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The Value Of Operational Due Diligence

Deciding which strands of due diligence to carry out is a critical part of any transaction process. Whilst Financial, Commercial and Legal Due Diligence have traditionally been commonplace, Operational Due Diligence (ODD) has often been neglected. However, investors are becoming increasingly cognisant of the impact that the operations of businesses can have on value creation or destruction, and Operational Due Diligence is now becoming a core consideration on both the sell and buy-side for trade and private equity players alike.

What is Operational Due Diligence?

As part of a typical Operational Due Diligence, we analyse all facets of a business’s supply-side operations including:

  • Performance and compliance on operational fundamentals: We dig into metrics across health & safety, environmental, cost, service, quality, people and processes, to confirm the business is performing as expected on these “hygiene factors”
  • Current and future capacity assessment: We build bottom-up capacity models to ascertain the true capacity and utilisation of a business, and to accurately map the impact of planned future enhancement initiatives
  • Historical and future CAPEX assessment: We analyse and benchmark historical capital expenditure to identify any requirement for catch-up CAPEX, and future CAPEX plans to critique sufficiency
  • Procurement assessment: We evaluate the quality of the procurement function and processes, to identify any ledger savings opportunities
  • Forward plan assessment: We bring all the above facets together to provide a view on whether the operations of the business are of the standard and scale required to deliver management’s commercial plan

This culminates in a report which clearly outlines the state of the business’s operations, and identifies operational risks and opportunities associated with the potential investment. The report is often shared with relevant parties in the process; on the sell-side this typically means prospective bidders, and on the buy-side, this could be the client’s investment committee, and lending parties.

All Roads Lead to Value

At the most fundamental level, Operational Due Diligence at Food Strategy Associates is about ascertaining the impact of operational challenges and opportunities on value. With decades of experience in the European Food & Beverage industry in Operational leadership roles, we are able to paint a pragmatic and realistic picture of current and future-state operations, which can both inform valuation for our client, and provide a basis for future improvement.

From a sell-side perspective, we bring credibility to commercial plans by confirming the operations of the business are suitably and sufficiently equipped going forward. We identify issues that need attention before a sale process, with our knowledge of areas that are likely to be probed by prospective bidders and would likely detract from valuation.

On a recent sell-side project, we built a bottom-up capacity model which identified a potential future constraint which would require additional investment beyond the CAPEX allocated in management’s original plan. In doing so, management had the opportunity prior to the process to tweak their investment plans to provide for this additional investment and adjust their commercial plan towards product lines where ample production capacity existed.

From a buy-side perspective, we bring a sense of realism to the ambitions of the target business, identifying risks and opportunities which may not have been fully considered by the target management team that may impact our client’s decision on valuation or the decision to bid at all. For trade players and investment funds with existing presence in the relevant industry, we also identify sources of synergy between businesses in developing value creation plans for our clients to implement across the initial years of ownership.

On a recent project, we developed a value creation plan stretching from high level footprint decisions to procurement savings, to day-to-day operational excellence, quantifying the bottom-line impact and investment required to do so. This allowed our client to have confidence in the operational savings potential of the business, a key component in informing their valuation.

Food Strategy Associates Expertise

As the leading providers of Operational Due Diligence to the European Food & Beverage industry, we blend real-world operational leadership experience with top-tier consulting to create tangible and actionable value for our clients, both during the transaction process, and in the months post-acquisition.

We can also provide Operational strategy support including footprint evaluation, capacity and capacity release assessments, and procurement opportunity review.

Alongside our Operational practice, we have deep Commercial expertise, industry experience, and due diligence credentials, allowing us to ‘join the dots’ and elaborate the impact of operational challenges across a full business, providing our clients with an unparalleled proposition.

If you would like to understand more about our Operational Due Diligence offering and credentials, please get in touch with our Operations Expert, Nigel Devine, at nigel@foodstrategy.co.uk