Avoiding the Hidden Pitfalls of Operational Due Diligence
After decades of working with global enterprises, my business partners and I have spent a lot more time lately working with small to mid-sized firms. Many of them are first-generation, family-owned businesses looking to exit or private equity groups that have acquired these types of businesses. Small business equals big impact, so we're enjoying this shift in our ideal client profile.
What we are seeing over and over again is that mergers and acquisitions often fail not because of financial miscalculations, but due to operational blind spots that surface after the ink has dried. Operational due diligence (ODD) is the most underappreciated yet most impactful component of successful deal-making.
Good deals are no longer about just buying low and selling high. In today’s market, operational excellence (OpEx) is the new king of the hill. Studies show that up to 70% of value creation in private equity stems from what happens after the deal closes, in the form of operational improvements (lean, formal management systems, and digital transformation specifically). Yet many diligence processes continue to gloss over this critical aspect of due diligence and the transformation strategy.
When deals turn south, it is typically due to operational oversight rather than the numbers. According to the Harvard Business Review, "47% of failed deals cite integration and operational challenges as the primary cause."
Deal after deal, we're seeing how minor gaps in operational understanding can snowball into costly post-closure setbacks. Here are a few tips on how to avoid these pitfalls and how my team and I might be a good addition to your due diligence team.
5 Common Pitfalls in Operational Due Diligence
1. Overlooking tribal knowledge
Many businesses, especially founder-led or family-run firms, rely heavily on undocumented knowledge. When key personnel walk out post-close, so does critical process intelligence. This can lead to major disruptions in production, customer service, and compliance.
"Family businesses are also frequently comprised of strange and interesting organizational structures," says Ronii Bartles, Managing Partner of Concentric Global. "Leadership titles that don't align with competency requirements found in the rest of the world, and owners that would rather see their company retire too, rather than pass it along for top dollar."
✅ Our Approach: We deploy tools like standardized work (i.e., work instructions, SOPs) and our Competency Passport and Competency Tracker to capture and codify this tribal knowledge before it's lost. We do an inventory of the organization's business management system to determine what exists and what is missing, using our 12 Tools as a benchmark. We also identify key functions and necessary succession planning through our "bench strength analysis" to ensure knowledge is preserved for the next generation.
2. Assuming compliance equals capability
Certifications like ISO, GPCM, and clean audit trails don’t necessarily translate to scalable, resilient operations. Certifications often check boxes, but don’t uncover systemic weaknesses, capacity constraints, or culture misalignment. "Just because you have a license to kill doesn't mean you're a good shot!" - a student from Central PA circa 2004
✅ Our Approach: We go beyond compliance and evaluate organizational maturity using our Organizational Maturity Index (OMI) assessment. We assess whether teams can adapt, innovate, and execute at scale under new ownership based on a 1-5 maturity scale for dozens of key documents and business practices.
3. Failing to identify operational bottlenecks
From outdated ERP systems to siloed departments, hidden inefficiencies lurk in almost every acquisition target. If not flagged early, these bottlenecks and "mini-factories" can drag down integration, profitability, and morale.
✅ Our Approach: Through deep dive "on the floor" audits, walking the process cross-functionally, and performance benchmarking, we pinpoint operational inefficiencies and model their financial impact up front.
4. Neglecting cultural fit and change capacity
Culture clashes and leadership mismatches are deal killers. A lack of strategic alignment or conflicting work styles between buyer and seller teams can paralyze progress. You might bring in the best system in the industry, but if the players aren't capable or willing to change, you'll have major problems with deploying the transformation plan.
"Before the [Organizational Change Capacity] assessment, every change initiative was a gamble. What slightly bends one of my leaders might break another. As the owner, I was left guessing who would hold steady and who would crumble." - Private equity client
✅ Our Approach: Our Organizational Identity Index (OII) and Organization Change Capacity (OCC) assessments uncover the values, behaviors, and skill sets driving the business, so you can see whether they align with your post-close vision.
5. Treating operational DD as a mere checklist item
Too often, operational due diligence is compressed into the final stages of the deal. Or worse, treated as a formality. This creates assumptions, blind spots, and limits your ability to plan for a realistic Day 1. "Looked good on paper..." doesn't help you make your shipments or comfort your customers after they receive bad products or service, once you're in the driver's seat.
Think about it. You wouldn't expect your Materials Manager to conduct a high-quality tax or SOX audit, would you? Then why would you rely on "The Finance Guy" to assess the operational integrity?
✅ Our Approach: We conduct operational diligence in parallel with financial and legal reviews, so issues are identified early enough to influence deal structure, price, and integration planning.
Why we're a good operations partner
Sample M&A Due Diligence Key Indicators Scorecard
Our approach is to integrate strategy, operations, and leadership analysis into every engagement. We don't just report issues. We co-create actionable roadmaps and specific, prioritized action items that drive EBITDA growth and sustainable long-term value.
Our differentiators include:
✅ Deep M&A experience: We've supported buyers and sellers on both sides of the table, especially in lower-middle-market deals where operational gaps are most pronounced.
✅ Flexible engagement models: Our engagement structure is flexible. We offer flat-rate assessments, equity-based compensation, and post-close value realization projects.
✅ Tool-driven methodology: Our 12 Tools framework brings structure, speed, and insight to your diligence process.
✅ Post-close acceleration: We stay involved after close, turning risks into ROI opportunities with implementation support - from advisory roles to hands-on certification support.
Ready to reduce the pitfalls on your next deal?
If you’re a private equity firm, high-net-worth advisor, or business owner preparing to sell or buy, let’s talk. Operational due diligence is where real value lives, and where real deals are won or lost.
