It doesn’t take a private investigator like me to tell you that a fool and his money are easily parted. 

Few people would splash out on a new car without first taking a test drive, peering under the bonnet, or at least giving the tyres a perfunctory kick.  And failing to research a new home might see you having to put up with damp, or the neighbours from hell.

When buying a business, operational due diligence is the equivalent of bringing along a mechanic to do your pedantic tyre-kicking for you, or having a detailed property survey carried out by someone who knows what they’re doing.  Buying into a bad business could cost your livelihood.

Yet it’s amazing how many businesses will commit to mergers and acquisitions without knowing the full details of what they’re getting in to down to the finest detail. 
The Royal Bank of Scotland (RBS) found out to their detriment just how important due diligence can be, when they purchased Dutch bank MBN-AMRO in 2007.  Famously, the information the bank gathered on ABN-AMRO fitted into two lever arch files and a single CD ROM. 

Even more surprising than the fact that anyone still uses CD ROMs to store information, is that RBS bosses were willing to splash out £49 billion on MBN-AMRO, despite this apparent lack of information.

What the limited research didn’t show was the extent of ABN-AMRO’s exposure to the sub-prime market, which later resulted in around £20 million in losses for the RBS, cost chairman
Fred Goodwin his job and led to the bank ultimately being bailed out by the British tax payer in 2008.  

So what could have been done differently?

Whether buying a multinational banking corporation or a local hairdressing salon, operational due diligence is a series of detailed checks to help make sure that minor details like toxic debt, poor accounting, or stock discrepancies won’t jump up and bite a new owner on the behind later on.

Operational due diligence is time-consuming, painstaking work, made all the more difficult when an intended acquisition is hiding important information to make the proposition appear more attractive than it actually is - but it’s important work too.

Thorough due diligence puts every aspect of the business under microscopic scrutiny.  Examining accounts might tell a prospective purchaser that a business has been performed well in the past and is continuing to make money.  What it might not reveal is that most of the equipment is about to become outdated and is likely to cost a bailout-sized chunk of cash to replace.

Good operational due diligence can even look into the backgrounds of company directors and owners to make sure they’re not involved in criminal activity, give a true picture of asset value and look point out hidden liabilities.  In short, operational due diligence tells you why you might not want to buy a business.   After all, if things do go wrong, no-one is going to bail your business out.