Operational Due Diligence Unlocks Hidden Defence Value

As Europe ramps up defence spending in response to heightened geopolitical threats, the defence manufacturing sector is undergoing a profound transformation.

For private equity firms and strategic buyers eyeing acquisitions in this space, the stakes have never been higher. Record order backlogs, growing capital inflows, and a renewed focus on European strategic autonomy mean that acquiring the right asset isn’t just about price—it’s about operational performance.

In this high-pressure environment, operational due diligence (ODD) is emerging as a critical success factor. Unlike traditional financial or legal diligence, which validates what a business has done, operational due diligence focuses on what a business can do. And for defence manufacturers, that difference is everything.

The announced value of private equity and venture capital-backed investments in aerospace and defence in Q1 2025 totalled over  $4.27 billion globally, nearly equalling the $4.31 billion invested in such deals in all of 2024.

Source: S&P Global Market Intelligence data

The New Defence Landscape

Since the Russian invasion of Ukraine, European nations have accelerated their defence budgets, leading to unprecedented order backlogs for manufacturers. The eight largest European defence companies saw a 19% increase in backlogs in 2024, totalling a record €291 billion.

EU-level initiatives like the €150 billion SAFE programme and national increases under the “ReArm Europe” strategy further fuel this demand.

But this boom brings challenges. Capacity constraints, supply chain fragility, and the pressure to scale rapidly have created operational bottlenecks. In parallel, private capital is flowing into the sector at pace, driving competition for assets and pushing valuations higher.

The Case for Operational Due Diligence

Too often, buyers rely solely on financial due diligence to assess acquisition targets. This may uncover the health of the balance sheet, but it misses the operational heart of a manufacturing business.

Operational due diligence fills this gap. It evaluates a company’s ability to deliver on future orders, meet customer expectations, integrate new technologies, and scale production profitably.

This insight is essential not just for risk management—but for unlocking hidden value. In our experience operational due diligence – done well – can pinpoint areas where improved performance can generate significant value and make a substantial contribution to a deal’s ultimate return. According to some estimates, operations can account for around half of all value creation.

Value Creation Starts Before the Deal Closes

Significant  value creation comes from operational improvements—not just from financial engineering or revenue growth.

Operational Due Diligence allows acquirers to:

• Identify cost savings and efficiency gains.
• Pinpoint capacity constraints and plan CapEx investments.
• Benchmark performance against sector leaders.
• De-risk post-deal integration and accelerate improvement timelines.

Successful manufacturers the aerospace and defence sector will pursue acquisitions that add specific capabilities such as operational talent and advanced operating models — and rely on ODD to ensure those capabilities are viable and scalable.

What to Examine in Operational Due Diligence for Defence Assets

At Seraph our hands–on experience directs our key areas of focus when we deliver a manufacturing ODD for a defence asset:

• Production and Capacity: Assess facility throughput, equipment utilisation, and bottlenecks. Is the business operating at sustainable capacity—or just barely keeping up with orders?
• Supply Chain Resilience: Identify vulnerabilities in critical parts sourcing, especially given EU regulations favouring “Buy European” suppliers
• Technology and Automation: Review current tech stack and readiness for automation. Defence firms must innovate faster while maintaining traceability and compliance
• Leadership and Workforce: Evaluate the strength of site leadership, retention risks, and readiness for change. Defence firms with rigid hierarchies may struggle with transformation
• ESG and Regulatory Compliance: Defence M&A involves unique scrutiny. Understanding environmental and governance risks can prevent costly surprises post-close
• Operational KPIs: Metrics like OEE (Overall Equipment Effectiveness), On-Time Delivery, scrap rates, and quality metrics provide a real-time view of execution capability

Why is Defence Different?

Defence manufacturing brings additional complexities:

• Long lead times and low-volume, high-complexity builds.
• Government procurement oversight and state aid rules.
• Stringent export controls and security clearance requirements.
• Limited vendor base and restricted technologies.

Operational due diligence, in this context, becomes more than just prudent—it’s essential. Without it, buyers risk underestimating the time, cost, and risk of scaling the business.

The 100-Day Edge: From Insight to Action

The best acquirers use the pre-close period to build their 100-day value creation plan.

ODD delivers the insight needed to:

• Set realistic integration goals.
• Mobilise quick wins (e.g., productivity, procurement, scheduling).
• Define the talent and technology investments needed for growth.
• Avoid disruption to critical contracts or government relationships.

Seraph believes that firms who embed operational planning early are best positioned to capture synergies and defend margins in dynamic markets.

Conclusion: Operational Diligence as a Differentiator

In today’s European defence landscape, competitive advantage is not just about acquiring the right target—it’s about knowing what to do with it.

Operational due diligence turns uncertainty into insight, risk into opportunity, and complexity into clarity.

Whether you’re a , operational due diligence is your edge in a crowded, high-stakes market.

Don’t just buy a factory. Buy the ability to deliver

Next Steps: Is Your Target Ready?

At Seraph, we specialise in European Defence Operational Due Diligence.

Contact us www.seraph.com/contact-us/ to schedule a rapid readiness review.

Download our European Defence Operational Due Diligence Acquisition Checklist here:

Let our experts help you go beyond the balance sheet so you can unlock real value – fast.

Sources:

• Fitch Ratings: European Defence Companies’ Record Backlogs Boost Cash Flow Generation, Fitch Wire, 20th March, 2025.
• White & Case; The Big Bang? European Commission unveils proposals to support surge in defence spending, reduce reliance on third countries; 7th April, 2025.
• Vestbee M&A market outlook 2025, February 18th
• The Power of Buy and Build; How Private Equity Firms Fuel Next-Level Value Creation, BCG and Leipzig Graduate School of Management, 2016. S&P.
• S&P Global Market Intelligence Data, Q1 2025