What is Commercial Due Diligence?
Updated: May 8
Commercial due diligence is a mandatory part of any acquisition process. Commercial due diligence (DD) is crucial for the prospective purchaser to have a detailed view of the target's current situation. In addition, this process allows the parties to make informed decisions during negotiations and get an accurate business picture.
Commercial Due Diligence Checklist
Below is a Commercial Due Diligence Checklist. We'll touch on some of these points later.
Start by understanding the target and its products/services
Review the financial statements for the last 3 - 5 years.
Evaluate the management team
Size up the competitive landscape
Assess the company's supply chain and distribution channels
Review customer feedback and reviews online
Review the companies sales pipeline
Analyse the company's marketing strategy
Use the information above to assess the firm's financial forecasts.
Perform a SWOT analysis to understand the business's strengths and weaknesses
The commercial due diligence process will give a good understanding of the business and its position in the market. You can begin to validate your investment thesis.
As we outline later, customer feedback can also be helpful in this research stage. It's essential to see what customers say about the company and its products or services. Are customers happy with what they're getting? Are there any complaints? This information can help you fine-tune your investment thesis.
Finally, don't forget to analyse the firm's marketing strategy. This can give you insights into how the company is positioning itself in the market and whether or not it is succeeding. In addition, look for any recent news or press releases about the company, as this can also provide valuable information.A Quick Guide to Commercial Due Diligence
Commercial due diligence is the process of investigating a company or business to assess its value and make an informed buying decision. It involves examining things like the company's financial health, its business model and strategies, as well as its competitive landscape.
Who undertakes Commercial Diligence?
Generally, most commercial due diligence is carried out by a corporate entity or private equity firm (pe firm). However, the process can also be conducted by an independent consultant. This happens because most buyers lack the time, expertise, and knowledge required to evaluate the target company thoroughly.
Why does a prospective buyer do Commercial Due Diligence?
A commercial due diligence process is essential. Here are a few key reasons why:
- To get a complete picture of the business and all its assets.
- To assess the risks associated with buying the company.
- To validate the valuation and the final investment decision.
- To determine what kind of synergies and return on investment they can expect.
- To identify any potential liabilities they may be taking on by purchasing the company.
What Are Some Typical Components of Commercial Due Diligence?
There is no one-size-fits-all approach to commercial due diligence, but typically it will involve examining the following three areas:
1. External Market Factors
a) The Market
Buyers evaluate the market trends and conditions during commercial due diligence to understand the attractiveness of a potential investment. They also want to know the risks and opportunities to make an informed decision. Additionally, buyers want to ensure that they are not overpaying for a company or business.
There are several critical aspects of market due diligence that buyers should keep in mind:
Assessing the overall industry or markets the target company operates.
Understanding the competitive landscape, competitive dynamics and the target company's position.
Analysing historical trends and forecasting future market conditions.
Identifying any potential risks and opportunities associated with the target company's industry or markets (e.g. regulatory changes, disruptive technologies etc.).
Determining how the target company's business could be affected by market conditions.
By doing thorough market due diligence, buyers can make more informed decisions about whether or not to invest in a company. However, it is also important for buyers to remember that the market conditions can change quickly, so they should always be prepared to revise their analysis as needed.
Understanding the target's competitive landscape allows buyers to start assessing the risk posed by competitors. Additionally, buyers can start formulating strategies to overcome any potential threats posed by the competition.
Some of the key areas that buyers will assess when evaluating the target's competitors include:
Who are the main competitors?
Market share: What is the competitor's market share? How has this changed over time?
How different are the respective products/services differ?
What advantages/disadvantages do they have relative to the target?
What are the market dynamics - for instance, what are the barriers to entry for new competitors?
Buyers must understand the customer base. By assessing the target's customers, buyers can ensure that the company is a good fit for their needs and has a good reputation.
Additionally, happy customers are essential for the success of any business, so buyers need to gauge customer satisfaction levels. Conversely, unhappy customers may be symptomatic of more significant issues and risks for the buyer.
Therefore buyers will want to know the following:
An overview of who the customers are.
Growth prospects for each customer.
The average lifetime value of a customer?
The levels of and reasons for customer churn.
Customer satisfaction (Buyers may reserve the right to interview a cross-section of customers to get customer references and net promoter scores so they can validate assumptions.)
Where possible, it is essential to interview the target's customers. This lets you get an idea of what the customer wants and expects from the product or service. It can also help you identify any problems that may have arisen with the target, their products or services and business processes. By talking to customers, you can also get feedback on what they liked and disliked and any issues.
Additionally, talking to customers allows the prospective buyer to validate the business's growth potential, learn more about the target's competitive position, and identify customer churn risks.
3. Internal Factors (Target Specific)
Finally, understanding the internal operations and appraising it, is crucial for buyers to make an informed investment decision. Buyers will look at every inch of the target business, including its history, mission, vision and future plans.
This process will include developing an in-depth assessment of what makes up each aspect of the company. This will include areas such as leadership roles & responsibilities; financials; procedures, sales & marketing and customer support.
Additionally, a review of the company's business plan.
How realistic is the business plan?
How can the business plan be improved upon after an acquisition?
Are there business plan areas that don't fit with the buyer's strategic objectives?
The three primary purposes of the diligence process are to:
Identify and assess risks within the target company.
Validate that the buyer's investment case is correct and justify the valuation.
Support integration and help the buyer plan for how they will operate the business post-acquisition.
The due diligence process can be complex, but it's essential for business buyers who want to make informed decisions about whether or not to buy a company. By doing thorough due diligence, they can avoid costly mistakes and ensure that they're getting a good deal on the purchase.
Thank you for reading! We hope this article has helped give you a better understanding of commercial due diligence.
Lighthouse Commercial Due Diligence Services
We provide commercial due diligence services to Executive teams as part of our strategic development process.
Our commercial due diligence report provides an X-ray of the target company.
Lighthouse also supports investors, Corporate Development teams and Private Equity firms in assessing acquisition opportunities. In addition, we help to develop investment cases and validate the risks and opportunities involved with a potential deal.
We understand technology businesses, and we know what good looks like. So for more information or help with your business purchase, don't hesitate to contact us today.