Commercial due diligence is the process a prospective buyer institutes in order to assess a target company’s commercial viability prior to purchase negotiations. The aim is to achieve a full overview of the company’s internal and external environment, highlighting potential risks and estimating the ultimate Return On Investment a buyer can expect.
The product of this process is a report outlining and analysing everything from the company’s recent performance and the scope of the market to competitor profiles, the company’s internal culture and the likelihood it will meet its current targets on time.
For this reason, commercial due diligence is a relatively complex undertaking, generally lasting 2-3 weeks and requiring a variety of research and inspection methods.
There are three fundamental functions of commercial due diligence:
Combined, they give a prospective buyer the level of visibility and operational knowledge necessary not just to decide whether or not the acquisition is worthwhile, but to actually run and – if necessary – restructure the business once the acquisition is made.
The vast majority of commercial due diligence is undertaken on behalf of corporations or private equity firms. However, a third party consulting firm is usually hired to conduct the actual process.
This is because the prospective buyer generally does not have the time, resources or specialist knowledge to undertake a thorough analysis of the target company. Outsourcing also means the process is undertaken from a more impartial perspective.
There are three basic stages in a commercial due diligence:
1. The initial liaison between a prospective buyer and the third party they have hired to undertake the due diligence. At this stage the buyer will outline specific information it wants on the target company and set clear deadlines – generally to coincide with negotiations.
2. The report is compiled by the third part. This is the lengthiest part of the process and will typically involve conducting interviews and synthesising detailed research from a variety of sources – including trade publications, market analyses, government statistics and various forecast reports.
3. The report is reviewed by the buyer, and they will have the opportunity to probe aspects of the findings and analyses before making a final decision on the purchase.
The report is generally intended to be exhaustive, and as such will generally be tailored to the specific industry and nuances of a target.
Beyond the basic facts about a company’s history, values, products and services, there are several core factors which any proper commercial due diligence report should touch on:
Commercial due diligence is a vital component of any serious acquisition, and while the traditional model has proven largely effective, there is still plenty room to improve the process and make more robust, better informed decisions.
According to the IMAA’s research, less than a third of due diligence processes included interviewing customers from the target company. For a commercial venture, this is unthinkable: what is more important, today, than customer service?
Commercial due diligence must seek to create a clearer sense of how the public interacts with a target company and how those sentiments are likely to shape the future.
It is also increasingly clear that supply chain management – from sustainability goals to supplier visibility – will continue to shape business performance in coming years, and including more vital information about how, where and why a business is sourcing its products will provide a level of strategic clarity many commercial due diligence reports lack.