What is commercial due diligence?

Commercial due diligence is when a potential buyer audits a target company’s commercial activity, long-term viability and potential. A commercial due diligence report provides detailed data on market demand, commercial positioning, revenue and competitive dynamics.

So how does commercial due diligence fit alongside the other types of due diligence undertaken during an M&A deal?

Commercial Due Diligence	Financial Due Diligence	IT Due Diligence	HR & People Due Diligence
Sales & margin analysis	Analysis of Quantity of Earnings Report	IT systems & infrastructure assessment	Analysis of recruitment processes
Key success factors analysis	Confirmation of financial statements	Code Reviews & assessment of code author rights	Analysis of employee structure
Market drivers and prices	Analysis of capital expenditure	IT architecture & applied technology analysis	Analysis of compensation models
Market modelling	Assessment of projections	Software assessment	Employee contract analysis
Strategic customer analysis	Asset and liabilities audit	Analysis of IT and security risks	HR Compliance guidelines assessment
Business scalability & viability	Current financial situation & risks	Assess IT capability & risks	HR capability & development potential

 

 

Commercial due diligence vs financial due diligence

Commercial due diligence aims to uncover the market position, potential opportunities and competitive advantages. Financial due diligence confirms whether the figures presented by the seller are accurate and true. 

The goal of commercial due diligence is to identify if the business is viable and has long-term potential. It looks at the product-market fit, customer insights and growth potential. Financial due diligence primarily exists to ensure that the figures presented to investors add up and that there are no hidden risks or liabilities.

Why market due diligence is important

Commercial due diligence (DD) is critical in providing a prospective buyer with an in-depth understanding of a target’s current position and long-term viability. It allows all parties to make informed decisions and go into negotiations with an honest picture of the business.

Without market DD, neither party can claim to know the business's relative position, whether there are any impending threats to the business model, or how to navigate the post-deal industry landscape successfully.

Types of commercial due diligence

Commercial due diligence during a deal can be initiated in different ways depending on the specifics of the transaction. Here are four ways the commercial due diligence process may be initiated and how each differs. 

Buyer-initiated commercial due diligence

Potential buyers can initiate commercial due diligence to gain a comprehensive understanding of the target company. This usually happens after the letter of intent and non-disclosure agreements and before the transaction terms are set. The buyer requests information from the target company with the details that help it assess the viability and potential of the business.

Buyer-initiated commercial due diligence should focus on business operations, financial performance and market dynamics. 

Seller-initiated commercial due diligence

The seller may begin commercial due diligence to prepare for an acquisition. This helps the company to prepare for a potential sale or merger and to anticipate any questions that may arise during M&A due diligence. 

Seller-initiated due diligence allows the sell-side to identify and correct organizational risks, address any issues and prepare to answer potential buyer concerns. Conducting commercial due diligence as part of the deal preparation process can potentially increase the sale value of the company and streamline the M&A process.

Red flag commercial due diligence

Red flag due diligence is an expedited form of commercial due diligence that focuses on surfacing any significant risks of an acquisition. This high-level assessment of the target company might occur ahead of a more in-depth analysis. The goal is to save resources by identifying red flags early in the M&A process. 

Red flag commercial due diligence focuses on identifying substantial market risk indicators, financial risks, or legal issues. 

Top-up due diligence

Top-up due diligence supplements other due diligence processes to provide additional information about specific business functions or aspects. 

This type of commercial due diligence supports other types of due diligence, like financial, legal and IT due diligence, with further information about the market fit or risks within the target company.

Commercial due diligence process

Commercial due diligence can be a long and complex process, requiring exhaustive, in-depth reports and data from the target company. Commercial due diligence may be undertaken by an external party or by a dedicated team within the buy or sell side. 

1. Request documents for commercial due diligence

The first step in commercial due diligence is to establish the relationships and how information will flow between parties. Using a virtual data room enables seamless Q&A and secure sharing of documents. 

Using an external third party for commercial due diligence can decrease potential bias, and may play a role in ensuring the information in the final reports is sound. The commercial due diligence team will include business and industry experts, accountants and solicitors.

2. Preparing the commercial due diligence report

The report analyses the current and potential market value of the target company. It will consider and review all key company documentation, including: 

• Strategic plan
• Financials and forecasting
• Product market fit
• Competitive landscape and market saturation
• Customer base
• Sales and marketing processes

At this stage, a buyer or seller may decide to do a rapid red flag commercial due diligence process before continuing to rule out substantial risks to a successful transaction. 

3. Reviewing the final report

Once the complete report is ready, the buyer or investor reviews each section of the commercial due diligence report. More questions may be submitted, or a decision may be made in the context of the other due diligence that is in progress in parallel.

What’s in the commercial due diligence report?

A final commercial due diligence report will include data that assesses all of the information the buyer has supplied relating to commercial due diligence. This will usually include: 

Strategic business plan

The business plan is analysed to identify if: 

• It provides a clearly defined route for income expansion
• Feasibility and the ability to enhance it post-acquisition
• Alignment with the buyer’s strategic objectives. 

Management structure and employee agreements

The ownership structure, employee agreements and contractual obligations to customers all reveal information about how resilient the target company will be during change. Structural and team-based resilience during change is essential to the success of an acquisition or merger as the combined company must be able to maintain revenue growth during change or market fluctuations after the deal is complete. 

Competitive market positioning and opportunities

A SWOT analysis of competitors reveals the similarities and differences in the products and services of the target company, obstacles and opportunities for growth. 

Market analysis will also identify potential trends, current performance and potential for growth of market share or entry to new markets. 

Review of the customer base

The psychographic and demographic attributes of the customers will influence the business viability and potential. Knowing the current customer lifetime value, churn rate and levers that can increase customer retention and LTV is key to identifying a target company’s potential. 

Sales, forecasting and pricing

Finally, analysing the sales lifecycle and process gives a buyer insight into how the business might be optimised for efficiency and better returns. This stage considers the percentage of the budget spent on marketing and sales, customer acquisition costs, and whether projected revenues are realistic. 

The final due diligence report includes all of this information, alongside data about real estate, revenue margins and sustainability. 

Benefits of commercial due diligence

Commercial due diligence provides a clear picture of the market in which the target company operates, as well as how it is performing. The commercial due diligence report provides a high-level overview of the current state and future potential and a deep dive into where improvements can be made or opportunities for new growth can be realised. 

Both the buyer and the seller benefit from commercial due diligence. The buyer gains confidence in the transaction and transparency of the business potential. The seller has the information it needs for informed negotiations to realise the maximum value in the sale or raise. 

Power efficient commercial due diligence with Ansarada’s due diligence suite

Due diligence is a critical part of deal preparation and execution. Keeping the commercial due diligence processes tidy and streamlined using a secure workflow could be the difference between the success or failure of the transaction. 

From digital tools to accelerate due diligence to online checklists that ensure no stone goes unturned, Ansarada applies learnings from thousands of mergers and acquisitions to create practical solutions for dealmakers and consultants (see how our clients use Ansarada for M&A). 

The commercial due diligence checklist is the perfect place to start — it’s free, and it can help sellers and buyers to start preparing for the in-depth process of commercial due diligence. 

Questions about commercial due diligence

Why is commercial due diligence important?

Commercial due diligence can ensure the successful sale or merger of companies and it can help investors gain a better understanding of the operational or financial risks a company faces. 

How is commercial due diligence done?

Following an NDA, commercial due diligence reviews company information in a secure process to assess historical and forecast performance within the market, from the customer perspective, analyse competitors and assess internal capabilities.