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.
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:
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.
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.
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.
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:
Examining and knowing whether an investment is solid before completing a transaction often bestows many benefits for the prospective buyer. These include:
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.
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.
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.
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.
This checklist contains the necessary information needed in order to inform a decision on a potential acquisition or investment. While some may vary by transaction, many of the following items will determine deal success:
This helps to determine the position of a target firm in their market. It will help you predict where a particular firm is heading. Additionally, it is beneficial to know that particular market trends.
You can better glean the value and lifespan of the target company respective to its direction in the market.
Here, you learn prospective goals of the company, check on the goal’s visibility, and decide if it’s even reachable. It is important to know whether the business’ predictions can come to reality and achieve its road-mapped plan.
The phrase “customer is king” is more than just an idiom. They can make or break a business. You need to know the firm’s customers and their characteristics to maintain relationships and cultivate new ones.
This includes identifying their segmentation, buying power, purchasing behavior, and trends. Examining the customer base will also help you to discern whether the number of customers they have is legitimate or fluffed.
When entering into a potentially new market, you need to know who and what you are up against. The commercial due diligence checklist entails an examination of competitors business area.
Here you assess competitor market power and gauge the level competition is in the market. This will help you to determine how profitable the business can be and its potential profitable lifespan.
Beyond customers and competition, you need to pinpoint what operational factors drive and detract from a business’ performance.
If the firm is flourishing, you will need to know what aspects to maintain that. If it’s declining, you will need to diagnose and negate potential causes so your investment doesn’t flounder.
Having a full idea of the possible income a firm will generate over a period of time is essential. Before concluding and investing heavily in a transaction, you want to be certain that it won’t plunder 90 days later.
It is essential to have a general idea of the price and value of an investment. This helps protect from and be informed of potential future price fluctuation. It also helps to have a holistic idea of the price changes over the years.
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.