Conducting a commercial due diligence is an essential part of almost every transaction with investors involved both on the buy side and the sell side. The two key questions are: why has the company been successful so far, and what success can the company achieve in the future? In order to answer these questions, several factors need to be analysed: the business model, relevant markets, the competition, client feedback and the positioning of the company in its markets. In addition, the company’s potential is examined and evaluated.
In a due diligence review, opportunities and risks are analyzed in advance of an intended transaction (in this case, company acquisition or sale, IPO, investment). Based on the purpose, the areas to be examined vary. The due diligence review is initiated by the buyer or seller of the company and carried out in the context of upcoming transactions.
In the case of a company purchase or investment, the legal, tax, economic and financial factors as well as the commercial and strategic aspects of the target company are examined in particular. Depending on the business model, other specific aspects, such as environmental assessments (ESG reviews), may be relevant to the review.
There are the following types of due diligence:
The due diligence is mandated by the buyer/investor or by the target company (seller) itself. Depending on the type of due diligence (e.g., commercial due diligence), the process is usually carried out by experts such as strategy consultants, tax consultants/auditors or by technical experts.
A due diligence review helps to identify all relevant opportunities and risks of a company in advance. A distinction is made between the following 3 types of opportunities and risks:
- Economic opportunities and risks: The purchase of a company has a direct impact on the economic situation of the buyer. Therefore, a systematic analysis of strengths and weaknesses is essential as a safeguard for the buyer.
- Legal risks: Here we examine the extent to which legal issues can lead to risks to the company's existence and liability. Aspects of competition law are also examined here.
- ESG opportunities and risks: Risks relating to the environment, corporate governance and compliance with the law, as well as social factors (treatment of employees, customers, etc.). In other words, ESG is about "human benefit" or the value the company adds to people (especially employees and customers, the environment, and society). ESG risks can result in penalties or damage to a company's image. Positively speaking, added value can be created through a consistent ESG strategy.
The due diligence analysis is an important part of a successful corporate transaction. It helps the buyer to identify the opportunities and risks associated with the purchase. The results of the analyses are summarized in due diligence reports, e.g., Commercial Due Diligence Report, Financial Due Diligence Report. Based on the expert assessments, the buyer can get a comprehensive picture of the object of purchase and derive a purchase price. Many aspects analyzed in the due diligence play a role in the offer price, e.g., growth prospects, risks in the market environment, synergy potential, gaining market share and many more.
An investor invests in the future of a company and not in the past. As a result, a commercial due diligence should answer 2 questions: Why was the company under review successful in the past and how successful is it likely to be in the future and for what reasons? This is exactly where commercial due diligence comes in. The focus is on a careful examination of the business model, the relevant market environment (market drivers, trends, market size, market share, etc.) and the positioning in the current and future competitive environment. In addition, the resilience of current customer relationships, as well as future growth potentials are of interest with which the business planning of the target company can be validated.
If commercial due diligence is performed for the seller (sell-side), i.e., of the target company, it is referred to as commercial vendor due diligence, which provides potential investors with in-depth insights into the company, which is then validated (or not) by other strategy consultants from the buyer side (buy-side).
Commercial due diligence focuses on the future development of the target company and its marketability. An excellent commercial due diligence creates clear answers to the 2 questions: Why was the company under review successful in the past and how successful is it expected to be in the future and substantiates these questions through analyses, interviews with management, experts and customers. Industry knowledge and experience in conducting commercial due diligence are important prerequisites for achieving results in the short time available. In the retrospective, the quality of a commercial due diligence is shown by the actual development of the target.