing process in place? (Think email sequence or monthly check-ins)

- What's the rate of repeat business?

Remember: in an operational review, you're after the "how" of a business - not just the "how much". Your goal is to build a comprehensive picture of the business's day-to-day operation.

3. Customer Service

You can learn a lot about a business from how it handles customer complaints:

- First of all, how active is their customer support? Do they get a lot of questions and/or complaints? This is a potential red flag.

- How accessible is the support team?

- What channels are available for customer contact, and what is the response time?

- What do reviews say? Read them - they'll tell you what customers like and don't like about the company.

Again, don't trust the owner on this. Pressure-test it yourself. Call the number or email them and see how long before they get back and what kind of answers you get.

4. Supply chain Management

The key thing here is to make sure that suppliers will stay with you through an owner change - and that they can scale with you as you grow the business.

Review supplier contracts:

- How long have they been working with the business?