Daly became the head coach at the University of Pennsylvania in 1971, succeeding Dick Harter. Penn won twenty or more games and captured the Ivy League title in each of its first four seasons with Daly at the helm. The most successful campaign was his first in 1972, when the Quakers recorded a 25–3 record overall (13–1 in their conference), and advanced to the NCAA East Regional Final, eventually losing to North Carolina. An additional significant success for Daly was in 1979, when all five starters on Pennsylvania's Final Four team had initially been recruited by Daly. His overall record after six seasons at Penn was 125–38 (74–10 within the Ivy League).
In 1978, Daly joined the NBA's Philadelphia 76ers as an assistant coach. During the 1981 season, he was hired as head coach by the Cleveland Cavaliers, but was fired before the season ended. He then returned to the 76ers as a broadcaster until he was hired in 1983 by the Detroit Pistons. The Pistons, a club that had never recorded back-to-back winning seasons before Daly's tenure, made the NBA playoffs each year he was head coach (1983–1992), as well as reaching the NBA finals three times, winning two consecutive NBA championships in 1989 and 1990. While serving as the Pistons coach, Daly was also a color commentator for TBS's NBA Playoff coverage.
Daly was named head coach of the U.S. Dream Team that won the gold medal at the 1992 Olympics, before moving his NBA career onto the New Jersey Nets for the 1992-93 NBA season. Daly stayed with the Nets for two seasons, before his first retirement.
Daly again took up a role as color commentator for TNT's NBA coverage during the mid-1990s before coming out of retirement to coach the Orlando Magic at the beginning of the 1997-98 season. Daly stayed two seasons with the Magic and then retired permanently.
Daly coached a total of 14 NBA seasons with the Cleveland Cavaliers, Detroit Pistons, New Jersey Nets and Orlando Magic. He compiled a 564–379 (.598) career record, 13th best among all coaches and ninth best by percentage. On the combined NBA/ABA victory list, Daly's 564 wins places him 17th all-time. His 74–48 playoff record ranks fourth best in NBA history by wins and eighth best by percentage (.607).
Daly was diagnosed with pancreatic cancer in March 2009 and died on May 9, 2009, at the age of 78. He is survived by his wife Terry and their daughter Cydney. He is buried at Riverside Memorial Park in Tequesta, Florida.