Operational Due Diligence
Encyclopedia
Operational due diligence (ODD) is the process by which a potential purchaser reviews the operational aspects of a target company during mergers and acquisitions
.
that has been provided is achievable with the existing operational facilities plus the capital expenditure
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 risks about which the potential buyer should be concerned (thereby allowing the buyer to consider aborting the deal or renegotiating the price).
, Ernst & Young
, PricewaterhouseCoopers
and Deloitte) or a consulting firm (e.g. Boston Consulting Group
, Roland Berger
, AT Kearney, Arthur D. Little
, TriVista, and Due Diligence, Inc.). Often the ODD is requested by the bank or other financier
that is supporting the acquisition and is interested in the downside risks (especially to the cashflow projections).
ODD activities are often focused on analyzing the supply chain, engineering, and manufacturing operations of a target acquisition in detail.
. Others include:
Mergers and acquisitions
Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or...
.
Process
The ODD review looks at the main operations of the target company and attempts to confirm (or not) that the business planBusiness plan
A business plan is a formal statement of a set of business goals, the reasons why they are believed attainable, and the plan for reaching those goals. It may also contain background information about the organization or team attempting to reach those goals....
that has been provided is achievable with the existing operational facilities plus the capital expenditure
Capital expenditure
Capital expenditures are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life extending beyond the taxable year...
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 risks about which the potential buyer should be concerned (thereby allowing the buyer to consider aborting the deal or renegotiating the price).
Reviewers
An ODD review is often performed by a third party such as a professional services firm (e.g. KPMGKPMG
KPMG is one of the largest professional services networks in the world and one of the Big Four auditors, along with Deloitte, Ernst & Young and PwC. Its global headquarters is located in Amstelveen, Netherlands....
, Ernst & Young
Ernst & Young
Ernst & Young is one of the largest professional services networks in the world and one of the "Big Four" accountancy firms, along with Deloitte, KPMG and PricewaterhouseCoopers ....
, PricewaterhouseCoopers
PricewaterhouseCoopers
PricewaterhouseCoopers is a global professional services firm headquartered in London, United Kingdom. It is the world's largest professional services firm measured by revenues and one of the "Big Four" accountancy firms....
and Deloitte) or a consulting firm (e.g. Boston Consulting Group
Boston Consulting Group
The Boston Consulting Group is a global management consulting firm with offices in 42 countries. It is recognized as one of the most prestigious management consulting firms in the world. It is one of only three companies to appear in the top 15 of Fortunes "Best Companies to Work For" report for...
, Roland Berger
Roland Berger
-References:...
, AT Kearney, Arthur D. Little
Arthur D. Little
Arthur D. Little is an international management consulting firm originally headquartered in Boston, Massachusetts, United States, and formally incorporated by that name in 1909 by Arthur Dehon Little, an MIT chemist who had discovered acetate. Arthur D. Little pioneered the concept of contracted...
, TriVista, and Due Diligence, Inc.). Often the ODD is requested by the bank or other financier
Financier
Financier is a term for a person who handles typically large sums of money, usually involving money lending, financing projects, large-scale investing, or large-scale money management. The term is French, and derives from finance or payment...
that is supporting the acquisition and is interested in the downside risks (especially to the cashflow projections).
ODD activities are often focused on analyzing the supply chain, engineering, and manufacturing operations of a target acquisition in detail.
Other types of diligence
ODD is only one form of due diligenceDue diligence
"Due diligence" is a term used for a number of concepts involving either an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations...
. 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 environmentInformation technologyInformation technology is the acquisition, processing, storage and dissemination of vocal, pictorial, textual and numerical information by a microelectronics-based combination of computing and telecommunications...
is reviewed, - ICDD, intellectual capital due diligence, where a company's intellectual capital is analyzed and assessed,
- HCDD, human capital due diligence, where a company's human capital is analyzed and assessed, and
- MDD, modern due diligence, where all of a company is analyzed and assessed.