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What is Commercial Due Diligence?
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What Is Commercial Due Diligence
In mergers and acquisitions, commercial due diligence refers to the process of investigating a company’s commercial activities, competitive landscape, and market positioning.
In other words, an acquirer will assess a target company’s revenues, target market, commercial viability, and potential.
Commercial due diligence aims to see how well a company is doing from a commercial perspective and how its commercial activity will evolve over time.
In recent years, commercial due diligence has grown in popularity as companies’ commercial activities have become more complex, there are a number of emerging markets, and narrower specializations.
For a company to succeed, it must have a well-defined commercial strategy, have proper market positioning, and define a clear growth path.
Keep reading as I will further break down the meaning of commercial due diligence and tell you how it works.
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Why Is Commercial Due Diligence Important
There are many reasons why companies should perform commercial due diligence.
This is particularly true in the context of mergers and acquisitions.
The first reason why buyers should perform commercial due diligence is to have enough information about the target’s business allowing them to better negotiate a merger or acquisition.
Also, buyers looking to finance the purchase or bring in investors will want to have reliable data on the target company to show that they are investing soundly.
Investors and financial institutions want to have the assurance that the target company’s business is commercially sound and has the potential to grow over time.
Another reason why commercial due diligence is important is that it allows you to assess the company’s competitiveness in the market and identify its key strengths.
Knowing how the company is doing in relation to its competitors and how it can leverage its strengths to grow is important for many buyers in M&A transactions.
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Elements of Commercial Due Diligence
Depending on the reason and scope of your commercial due diligence, the topics that will be covered may vary.
However, most commercial due diligence reports will include key elements.
The first element is information about the company, its history, its mission statement, and its overall objectives.
Then, commercial due diligence will evaluate the company’s leadership team, key employees, and overall employees to see how well it is structured.
Commercial due diligence will also focus on the company’s products and services to see what it currently offers, what it is looking to offer in the future, and how it is satisfying customer needs.
Another focus of commercial due diligence is the company’s marketing strategy, business plan, and target market.
The objective is to see how well the company is targeting its customers, how well it converts leads to paying customers, and what it is looking to do in the future.
Competition is another key focus in commercial due diligence.
The objective is to see who are the company’s main competitors, how the company is positioned in the market in relation to its competitors, what are the strengths and weaknesses of the company in relation to the competition, and so on.
You can get into other aspects of commercial due diligence like pricing, sources of revenue, customer profiles, competitor profiles, operational costs, company operations, legal risks in the company’s commercial activities, and so on.
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Commercial Due Diligence Process
The success of any due diligence is directly related to how well you can gather enough reliable data to make a business decision.
Commercial due diligence can be a long and complex process that you should plan ahead of time.
The first step in the commercial due diligence process is to interview the target company’s senior management team to understand their perspective of their market positioning and growth plan.
Then, it’s important to understand the company’s current market positioning, the market trends, understand the company’s competitive landscape and its relative performance, and review the customer base.
The objective is to see in what market the company is operating in, its position within the market, and how it is relatively positioned in relation to its competitors.
The next step is to look at the company’s growth potential by looking at the company’s growth plan, the feasibility of its growth plan, expected changes in market trends, and how the competition will evolve.
Ultimately, it’s important to look at a company’s revenues, pricing, profit margins, and projective revenue targets.
Assessing a company’s revenues and profitability can provide a good idea of the company’s performance and how well it is executing its objectives.
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Commercial Due Diligence FAQ
What does commercial due diligence mean?
Commercial due diligence is the process of evaluating a company’s commercial attractiveness, commercial performance, potential, and risks.
Typically, commercial due diligence is done by buyers in M&A transactions to ensure the target’s strategic fit.
Commercial due diligence looks at a company’s entire commercial activity, performance, and objectives.
The objective of commercial due diligence is to provide a buyer with a complete understanding of the target’s business, market positioning, and potential for growth.
What is a sell-side commercial due diligence?
A sell-side commercial due diligence is when a selling company will perform commercial due diligence on its own market positioning.
Nearly half of M&A deals fail due to material issues buyers discover in the context of their due diligence.
To avoid losing a deal, sellers can proactively engage in commercial due diligence to identify potential deal breakers and cure them.
What is a buy-side commercial due diligence?
A buy-side commercial due diligence, as the name suggests, is when a buying company will perform commercial due diligence on a selling company.
The objective is to ensure that the buyer is investing in a good company without major commercial viability risks.
Today, a company’s commercial activities are more complex, global, and rapidly changing.
Buyers are interested in validating that the selling company’s market positioning is good and has the potential to grow.
What are the benefits of commercial due diligence?
There are a number of benefits to performing commercial due diligence, such as:
- Understanding a company’s products and services
- Understanding a company’s target market and positioning
- Understanding a company’s marketing strategies
- Understanding a company’s competitive advantage
- Assessing a company’s growth potential
In M&A deals, the acquirer has an interest in performing commercial due diligence to ensure that they are investing in the right company.
Commercial due diligence is also important to get financing or attract investors.
What is a commercial due diligence checklist?
A commercial due diligence checklist is a document that you can prepare ahead of your due diligence to ensure that you cover all the important elements in your investigation.
Here are some questions that should be part of your commercial due diligence checklist:
- What is the company’s market positioning?
- What are the market trends?
- How will the key drivers change?
- Who are the company’s customers?
- What are the customer characteristics?
- What are the customer psychographics and demographics?
- What is the customer churn rate?
- What is the average lifetime value of a customer?
- What are the company’s competitors?
- What are the company’s strengths and weaknesses?
- How is the company different from its competitors?
- What are the market entry barriers?
- What is the company’s growth plan?
- Is the company’s growth plan realistic?
- What is the company’s marketing budget?
- What is the company’s marketing strategy?
- How much is the average customer acquisition cost?
- Are the products and services being marketed effectively?
- Is the company’s profitability sustainable?
There are many other questions that you can induce in your commercial due diligence depending on your specific needs.
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So there you have it folks!
What does commercial due diligence mean?
In a nutshell, commercial due diligence refers to a company’s market positioning, commercial viability, and growth potential.
More and more buyers in M&A transactions will perform commercial due diligence to gain an in-depth understanding of the target’s commercial activities, market positioning, and long-term growth.
The idea is to see if there are any potential risks, threats, or red flags in a company’s positioning and competitive landscape that can impact a company’s commercial viability in the long run.
The vast majority of commercial due diligence is done by corporations in M&A transactions along with private equity firms when investing in a company.
In essence, commercial due diligence is a crucial part of a proper acquisition plan allowing you to identify the benefits or risks associated with a particular transaction.
Now that you know what commercial due diligence means and how it works, good luck with your research!
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