When a company buys another, its target is first evaluated. This evaluation is known as Commercial Due Diligence (CDD). It is the process that involves the auditing of the target company’s commercial activities, financial potential, and long-term viability. The insights gained from this evaluation assist the buyer in the decision-making process.

While important, CDD can also be quite lengthy and technical. Hence, a buyer should seek proper assistance when conducting a transaction process.  Commercial due diligence consulting services exist for this reason.

What is Commercial Due Diligence?

In Commercial Due Diligence (CDD), a buyer evaluates a target company from a commercial standpoint. An in-depth analysis of the company’s current market position and growth potential is conducted, helping the buyer make informed decisions during the transaction process.

The primary goal of CDD is to give the buyer a clear understanding of the target company’s market standing and prospects, providing a foundation for assessing whether the acquisition is good for the buyer.

Types of Commercial Due Diligence

CDD comes in various forms, depending on the nature of the deal and the concerns of the stakeholders. Each type serves a different purpose. The four common types of CDD are:

1. Buyer-Initiated Commercial Due Diligence

In buyer-initiated CDD, the potential buyer analyses the target company before completing a transaction. The goal is to understand the target’s business operations, financial health, and market dynamics, equipping the buyer with all the necessary information for the transaction process.

2. Vendor-Initiated CDD

Vendor-initiated CDD is the opposite of buyer-initiated CDD. It is conducted by the seller who prepares the business for sale by addressing potential concerns before the buyer performs due diligence. This proactive approach allows the seller to resolve any issues, address risks, and increase the value of the business.

3. Red Flag CDD

Red Flag CDD is a high-level, expedited assessment that identifies critical risks before performing a deeper analysis. The buyer performs Red Flag CDD. It focuses on areas with significant risks, such as legal issues, financial discrepancies, or market risks. By uncovering potential liabilities and risks, Red Flag CDD helps the buyer in the decision-making process.

4. Top-up CDD

Top-up CDD deepens the due diligence process by providing additional information in specific areas of concern. This ensures that all risks are identified and properly evaluated during the later stages of the deal.

Commercial Due Diligence Process

CDD typically involves several stages, each requiring comprehensive research and analysis. They can be broken down as follows:

1. Liaising

The CDD process begins with the involvement of a third-party firm that conducts an in-depth analysis on behalf of the prospective buyer. This external party helps to reduce bias and ensures a reliable, objective assessment of the target company.

2. Report Preparation

The third-party firm prepares a detailed report outlining the target company’s market position, potential risks, business operations, and financial performance. This report enables the buyer to make well-informed investment decisions and may prompt further investigation into specific areas of concern.

3. Report Review

In the final stage, the buyer reviews the report’s findings, inspecting the company’s financial sustainability, growth potential, market position, and other key factors. This helps the buyer determine if the target company aligns with their initial strategic goals and whether the acquisition is worth pursuing.

Types of Commercial Due Diligence Services

Commercial Due Diligence (CDD) consulting services perform tasks that assist in the transaction process. Typical examples of such services include:

1. Testing Key Valuation Inputs

This involves assessing the stability of the company’s revenue streams, the potential for growth, profit margins, and the investment needed to achieve this growth.

2. Sizing Markets

This involves identifying and quantifying the total addressable market for the company’s products or services while understanding the key drivers and dependencies for market growth.

3. Assessing the Target’s Competitive Position

The target company’s market position is analysed from a structural standpoint and how the customers and competitors perceive it.

4. Evaluating Operational Effectiveness

With the help of operational and technology specialists, the effectiveness of the target’s operations is examined. The findings of this investigation help in operational improvements and focus on how revenue converts into profit and cash flow.

5. Vetting the Investment Thesis

The strategic plan for driving profits is refined. Mergers and acquisitions (M&A) and other value-creation opportunities that align with the buyer’s investment strategy are considered.

Commercial Due Diligence (CDD) is crucial in guiding the M&A decision-making process. By thoroughly evaluating the target’s market position, operational effectiveness, and financial potential, CDD helps buyers make informed choices. Axial’s consulting services streamline the transaction process, offering detailed analysis, identifying opportunities for operational improvements, and providing risk mitigation to enhance your strategic outcomes.