This is Part 1 of the Buyer Beware M&A Series.
Operations Assessment Framework
When evaluating an acquisition target, operational maturity often reveals more about long-term viability than the product itself. A brilliant product built on unstable operational foundations becomes a liability, while a solid operational foundation can support rapid improvement and scaling.
This guide provides a systematic approach to evaluating the operational capabilities that will determine post-acquisition success.
Dependencies and Licensing
Intellectual Property Audit
Are there parts of the codebase the target company doesn’t own? Startups often adopt a “move fast, deal with legal later” approach that can create significant post-acquisition complications.
Key Questions:
- What open source packages are in use and under what licenses?
- Are there any GPL or other copyleft licenses that could require disclosure?
- Has the company performed regular license audits?
- Are there any pending IP disputes or claims?
Red Flags: GPL components in proprietary products, missing license documentation, or a history of “we’ll deal with that later” responses to IP questions.
Third-Party Component Strategy
Understanding the balance between build vs. buy decisions reveals both technical maturity and future cost structure.
Evaluation Criteria:
- Ratio of proprietary code to third-party dependencies
- Quality and sustainability of chosen dependencies
- Vendor lock-in risks and migration complexity
- License cost scaling with user growth
Consider: A heavy reliance on third-party components isn’t necessarily problematic, but understanding the strategic rationale and long-term cost implications is crucial.
Operating Expense Analysis
Cloud Infrastructure Costs
Cloud spend as a percentage of revenue provides insight into both technical efficiency and business model sustainability.
Assessment Framework:
- Cost per customer/user: Does the unit economics make sense?
- Cost growth trajectory: Is spending scaling linearly or exponentially with growth?
- Optimization efforts: Is there a roadmap to address inefficiencies?
- Reserved capacity strategy: Are they managing costs strategically?
Benchmark Questions:
- “What’s your cloud spend as a percentage of recurring revenue?”
- “What are your three largest cost drivers?”
- “What optimization work is in your current backlog?”
Customer Support Overhead
High support costs often indicate product usability issues or incomplete feature development.
Key Metrics:
- Support cost per customer
- Ticket volume trends
- Resolution time patterns
- Escalation frequency
Red Flags: Support costs growing faster than customer base, repetitive tickets indicating systemic issues, or lack of self-service capabilities.
Professional Services Dependency
Understanding whether you’re acquiring a product company or a services company disguised as a product company.
Critical Assessment:
- Revenue split between product licenses and professional services
- Customer success rates with minimal professional services
- Standardization of implementation processes
- Self-service adoption rates
Warning Signs: New customers requiring extensive professional services, custom implementations for most deals, or services revenue growing faster than product revenue.
Operational Maturity
Development Operations (DevOps)
Modern software delivery practices indicate both team capability and product reliability.
Continuous Integration/Continuous Delivery (CI/CD)
Maturity Indicators:
- Automated testing coverage and quality
- Deployment frequency and success rates
- Rollback capabilities and procedures
- Environment parity (dev/staging/production)
Questions to Ask:
- “How do you deploy to production?”
- “What’s your deployment frequency?”
- “How do you handle rollbacks?”
- “What’s your automated test coverage?”
Version Control and Code Management
Assessment Areas:
- Branch management strategy
- Code review processes
- Release management procedures
- Documentation quality and coverage
Infrastructure and Architecture
Infrastructure as Code (IaC)
Evaluation Points:
- Percentage of infrastructure managed as code
- Version control for infrastructure changes
- Environment reproducibility
- Disaster recovery capabilities
Red Flags: Manual infrastructure management, inconsistent environments, or lack of documented procedures.
Scalability and Performance
Technical Assessment:
- Load testing practices and results
- Monitoring and alerting systems
- Performance optimization history
- Capacity planning processes
Security Posture
Security Fundamentals:
- Access control and authentication systems
- Data encryption (at rest and in transit)
- Security incident response procedures
- Compliance framework adherence
Critical Questions:
- “Who has production access and why?”
- “How do you handle security incidents?”
- “What compliance requirements do you meet?”
- “When was your last security audit?”
Data Literacy and Monitoring
A team’s relationship with data reveals their product understanding and operational sophistication.
Operational Metrics
Infrastructure Monitoring:
- System performance metrics (CPU, memory, disk, network)
- Application performance monitoring (APM)
- Error rates and patterns
- Cost allocation and tracking
Business Metrics:
- Customer usage patterns
- Feature adoption rates
- Performance impact on user experience
- Revenue attribution to technical improvements
DORA Metrics
The DevOps Research and Assessment (DORA) metrics provide industry-standard benchmarks for engineering effectiveness:
Core Metrics:
- Deployment Frequency: How often code is deployed to production
- Lead Time for Changes: Time from code commit to production deployment
- Change Failure Rate: Percentage of deployments causing production issues
- Time to Recovery: How quickly the team recovers from production incidents
Assessment Approach: If these metrics aren’t already tracked, conduct informal assessment through interviews and observation. The absence of these metrics itself indicates maturity level.
Product Analytics
User Behavior Understanding:
- Monthly/Daily Active Users (MAU/DAU)
- Feature utilization patterns
- User journey analytics
- Conversion funnel analysis
Product Development Insights:
- A/B testing capabilities
- Feature flag management
- User feedback integration
- Data-driven decision making processes
Risk Assessment and Mitigation
Technical Debt Evaluation
Debt Categories:
- Code quality and maintainability
- Infrastructure modernization needs
- Security vulnerability backlogs
- Documentation and knowledge gaps
Business Continuity Planning
Disaster Recovery:
- Recovery Time Objective (RTO) and Recovery Point Objective (RPO)
- Backup and restore procedures
- Geographic redundancy
- Incident response playbooks
Operational Resilience:
- Single points of failure identification
- Key person dependencies
- Vendor relationship management
- Compliance and audit readiness
Integration Planning Considerations
Operational Compatibility
Assessment Areas:
- Technology stack alignment
- Deployment pipeline compatibility
- Monitoring and alerting integration
- Security policy alignment
Migration and Consolidation
Planning Factors:
- Timeline for operational integration
- Cost of maintaining parallel systems
- Risk mitigation during transition
- Success metrics for integration
Conclusion
Operational assessment requires looking beyond current functionality to understand the foundation upon which future growth will be built. A target company with solid operational practices can scale efficiently and integrate smoothly, while operational deficiencies often become expensive post-acquisition problems.
Key takeaways for your operational assessment:
- Cost structure sustainability: Ensure unit economics support profitable growth
- Operational maturity: Look for automated, repeatable processes
- Data-driven culture: Teams that measure and optimize tend to improve continuously
- Risk management: Understand and plan for operational risks before they become problems
- Integration complexity: Factor operational differences into your acquisition timeline and budget
Next in Series: Part 2: People and Culture Assessment covers team composition, cultural alignment, and retention strategies.
Return to Buyer Beware Series Index