In the process of any Mergers and Acquisitions (M&A) deals, due diligence is defined as a comprehensive appraisal of a business undertaken by a prospective buyer or seller, especially to establish the existence and value of its assets and liabilities in evaluating its commercial potential.
Value drivers such as products, markets, customers, and capabilities determine price and structure of the transaction and define the nature and the scope of due diligence which is usually performed after the target screening within the M&A life cycle.
From target screening to pre-deal negotiation, due diligence services are typically required as follows:
- Financial and tax due diligence
- Commercial and operational diligence
- Human resource diligence; and
- Transaction advice and support
Commercial Due Diligence (CDD)
Commercial due diligence reviews the target company’s historical and forecast performance from the perspective of its markets, its customers, its competitors, and its internal capabilities. It serves to provide investors a detailed and fact-based review of the target company’s strategic risks and opportunities, as well as a quantitative assessment of the growth projections used as basis for the transaction.
Typically, commercial due diligence would cover:
- A review of market demand, verifying the level of market growth in the business’s specific products/services;
- Analysis of the competitive environment, to assess the level of competition in the market and verify the target company’s particular competitive position;
- Analysis of key customers and the strength of the customer relationships;
- An understanding of the drivers of historical trading performance, that is, market changes, new products, competitor action or regulatory changes which may include the Environmental, Social and Governance (ESG) aspect which is an increasing concern. Climate reporting will be mandatory for public listed entities in sectors such as financial, agriculture, food and energy, commencing from financial year ending 2023 onwards;
- The extent of the achievability of forecast projections which may require specific validation.
Commercial performance focuses on top-line and gross margin developments and their drivers – essentially how well the company is performing in the marketplace. Typical analyses can include looking at price dynamics, customer portfolio-related risks (e.g., dependencies on a few customers) and trends, and a view of revenue development in categories such as geographies, product groups and distribution channels. A financial projections review can also be performed in both financial due diligence as well as commercial due diligence to ensure that the profit and cash impact of any adjustments are accurately modelled, giving a clear view of the impact on valuation.
Commercial due diligence scope can be customised to your needs:
Benefits of Commercial Due Diligence include:
- Make Informed Negotiation
Commercial due diligence can provide the investor with an edge over the seller during negotiations. Being aware of all the necessary information will help the buyer establish a more accurate and reasonable purchase price.
- Assurance of Good Investment
Loans from financial institutions and/or shareholders may be necessary to complete the deal. A commercial due diligence report can help reassure investors that the investment will be worthwhile and provide a better outlook for the business.
- Forecast Future Performance
Commercial due diligence provides an in-depth overview of the target company’s competitiveness and market strengths. This knowledge enables potential buyers to better forecast the company’s long-term successes and respective gains.
Commercial due diligence examines recent business performance, operations, and market strengths, thus providing valuable insights into a target company’s future earnings, which serves to mitigate risk and support favourable transaction price.
Commercial due diligence is especially relevant and useful for buyers/investors expanding into new geographical locations, diversifying business activities or investment portfolios, and exploring product innovations etc. It can identify, assess, and minimise risk that could improve/validate the valuation model and improve synergy to support deal decision making, negotiating, execution and post-acquisition integration.
View the full article in PDF here.
Commercial Due Diligence Specialists
|Grace Lui |
|Karen Lau |
|Krishna Sadashiv |