Anybody who has ever completed due diligence in M&A will tell you, there are many different types of due diligence. Here, we’re going to discuss the basics of market due diligence or commercial due diligence from both the buy and sell-side perspective. We’ll look at why it’s necessary, and how to get the whole process done in a matter of days, instead of months.

 

What is commercial due diligence?

Commercial due diligence is the process of evaluating a target company’s market position and growth potential.

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 relative position of the business, whether there are any impending threats to the business model, or how to navigate the post-deal industry landscape with success.

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The commercial due diligence process

Generally speaking, the commercial due diligence process will consist of the following: 

Reviewing the business plan 

• Does it offer a clearly defined route for income expansion?
• How feasible is the business plan in practice?
• Can the business plan be enhanced following an acquisition?
• How well does the business plan align with the buyer's strategic objectives?

Analysing the market and the company’s position within it

• What are the primary competitors in the market?
• What are the strengths/weaknesses of the competitors compared to the target company?
• How do the products/services of the competitors differ?
• What are the obstacles that new competitors face when entering the market?
• Predicting the future of the market and the target’s place within it
• Looking at market trends 
• Analysing the target's competitive position and relative performance

Reviewing the customer base

• What are the psychographic and demographic profiles of the company's customer base?
• What is the average lifetime value of a customer?
• What is the customer churn rate for the company?
• How does the company deliver a positive customer experience?

Investigating sales, pricing and financials

• What portion of the yearly budget is allocated to sales and marketing?
• What strategies could enhance the effectiveness of the sales and marketing efforts?
• What is the average cost of acquiring a customer, and how does it compare to the market average?
• Is the company effectively promoting its products and services?
• Assessing whether projected revenues are likely to be reached

Market DD sell-side

In mergers and acquisitions, it's usually the buyer performing commercial diligence. However, it's a good idea for sellers to do it too. Since 47% of deals fail due to issues surfaced during the due diligence process, it's important for the seller to get on the front foot. If the sell-side can perform due diligence on their own company first, issues can be identified prior to the buyer getting involved.

This makes for a more seamless transaction and appealing deal for the buyer, which can often result in a higher value outcome for the seller.

Market DD buy-side

For the buyer, commercial due diligence can mean the difference between a good investment and a very bad deal indeed.

Because of the sensitive nature of the information to be scrutinized, the buyer and seller will need to share documents in a secure data room.

Commercial due diligence checklist

Our commercial due diligence checklist covers everything you need to prepare or review (depending on whether you're sell or buy-side) during an M&A deal.

The best advice we can give you for a seamless due diligence process if you're the seller is to prepare well in advance. However, if you are selling a business in a hurry, Ansarada’s M&A: Company Sale/Exit Pathway is ideal.

A digitized template for M&A, it contains all the critical data points that ensure a company is healthy and prepared for sale. All you need to do is upload your documentation into the secure platform. Then, when it’s time, all your information is structured and ready to transfer seamlessly for a swift deal.