Operational diligence looks at how the work actually gets done. Its real subject is dependency: on the owner, on one supplier, on one machine, on one person who knows how something works. Every question is a version of what would break.
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What operations due diligence examines
The production or service delivery process end to end, capacity against current demand, supplier concentration and lead times, quality and complaint history, health and safety records where the trade has them, and the systems and controls that keep it consistent. For anything with a site, a visit is part of it.
What it is testing
Whether the earnings are repeatable by somebody else. A business where the owner quotes, schedules and resolves every problem is a business that halves on their departure, and operational diligence is where that becomes visible in a way an accounts review cannot show. This is the stream most directly connected to the multiple.
Preparing for the operational due diligence checklist
Document the processes that only live in someone's head. Name the person responsible for each function. Have supplier terms and alternatives ready for anything single sourced. And be honest about capacity: a business already at its ceiling is a growth story a buyer will discount unless the path to more capacity is costed.
Questions people ask about operational due diligence
Is this the same as operational diligence on a fund?
No. In fund investing the term means reviewing a manager's operations. Here it means the operations of the business being sold.
Who runs it?
The buyer, often personally, sometimes with a specialist consultant on larger or more technical businesses.
What helps most?
Written processes and named owners for each function. Both are evidence that the business is a system rather than a person.
How long does this stream take?
Usually a week or two of questions plus a site visit where there is a site. It runs in parallel with financial and legal diligence rather than after them.