In private equity deal making, commercial due diligence mitigates risk and adds value
A successful business investment can happen after due diligence is complete. The race to adequately complete each form of diligence – financial, operational, commercial, legal, ESG, etc. – typically begins with an investment round selection or a signed letter of intent. A prospective investor needs a deep understanding of a target company’s profitability, viability, and potential. Commercial due diligence (CDD) provides buy-side due diligence insights including commercial position, competitive dynamics, future cash flow, market dynamics, and much more.
CDD goes beyond pure financial due diligence to model and forecast the market. CDD evaluates the attractiveness and sustainability of the target company based on several internal and external factors. These factors can include business strategy, product portfolio strategy, revenue models, pricing, market outlook, market segments, and competitor analysis.
Identifying the factors that will lead to long-term financial gain is critical to a deal’s success. By looking beyond a target company’s five-year financial forecast and fully analyzing the growth potential, a prospective investor can negotiate a fair transaction price and see a better return on investment (ROI).
Commercial due diligence mitigates risk for private equity firms
CDD provides private equity (PE) firms an in-depth understanding of the target’s strengths, weaknesses, opportunities, and threats before an acquisition progresses. The process starts with a thorough examination of the target company’s market, customers, competitors, and products. CDD identifies potential risks that could impact the sustainability of the investment and limit asset growth. The analysis and data provided in a CDD report enables PE firms to make informed decisions and negotiate a fair, insights-based price.
Commercial due diligence adds value to private equity deal making
CDD also identifies growth opportunities, which may include potential adjacent, untapped markets. Because the CDD process dives deep into a target company’s strategy, operations, revenue models, market segments, and more, insights can reveal untapped potential. Determining these opportunities prior to acquiring the target company can help steer the management strategy post-acquisition and maximize the ROI of the acquisition.
Valuable and accurate CDD involves direct feedback from the value chain using primary research techniques like surveys, in-depth interviews, and competitor analysis. Further, the CDD process is complex and requires a substantial amount of resources, usually in a compressed timeframe. Outsourcing CDD to a third-party firm that specializes in these engagements can add value by allowing the deal team to focus on other aspects of the acquisition.
When short exclusivity periods limit the time available to complete an in-depth analysis of the target company, market research firms like The Martec Group can help. Martec can accelerate the research process by interviewing the target’s management team, accessing industry experts we’ve worked with for years, and providing the resources necessary to complete the engagement within the specified timeframe. In addition, our analytical team can complete an exhaustive review of market research reports and databases and conduct primary research across the value chain. Our final deliverable includes an executive summary report supported by detailed market-based insights to better support the deal team. This approach often allows PE firms to improve the deal structure and transaction price.
Martec’s commercial due diligence checklist
To mitigate risk and increase value for a business acquisition, review our CDD checklist. Here are the top items to examine – and what can be analyzed for each:
- Target company information – commercial position, business strategy, product portfolio strategy, revenue models, future cash flow, asset growth
- Market intelligence – TAM (total available market), SAM (serviceable available market), historic and forecast growth over the deal cycle, headwinds and tailwinds analysis, market cyclicality, growth trends, adjacent opportunities
- Customer intelligence – reputation analysis from current and prospective customers, SWOT analysis, brand image and positioning, customers by quintile/quartile, churn analysis
- Competitive intelligence – SWOT analysis of key players, new market entrants, potential roll-up candidates, market shares, pricing analysis
- Product intelligence – technology assessment, price-value mapping, alternative solutions analysis
CDD benefits PE deal making by mitigating risk and adding value to the investment thesis. When PE firms are equipped with detailed business intelligence insights to support the deal, a more profitable acquisition can be made.
Martec has been supporting PE acquisition activity for decades. Contact us for your commercial due diligence needs.