A Guide to Commercial Due Diligence

09 February 2017 Amelia Henderson

Commercial due diligence is the process a corporation or private equity firm undertakes to gauge a company's commercial attractiveness. Unlike financial due diligence, which focuses solely on the financial health of the company, commercial due diligence provides a full overview of the target's internal and external environment.

A commercial due diligence report analyses company performance, the likelihood that the business will meet its targets, and highlights potential problems that may occur as a result of an acquisition.

This report provides the potential buyer with in-depth knowledge of the target company and the market in which it is positioned. It is designed to enable the prospective buyer to make an informed decision, and highlight any potential risks associated with the target business.

Beneficial Owners

Commercial due diligence process

Commercial due diligence is typically conducted before negotiations begin, in order to allow the potential buyer to assess the risks and potential of the target before making a bid.

The process is comprised of the following stages:

  1. A corporation or private equity firm will liaise with a third party to conduct the report on their behalf.
  2. The third-party then prepares a commercial due diligence report, outlining the information required for a potential acquisition.
  3. This report is then reviewed the prospective buyer, in conjunction with other reports, before a final decision is made.

Portfolio Companies

What are the benefits of conducting commercial due diligence?

The primary benefit of conducting commercial due diligence is that it provides the prospective buyer with a thorough understanding of the target company's position, before negotiations begin. This allows the buyer to make informed decisions during a potential acquisition.

In addition, it provides an assessment of the external market landscape and what effect this may have on the target’s ability to reach its forecast results. It will also analyse competitors’ performance and market share. This allows the potential buyer to assess the target's potential and determine whether an acquisition of the target is likely to yield a profitable long-term investment.

A commercial due diligence report can be used by the acquirer to show to their bank to provide comfort and reassurance that the business will not fail.

List Report - Turnover

Commercial due diligence checklist

A commercial due diligence report will vary depending on the nature of the target company, however the contents of the report will remain largely the same across most industries. Typically the report will include the following information:

  • Review of the target's business plan and predictions
    • How realistic are these targets?
    • How achievable is the business plan?
  • Research and assessment of the market
    • Where is the target positioned within the market?
    • Where is the market heading? How could this affect the value of the target company?
    • What are the trends in the market?
  • Analysis of competitors and customer base
    • Who are the strongest and weakest competitors?
    • How does the target perform against its competitors?
    • What is its customer profile?
  • Revenue and gross margin modelling
    • Will the target reach its projected revenues?
    • How much can the target company be expected to make over a set period of time?
  • Pricing and margins
    • How have average prices fluctuated historically?
    • What is the forecast for prices in the future?

Shareholders

How DueDil can help

From due diligence to deal prospecting, DueDil helps businesses make data-informed decisions. DueDil combines comprehensive sources of company information and an intuitive set of features that allow any team to uncover opportunities and understand risks.

Unlike traditional information suppliers, DueDil provides a unified platform for teams across a business to contextualise and navigate the relationships between sets of data.

To find out how your business can enhance its due diligence processes, get started with DueDil today.