Busted: Financial due diligence finds financial risk. It was never designed to find the manual workarounds, the single-point-of-failure processes, or the rework loops that will quietly erode the margin you modeled. Those hide in operations, and most deal teams never look there.
Five reasons this myth costs real money.
🔹 The model assumes clean processes. Projected EBITDA improvements require operational efficiency that may not exist. If you don’t assess it before close, you’re pricing in performance you haven’t verified.
🔹 Workarounds don’t appear in financial statements. A process running on three people’s institutional knowledge and two spreadsheets doesn’t show up in the data room. It shows up in your first 90 days when one of those people leaves.
🔹 Operational risk compounds post-close. Integration pressure, leadership changes, and system migrations all stress processes that were already fragile. The weakest links break first, and they tend to break at the worst time.
🔹 The margin improvement estimate is a guess without an operational baseline. A rapid LSS-based assessment gives the deal team a concrete, process-level read on where margin is hiding and what it will take to get it out. That’s a different starting point than a general sense that there’s “room for improvement.”
🔹 Post-close discovery is expensive. Finding a broken process after you’ve written the check means fixing it under integration pressure, without the leverage you had during diligence, while the clock on your investment thesis is already running.
The best time to understand where the operational risk is hiding is before you write the check.
What does operational due diligence look like in your current process?