A prospective company will conduct commercial due diligence in order to fully understand the commercial or economic activity of the target company it is interested in acquiring.
More than just a review of the target company’s sales or revenue, commercial due diligence delivers complete insight into market demand, competition, operations and all factors that enable the production, delivery and sale of the target company’s products and services.
What Is Included in the Commercial Due Diligence Process?
Below are the most important areas for consideration in the commercial due diligence process.
This is a general overview of the target company’s history and a summary of key products/services and operations.
Management Structure and Key Executives
This is information on the ownership of the company and its management, including key senior executives.
The legal structure of the company would be covered here, including any contracts with employees, suppliers and customers, pending or past litigation, compliance issues, the regulatory environment of the jurisdictions in which the company does business, and other legal matters that could challenge revenues or profitability.
Products and Services
Descriptions of the company’s products and services, along with pricing, development costs and delivery methods would be included here.
Sales and Marketing
Information related to the company’s sales and marketing strategy, including the sales pipeline, customer relationship management (CRM), business plans, sales enablement and related costs would be covered.
Competition and Market Share
Information related to external competitors or market dynamics would be included in this section.
The Benefits of Commercial Due Diligence
Commercial due diligence yields multiple benefits for the prospective buyer, including the following:
A full understanding of the target company’s business and how the buyer sees itself incorporating or managing operations under new ownership can provide the acquiring company or investor an edge over the seller during negotiations. Commercial due diligence drives a stronger and more defensible valuation of the company, leading to a more complete understanding of the potential for the transaction.
Support for Financing
Commercial due diligence also helps the buyer acquire capital more easily, or perhaps at a more attractive cost, in order to complete the transaction. The report can help banks or even other investors understand the potential of an investment more clearly.
Forecasting and Business Planning
Commercial due diligence provides an in-depth overview of the products and services of the target company in order to assess the potential for continued revenues and profit. Potential buyers can more effectively forecast successes and anticipate any challenges to the business.
Competitive and Market Factors
The process also provides a much more thorough understanding of market forces, including competitors, on the potential for growth of the target company’s products and services.
Commercial Due Diligence Checklist
Below is a checklist of the information needed to conduct a proper commercial due diligence audit.
The target company’s business plan, including its business models showing how the company makes a profit, is important in commercial due diligence. The business plan should also include the pricing of products and services.
Operations and Liabilities
While this might not seem relevant to commercial due diligence, it’s important for the acquiring company to have a full understanding of the operational costs and liabilities that the target company must incur to develop and deliver its products. While sales or revenues can increase, higher than expected costs can cut into profitability and could present a challenge moving forward.
Technology and IP
This is especially important for technology companies, as IP or licensing of technology is often a large driver of revenue. Commercial due diligence should include a review of technology that the target company develops, sells and leverages for revenue.
Employee Capabilities and Skills
Employee performance may have much to do with the commercial viability of the target company’s products and services. As such, commercial due diligence should uncover the relationship or influence of the target company’s human capital on the commercial viability of its products.
Products and Services
An exhaustive review of the target company’s products and services, including historical, current and forecasted information should be conducted. This can include all information related to the target company’s pricing, contracts, sales channels, customer segments and marketing plans.
Commercial Due Diligence with Confidence
A virtual data room (VDR) still offers the best option for private and secure document access to support commercial due diligence activities related to a transaction.
A VDR needs to be more than simply a cloud document hosting and management platform for those involved in a transaction. Organizations should consider an enterprise virtual data room like Caplinked that has years of experience providing data rooms so that corporate representatives and their professional services providers can collaborate during sensitive and complex transactions.
Ready to learn more about what Caplinked has to offer for your business? Start your free trial today.
Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce, and IoT.