What is Commercial Due Diligence & How to Create a Strategy for it?
Usually, private equity firms or large businesses use the term called “commercial due diligence” to make judgements on whether a particular asset is a good investment or a bad one. This term can be used in a lot of other spheres like property, business, etc. In case you are wondering what commercial due diligence is and how to make a strategy for it, you have come to the right place. Read on to find out more about it.
No matter how small or big, a deal shall never be carried out without in-depth commercial due diligence. To define commercial due diligence in simpler terms, it is the process that a company or a PE firm engages in to determine the target’s commercial attractiveness or strategic fit.
Specifically, commercial due diligence also includes overarching details about the target, an analysis of the company’s performance of the targets, and an analysis of the target’s potential risks and its problem areas. It even includes analysing the ability of the target to meet the goals of the acquirer.
Keeping this in mind, this term we call commercial due diligence also differs from terms like financial due diligence. It is so because it provides a more complete and detailed picture and information of the target as the business entity.
What are some of the benefits of completing a commercial due diligence?
Any deal should not take place until the commercial due diligence process is executed and complete. There are certain benefits of devoting time as well as manpower to completing this work. Commercial due diligence can easily provide acquirers with:
- Understanding of the products customer base and service of the target
- The target’s market overview
- All the information and essential details on the company’s marketing strategies and value drivers
- Judgement of the target’s all operational costs and expenses
- Crucial and critical information as well as data to assist with its valuation and negotiation
- Details to help secure board approval and financing
Undoubtedly, all the benefits we have mentioned will yield a comparatively more successful deal. It will also work to eradicate some of the risk factors that can accompany while acquiring or merging with the company.
Some of the most crucial things that need to be included in a commercial due diligence checklist are:
- General company information
- Key employees as well as important executives
- Products and services
- Customer profiles
- Potential roadblocks as well as risk factors
- Operational costs
- Competitor profiles
- Financial model
- Legalities and litigation
The above-mentioned benefits and considerations of commercial due diligence have to be prefaced by a crystal clear strategic rationale so that the inorganic growth takes place.