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Commercial Due Diligence – Maximizing ROI

Due diligence is a complicated process often made more difficult by time pressures from investors, sellers, third parties, and of course the ticking clock associated with the LOI. In the financial area, due diligence efforts typically focus on assessing the quality of earnings and assets, accounting policies and processes, tax exposure and revenue projections. Other potential risks examined include regulatory compliance, IT structure, HR management and compensation, and others. Often overlooked – or underplayed – in the overall due diligence effort is commercial due diligence.

Commercial due diligence is an objective look at the strength of a target company’s customer base. Effective commercial due diligence must be fast, accurate and insightful. Often the window is as short as 2-3 weeks. To be able to gather good data in that small window requires a carefully designed and executed survey methodology, based on responses to a web-based or telephone survey. Accuracy is a somewhat complicated issue as it implies getting answers from people that are knowledgeable enough to answer, and also getting answers that are clear and actionable. And the insightful element of a successful commercial due diligence initiative suggests gathering deeper information than just performance on key product and service attributes, such as looking at attribute importance, competitive performance, and loyalty.

The benefits of commercial due diligence include:

  • Confirming revenue projections – assessing the likelihood that customers will continue to purchase products and services;
  • Identifying competitive vulnerabilities – isolating specific areas of performance that are behind competitors;
  • Understanding drivers of customer perception – measuring the importance of individual attributes by their contribution to overall satisfaction;
  • Evaluating marketing operational effectiveness – quantitatively determining how well the company is meeting customer expectations and highlighting areas of shortfall.

In addition to the core benefits of conducting commercial due diligence, sponsors routinely obtain insight into challenging strategic questions such as the opportunity for additional sales, product development ideas, and added insight into extracting and/or creating value.

This Post Has 2 Comments

  1. Barry Goldberg

    Charlie, I have been conducting what you refer to as commercial due diligence projects for both private equity firms, and companies expanding through acquisitions, for over 15 years. It accounts for over 50% of my current business.,

    Anyway you did a very good job of explaining this portion of the entire due diligence process. From my experience these projects are often the very last phase of the diligence process and in some cases the findings of a project can be determintative if a deal goes through or not.

    Nice work!

    Barry Goldberg
    President, TAPPA Group International

  2. admin

    Thanks Barry, as you know the short timeframe (often no more than 3 weeks) and the importance of the data is always an added challenge.

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