Operational due diligence (ODD) is the process by which a potential purchaser reviews the operational aspects of a target company during

mergers and acquisitions Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspec ...

. Most often ODDs are conducted in the industrial sector.

Process

The ODD review looks at the main operations of the target company and attempts to confirm (or not) that the

business plan A business plan is a formal written document containing the goals of a business, the methods for attaining those goals, and the time-frame for the achievement of the goals. It also describes the nature of the business, background information on ...

that has been provided is achievable with the existing operational facilities plus the

capital expenditure Capital expenditure or capital expense (capex or CAPEX) is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. It is considered a 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). The approach for ODD varies by industry.

Reviewers

An ODD review is often performed by a third party such as a professional services firm. Often the ODD is requested by the bank or other

financier An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Type ...

that is supporting the acquisition and is interested in the downside risks. 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 diligence Due diligence is the investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement or contract with another party or an act with a certain standard of care. It can be a ...

. 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 environment 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 *IDD, integrity due diligence, where a company's exposure to legal, corruption and regulatory risk is analyzed and assessed.

References

{{reflist Business terms Mergers and acquisitions