A commercial due diligence is the process a corporation or PE firm undertakes to assess a target company's commercial attractiveness. For this assessment, oftentimes strategy consulting firms are appointed. It is an analysis of the target company performance and potential problems that may occur as a result of an acquisition.
Generally speaking, there are four major sources of value that can be unlocked by acquiring a business:
- Achieve synergy benefits. Synergies come from increased utilisation of resources and often are realised by consolidation of assets or reductions in headcount within the combined entity.
- Achieve revenue growth by introducing new products or services, accessing new markets, entering new geographies or increasing the routes to market for existing products.
- Achieve a strategic advantage that presents new pathways to future growth. This may include industry disruption enabled by acquired technology, extracting value from underutilised assets, or acquiring capabilities that allow level shifts.
- Transform a company’s business model by restructure, financial engineering or changes to management structure.
The commercial due diligence provides a full overview of the target's potential to create post-acquisition value against the backdrop of its internal and external environment.
The overall process can be roughly divided into the following stages:
- A corporation or private equity firm will liaise with a third party to conduct the report on their behalf.
- The third-party then prepares a commercial due diligence report, outlining the information required for a potential acquisition.
- This report is then reviewed the prospective buyer, in conjunction with other reports, before a final decision is made.
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?