You don’t really know someone until you’ve lived with them – the case for post-closing operational diligence

Dress to impress, so the saying goes in dating, interviews and life. M&A is no different.

Acquisition diligence generally tells you what a seller was willing to show you and what you were able to decipher in a compressed timeline with limited access to data and staff. It rarely provides a fulsome picture of what you bought.

For buyers of food & beverage manufacturers, quickly understanding what you purchased matters more now than ever.

Financial market tailwinds that historically boosted investor returns have receded, and exits are harder to come by. Organic volume growth is scarce, squeezed by a stretched consumer, and, in many categories, GLP-1 adoption. Meanwhile, labor shortages, cost inflation and excess capacity pressure both top line and profitability. Lastly, competition for acquisitions is fierce as more than 100 PE firms have completed at least one food & beverage deal in the last decade.

As a result of these factors, the default playbook for creating value post-close (multiple expansion, sales growth, and accretive bolt-on M&A) is now much harder to execute successfully.

That places a premium on an underused value-creation lever: operational improvements that drive margin expansion.

Operations is often an underexplored hunting ground

In our work as operational practitioners exclusively focused on advising the middle-market F&B manufacturing industry, operational improvement is rarely a core pillar of a buyer’s value-creation playbook.

That’s a missed opportunity in our opinion.

For F&B manufacturers, cost of goods sold typically represents 80–90% of total operating costs and are usually 5x to 10x the size of EBIT.

Thus, modest improvements in operational efficiency have an outsized effect on your bottom line. And because most middle-market F&B manufacturers are operationally immature relative to large manufacturers, the ability to capture these improvement opportunities is real.

Pre-Closing Due Diligence constraints limit a buyer’s ability to uncover these opportunities

There’s another old saying: you don’t really know someone until you’ve lived with them, traveled with them, or worked with them. The same is true of a business.

Sellers don’t volunteer their warts. Diligence timelines are compressed, access to data and staff is limited, and a typical data room holds hundreds of documents, with the most useful insights often buried deep in operational detail. On top of that, buy-side investment professionals doing the digging often lack direct manufacturing experience and therefore don’t know where to look or how to interpret what they’re looking at.

While nearly all PE firms maintain an Operating Partner program, in our experience, Operating Partners tend to engage at a high level and/or often come from commercial or financial backgrounds.

Despite these factors, diligence typically stops at closing, right when the ability to dig deeper actually improves.

The fix: make post-closing operational diligence standard practice

Once you own a business, however, the constraints that limited pre-close diligence disappear. Staff will talk to you. Systems are open. There’s no deal clock forcing conclusions before the evidence is in. Extending focused operational diligence past close, as a deliberate, standard step rather than an afterthought, lets you:

• Confirm and de-risk the original investment thesis with the access you didn’t have before close
• Pursue the questions you didn’t have time to answer
• Surface problems and opportunities that weren’t uncovered during the pre-close process
• Put real analytical rigor behind decisions that were previously made on instinct or incomplete data
• Size the opportunity precisely enough to prioritize and sequence it
• Give your deal team and management team a shared, substantiated view of where value creation should focus

These benefits are not abstract. It’s fewer surprises, more earnings growth, shorter holding periods and bigger gains on successful transactions.

Post-closing operational diligence isn’t a replacement for what happens before signing.

It’s an acknowledgment that the best information about a manufacturing business generally only becomes available once you own it.