Operational Due Diligence: Bridging Investment Thesis and Operating Reality

A deal model shows the return an investor expects. Operational due diligence (ODD) should show whether the business can actually deliver it.

The numbers don't execute themselves

An investment thesis rests on assumptions: revenue will grow, margins will expand, working capital will improve, capacity will scale or new markets will open. CDD and FDD can validate the opportunity and historical performance but not whether the operating model can deliver those projections. Two businesses with similar revenue and EBITDA today can have very different prospects for sustaining and scaling them, depending on their supply chains, processes, people and technology. At Praxis, we see ODD as the bridge between the investment thesis and operating reality: can the business actually get to where the investor expects it to go?

Test scalability across the supply chain

Supply-chain diligence should test whether the network can support growth without disproportionate increases in cost, inventory, working capital or complexity. Assess supplier availability and concentration, capacity, lead times, qualification timelines, production capacity, warehouse throughput and logistics and resilience to supplier loss, price increases, seasonality and demand changes. Capacity headroom is not scalability: a supplier may have capacity today but be unable to support future volumes because of competing customers, geography or quality requirements. A plant may have spare capacity but still need utilities, shifts, manpower or downstream logistics. The practical question is: what needs to be added, where, at what cost and by when? A procurement benchmark gap is similarly not automatic savings; contractual terms, specifications, supplier relationships and switching costs determine realizable value.

Test the rollout, not just the expansion plan

A plan to enter 20 new cities says little about whether the network can be built profitably. ODD should go down to the micro-market and, where relevant, pincode level: where demand sits, how competitors are positioned, what infrastructure is required and where genuine whitespace exists. The key questions are which micro-markets to enter, the right location, competitive intensity, required utilization, ramp-up and break-even density. A scalable network also needs standardized SOPs, clear ownership and KPIs covering utilization, throughput, service levels, productivity, unit economics and ramp-up. The output is a grounded rollout map: where to expand, where not to, the right sequencing, the operating model to replicate and the KPIs that govern it.

Validate what happens on the ground

Management data and SOPs are the starting point; site visits, frontline discussions, supplier interviews, distributor and retailer conversations and benchmarking reveal execution reality. They can surface bypassed processes, location-level productivity differences, weaker-than-assumed supplier loyalty or practices that work in the core geography but may not replicate elsewhere. Granularity matters: a national view may suggest strong distribution while a micro-market view reveals gaps; overall supplier concentration may look manageable until a particular input or region becomes a single point of failure. The test is simple: where does the model work, where does it not, and why?

Understand channel economics, not just reported margins

Where distributors, dealers or retailers matter, trade practices can materially affect growth and profitability. ODD should test distributor returns, retailer satisfaction, territory overlaps, channel conflict, inventory and competitive offers. Undercutting and discounting can create conflict and margin leakage. It should also test whether reported sales growth reflects genuine end-demand or channel loading, higher trade schemes or inventory build-up. The objective is to reconcile reported economics with channel-level reality.

Scale controls with the business

Scaling is not simply adding capacity or locations; the operating control environment must scale alongside it. Standardized SOPs, clear accountability and consistent KPIs help identify deviations before they become lower productivity, higher wastage, weaker service or margin leakage. KPIs should connect volume, capacity, service and economics, with thresholds, escalation mechanisms and corrective actions. Without this discipline, expansion can create a fragmented network where each location develops its own processes and economics.

Translate findings into the investment case

The final test of ODD is whether findings change the underwriting. Every material finding should answer: What did we observe? Why does it matter? What needs to change? What will it cost? When does the impact reach EBITDA or cash flow? This could mean earlier capex for a supply constraint, a different network sequence, a smaller procurement opportunity than a headline benchmark suggests, or an underappreciated margin risk. Equally, ODD can show where management's plan is conservative where infrastructure has more scalable capacity than assumed or a repeatable rollout model can support faster expansion. The distinction is between theoretical potential and underwritable value: a benchmark gap, spare capacity or ambitious rollout is not a value-creation opportunity until there is a credible, operationally grounded path from intervention to cash.

A strong ODD does not simply tell an investor whether operations are “good” or “bad.” It establishes whether the business can scale at the pace, cost and economics assumed in the investment case and what could prevent it from doing so.