Commercial due diligence is instituted by a prospective buyer to uncover a target company’s commercial activity, viability and potential.
Commercial due diligence services insight on market demand, commercial position, revenue, and competitive dynamics.
On DealRoom platform, specifically designed for M&A, we have dozens of deals every year. And in this article we outlined the information generally acquired during commercial due diligence by our clients and the importance of thoroughly completing this process.
What is Commercial Due Diligence?
Commercial due diligence is the process through which a buyer analyzes a target company from a commercial perspective. The aim of commercial due diligence is to provide the buyer with an overall context of the company, based on its positioning in its market(s), and how that is likely to evolve in the years ahead.
Commercial Due Diligence Process
A deal should never be carried out without in-depth commercial due diligence.
However, commercial due diligence is a long and complex process and requires exhaustive, in-depth inquiry into a potential target. The following three stages will help organize and prioritize your workflow.
The due diligence process involved in conducting a thorough and informative report includes the following stages:
1. LIAISING PROCESS
The liaising process begins with the introduction of a third-party firm. The members of this external firm conduct in-depth diligence reports on behalf of the prospective buyer or private equity firm.
2. PREPARATION OF A GENUINE REPORT
The third party executes the commercial due diligence report which provides analysis regarding the organization’s potential and current market value. Once completed, the firm compiles and delivers a commercial due diligence report to the prospective buyer.
3. REVIEW OF THE DUE DILIGENCE REPORT
In the final step, the prospective buyer reviewing and assessing the third party’s findings. The investigations and respective reports due diligence are all encompassing to hit every faction of the target company.
Due diligence unearths revenue margins, business plans or performance, market positioning, any real estate, and overall success of operations.
What is a Commercial Due Diligence Report?
The commercial due diligence report provides a summary of the findings of the analysis undertaken during commercial due diligence. One way to think about this report is as a highly detailed SWOT analysis of the company, which casts a critical eye over the company and its commercial prospects.
For the buyer, it acts as a more objective version of the target company’s own business plan.
What's Included in CDD Process?
Many aspects of commercial diligence are essential to any deal, while the importance of others may vary situationally.
Listed below are core items most commercial due diligence processes require:
- COMPANY'S GENERAL INFORMATION. This is a general overview of the target company’s history, mission statement, and key operations.
- MANAGEMENT AND EMPLOYEES OF THE COMPANY. This is information on the owner of the company including management and other employees.
- LEGAL MATTERS. This includes items such as proper legal documentation, outstanding contracts, litigation, and certificates of occupancy. A lawyer within a third party firm usually handles all statutory matters and helps ensure proper compliance. These lawyers can also lend legal advice regarding the company following jurisdictional laws.
- PRODUCTS AND SERVICES. This encompasses all data and history on the company’s different products sold and completed transactions.
- MARKETING. This regards information pertaining to the company’s marketing strategy, business plan, customer profiles and competitor dynamics.
- COMPETITION. This details any and all current or potential competitors the target faces in the market, as well as how they compare to these competitors in market share.
Commercial Due Diligence Checklist
The extent of commercial due diligence to be undertaken largely depends on how many products and services, markets, and customers that the company has.
The following represents a broad overview of what a commercial due diligence checklist should include:
1. Market size for the company (TAM, SAM, and SOM).
- What are key drivers in the market?
- How is it likely to grow or change in the future?
- Is the market online or in-person? B2C or B2B?
- Are the industry margins sustainable at current levels?
2. Competitive Landscape
- Who are the main competitors?
- What advantages/disadvantages do they have relative to the target?
- How do their products/services differ?
- What are the barriers to entry for new competitors?
3. Review of the company’s business plan
- Does it provide a clear path to income growth?
- How realistic is the business plan?
- Could the business plan be improved upon after an acquisition?
- How does the business plan fit with the buyer’s own strategic objectives?
- What are the psychographic and demographic characteristics of the company’s customers?
- How is the average lifetime value of a customer?
- What is the company’s customer churn level?
- What customer experience does the company provide?
5. Sales and Marketing
- How much of the annual budget is spent on sales and marketing?
- How could the sales and marketing be improved?
- What is the average customer acquisition cost? Is it higher/lower than the market average?
- Are the company’s products and services being marketed effectively?
Commercial Due Diligence Benefits
Examining and knowing whether an investment is solid before completing a transaction often bestows many benefits for the prospective buyer. These include:
1. MAKING INFORMED NEGOTIATION
The investigative aspect of purchasing a company can give an investor the edge over the seller during negotiations. Being aware of all the necessary information will help the buyer establish a more accurate negotiation price and defend their position.
Additionally, the commercial audit helps the seller develop a clear understanding of the position of the seller and negotiate accordingly.
2. ASSURANCE OF A GOOD INVESTMENT
You may need to collect loans from financial institutions for the company or commercial property you want to purchase. This report can help you convince these institutions that the investment is worth it. In the end, it will present a better reassurance a better future for the business.
3. EXTERNAL EFFECTS OF THE BUSINESS
Commercial due diligence provides an in-depth overview of the target company’s competitiveness and market strengths. This knowledge enables potential buyers to better forecast the company’s long-term successes and respective gains.
4. INFLUENCE OF COMPETITOR’S BUSINESS
The diligence report provides an idea the effect a target company’s competitors have on the market. This is important in order to assess potential growth and market strategies.
Knowing the intensity of competition in the market will ultimately help you to discern whether the business is worth your investment.
How DealRoom can Help
Commercial due diligence is a complex process that requires organization, collaboration and careful analysis.
Teams collect copious amounts of sensitive documents, collaborate with various outside parties and work together to analyze the information received.
All these activities are essential to a successful deal, but can be extremely difficult and convoluted.
DealRoom’s leading due diligence management platform can help.
DealRoom’s platform enables team collaborate, secure and organized document collection and the examination of important analytics to enable informed decisions.
Close deals faster, more successful and more equitably by streamlining diligence with DealRoom’s intuitive, innovative platform.