The Assumption That’s Quietly Breaking PE Models

“Operations can wait until after close.”

By Tim Van Mieghem| Founding Partner | Author of Shocking Profit

I hear this constantly in Investment Committee discussions. The deal gets underwritten on growth assumptions, market tailwinds, and multiple expansion. Operations are treated as something you “fix later”, once ownership is secured.

That logic used to work. It doesn’t anymore.

As leverage becomes more expensive and multiples compress, execution is now the primary driver of returns. Yet it’s still the least understood pre close.

Why Do PE Firms Skip Operational Diligence?

1. Growth Still Dominates the Investment Narrative Most investment theses are built around revenue growth, not operational improvement.

   
   

   Cost, flow, throughput, and execution discipline don’t feel as “sexy” in an IC deck, even though they fundamentally reshape margins when done right.

   
   

   The irony? Operational diligence often exposes growth capacity. Capacity that is already there but hidden and covered up.
   

2. “We Don’t Want to Kill the Deal”

   
   

   This is said quietly, but it’s real.

   
   

   Going deep into how a business actually runs can introduce uncertainty. And PE firms exist to do deals.

   
   

   But here’s the truth I’ve seen repeatedly:

   
   

   Operational issues are rarely deal killers. They are deal shapers.

   
   

   Skipping diligence doesn’t eliminate risk. It just pushes it into ownership when leverage and options are worse.

   
   

3. Compressed Timelines and Diligence Fatigue

   
   

   Sellers are already buried under financial, legal, and commercial diligence. Everyone’s exhausted.

   
   

   Operational diligence feels like “one more thing.”

   
   

   Yet a well designed operational diligence:

   • Requires very little new data

   • Is observation heavy, not invasive

   • Can be completed in 2–3 weeks without slowing the deal

   
   

   The problem isn’t time. It’s prioritization.

   
   

4. Bad Past Experiences

   
   

   Many PE professionals have been burned by operational diligences that:

   • Produced generic “synergy” slides

   • Lacked ROI modeling

   • Were not actionable

   
   

   That disappointment is understandable. But it doesn’t mean operational diligence doesn’t work. It means most of it is poorly designed and executed.

A Real Operational Diligence Does Not:

• Audit management

• Critique the seller

• Produce theoretical recommendations

What Good Operational Diligence Actually Delivers:

• Identifies unstable operations that will break under growth

• Surfaces low hanging EBITDA early; often without leadership distraction

• Quantifies the cost and ROI of risks and opportunities

• Feeds directly into the 100 day and value creation plans

• Allows buyers to capture value the seller didn’t know existed

• Most importantly: It turns execution from a hope into a plan

Why This Matters More Now Than Ever

Evidence from real deals shows a consistent pattern:

• Deals without operational diligence often suffer Year 2 and Year 3 surprises

• Missed EBITDA is usually execution driven, not market driven

• Firms that emphasize operational diligence consistently uncover 20–50% profit improvement opportunities without major capital or headcount Operational diligence is no longer defensive. It’s offensive.