Insights
Financial due diligence tells an investor what the numbers say. It does not tell them whether the business behind the numbers can actually deliver the plan the investment case assumes. That is a different question, and the red flags that answer it are operational, sitting behind the financials where financial diligence does not look. Here are the ones that most often undermine an investment case after completion.
By Christopher Fagan
A business running on ageing systems, manual workarounds and a few key people who understand how it all fits together is carrying a risk that does not show in the accounts. The moment those people leave or the systems fail, the operation is exposed. Deferred systems investment is a liability that lands on the buyer, and it is rarely visible in the financials.
If the value creation plan depends on the business delivering significant change, and the business has no history of delivering change successfully, that is a red flag. Ambition in the plan and no capability to execute it is a gap that has to be filled, at cost, before any of the value materialises.
When critical knowledge, relationships or capability sit with a small number of individuals, the business is more fragile than the numbers suggest, and retention becomes a value protection issue from day one. Financial diligence rarely surfaces this; operational diligence should.
If the management team cannot answer basic operational questions with confidence, or different parts of the business give different answers, the data foundation is weak. That undermines not just reporting but the ability to run and improve the business, and it makes every subsequent change harder.
Maintenance, investment, difficult decisions, remediation, all deferred to flatter current performance. A business that looks efficient because it has been starved of necessary investment is presenting a cost that has been postponed, not avoided, and the buyer inherits it.
Each of these can be manageable if it is known and priced. The danger is discovering them after completion, when they were not in the case and the plan assumed a business that could execute. Operational due diligence exists to surface them while there is still time for them to affect the price, the plan or the decision. See operational due diligence.
We give investors an independent operational read before completion. Get in touch.
If any of this is live for you right now, the senior people who wrote it are the people you would work with.