When and Why a Funder Should Use an Operational Review
When and Why a Funder Should Use an Operational Review
Can this business deliver on its plans?
For private equity firms, specialist lenders, and banks, an operational review can be a powerful tool—when used at the right time and in the right way. Unlike financial due diligence, which primarily assesses the past, an operational review looks forward, evaluating whether the business is set up to execute effectively. However, its timing and approach vary depending on the context.
Many investors and lenders focus on financial due diligence (FDD) or audits to validate past performance and risk, but an operational review provides something different: an assessment of execution capability. Strong financials don’t always mean a business is running well—companies can look profitable on paper while struggling operationally. The real question is:
Financial Audit vs Financial Due Diligence vs Operational Review
| Financial Audit | Financial Due Diligence | Operational Review |
|---|---|---|
| Focuses on past financial data | Assesses historical financials to determine risk, sustainability, and valuation | Focuses on current and future operational execution |
| Checks compliance with accounting standards | Evaluates financial stability, cash flow, and business viability | Looks at efficiency, effectiveness, and execution gaps |
| Provides historical insight | Determines financial health for investors or buyers | Provides actionable recommendations for improvement |
| Tells you what happened | Tells you whether the numbers are reliable and sustainable | Tells you what needs to change and how to execute effectively |
While financial due diligence and audits focus on past data, an operational review is forward-looking—identifying bottlenecks, inefficiencies, and execution risks that could impact future performance.
Pre-Investment: A Balancing Act for Private Equity and Banking
Private Equity Perspective
At the pre-investment stage, an operational review could provide an independent opinion on whether the investment thesis is truly deliverable. However, this is a sensitive period.
- Competitive Dynamics – In a competitive bidding process, PE firms must balance diligence with speed. If management sees an operational review as intrusive, it may put the firm at a disadvantage.
- Trust and Access Challenges – Management teams—particularly in founder-led businesses—may resist deep operational scrutiny, fearing it signals a lack of trust or confidence.
- Alternative Approaches – If a full operational review isn’t feasible pre-investment, a light-touch assessment—such as informal discussions with operational leaders, supplier references, or desktop analysis—can provide valuable insight.
Banking and Specialist Lender Perspective
Banks and lenders are in a different position. If they are already financing the business, they may have better access and more leverage to request an operational review before committing further capital.
- Understanding Where the Money Will Be Spent – Before approving new lending, an operational review helps assess whether the business has the execution capability to deliver its plans.
- Risk Mitigation – Unlike PE firms, lenders have no equity upside—only downside risk if a business underperforms. An operational review helps determine whether the company can operate efficiently enough to sustain repayments.
- Trigger Points for an Operational Review – Banks may require a review before increasing credit facilities, refinancing, or funding expansion plans.
Key Takeaways for Pre-Investment
- PE firms may find an independent operational review valuable but difficult to execute at this stage due to management resistance and competitive pressures.
- Banks and lenders are in a stronger position to mandate operational reviews before committing funds, particularly when evaluating new loans, refinancing, or expansion plans.
Post-Deal: Understanding What You’ve Bought and Acting Quickly
Private Equity Perspective
Once a deal has closed, an operational review provides clarity on the real state of the business.
- The Window for Quick Wins – The first 100 days are critical for assessing operational gaps and identifying quick wins.
- Understanding the Business Beyond the Numbers – Many deals are based on financial projections, but execution determines whether those numbers are realistic.
- Preventing Surprises – Supply chain inefficiencies, weak middle management, or ineffective sales processes may only become fully visible post-acquisition. An operational review helps surface these risks early.
Speed Matters: Act Early Rather Than Reacting Later
Post-transaction, the natural instinct is to stabilise the business and reassure the team. While understandable, delaying operational changes can be more disruptive later.
- People Expect Change – Employees anticipate adjustments following an acquisition. It is far better to conduct an operational review early, identify improvement areas, and set out a structured plan in the first few months rather than waiting for issues to surface.
- Control the Narrative – If changes happen proactively, they are seen as part of a strategic vision. If changes come after a period of stability, they can feel like a reaction to failure.
Common Operational Risks Identified in Reviews
An operational review often uncovers risks that don’t appear in financial due diligence. Some of the most common issues include:
- Supply Chain Bottlenecks – Poor inventory control or logistics inefficiencies causing delays and excess costs.
- Sales & Marketing Misalignment – A disconnect between lead generation and sales conversion efforts.
- Weak Management Processes – A lack of structured reporting, decision-making, or accountability.
- Technology & Systems Lag – Outdated or poorly integrated technology that limits scalability.
- Cultural Resistance to Change – Employee inertia or leadership reluctance to make necessary improvements.
Identifying and addressing these risks early prevents operational weaknesses from turning into financial distress later.
Supporting the Management Team: A Critical Pivot Point
A Less Disruptive Alternative to a Management Change
When a business underperforms, investors often consider replacing leadership. While sometimes necessary, this can be destabilising. An operational review provides an alternative path:
- A Chance to Course-Correct: Instead of immediately replacing management, an operational review gives them a structured opportunity to improve.
- Reducing Resistance to Change: A well-run review helps management see the need for change, rather than resisting it.
- Avoiding Unnecessary Disruption: Leadership changes create uncertainty, culture shifts, and the risk of losing key employees.
An Opportunity for Management to Pivot and Improve
A seasoned operational advisor can turn a review into a positive pivot point for the management team:
- It Creates a Shared Agenda: Rather than being imposed externally, a review should empower leadership to own the improvement plan.
- It Provides Cover for Necessary Change: Many leaders know what needs to change but struggle to push through. An operational review can serve as an external mandate for action.
- It Offers a Fair Evaluation Before Making Harder Decisions: If management embraces the review and drives change, the business benefits. If they fail to act, investors can make leadership changes with confidence.
When Things Go Off Track: A Critical Time for an Operational Review
Private Equity Perspective
- Covenant Breaches & Underperformance – An operational review helps determine whether the problem is financial, structural, or execution-related.
- Before Additional Capital Injection – If follow-on funding is needed, an operational review ensures that capital won’t simply be swallowed by inefficiencies.
- Turnaround & Restructuring – If the business is struggling, an operational review can guide the most immediate operational levers to pull.
Banking and Lender Perspective
- Covenant Breaches & Credit Deterioration – Lenders need to understand whether financial strain is caused by poor execution.
- Debt Restructuring or Workouts – Before renegotiating terms, lenders often request an operational review to assess turnaround viability.
- Exit Planning – If a lender is considering reducing exposure, an operational review can inform timing and strategy.
Conclusion: Timing an Operational Review for Maximum Impact
Financial statements provide a snapshot, but an operational review tells you what’s really happening—and how to fix it.
The key is to conduct an operational review early, before issues become unmanageable. Acting proactively ensures a structured foundation, avoids reactive firefighting, and ensures that operational improvements are made on your terms—not as a last resort.
Just as importantly, an operational review can be a management support tool—giving leadership a clear mandate for change. If they take the opportunity, the business benefits. If they don’t, investors and lenders can proceed with confidence, knowing they provided the right opportunity for improvement.
Thinking about an Operational Review?
If you’re considering an operational review for a portfolio company or lending relationship, I’d be happy to discuss how it could apply to your situation. Get in touch to explore how structured, execution-focused insights can drive better investment and lending decisions.
