Commercial Due Diligence

Commercial Due Diligence: In-Depth Analysis of Market, Competition, and Customers

Commercial Due Diligence is a crucial component of the examinations conducted prior to a company acquisition. It focuses on the external perspective and provides an in-depth analysis of the target company’s market and competitive environment as well as its customer relationships. This delivers valuable insights for assessing the growth prospects and risks of a potential acquisition target.

Objectives and Tasks of Commercial Due Diligence

The primary objective of Commercial Due Diligence is to gain a well-founded understanding of the market in which the target company operates. It aims to answer questions such as: How attractive is the market? How will it develop in the future? What position does the company hold in the competitive landscape? How satisfied and loyal are the customers?

The core tasks can be divided into three areas:

1. Market Analysis:

• Defining the relevant market boundaries
• Estimating market size and growth
• Analyzing market structure and segmentation
• Identifying trends and drivers

2. Competitive Analysis:

• Identifying key competitors
• Comparing market shares and positions
• Assessing relative strengths and weaknesses
• Evaluating future competitive dynamics

3. Customer Analysis:

• Analyzing customer structure and segmentation
• Assessing customer satisfaction and loyalty
• Evaluating customer concentration and dependencies
• Reviewing the sustainability of customer relationships

The insights gained from these analyses feed into the company valuation and the estimation of future cash flows. They highlight opportunities and risks and provide an essential basis for purchase price determination and post-acquisition strategy.

Differentiation and Interaction with Other Due Diligence Areas

Commercial Due Diligence is closely linked with other due diligence sub-processes:

• It builds on the findings of Strategic Due Diligence and deepens the externally viewed strategic value drivers identified there.

• It provides important input parameters for Financial Due Diligence, for example, to validate business plans and revenue forecasts.

• It collaborates with Legal and Tax Due Diligence in reviewing contracts and tax aspects related to market and customer issues.

Compared to other due diligence areas, Commercial Due Diligence is characterized by its focus on the external perspective and the use of specific market and competitive analysis methods.

Methods and Information Sources

Commercial Due Diligence employs a mix of primary and secondary data collection methods:

• Secondary Research in databases, market studies, press articles, etc., is used to gather publicly available information on market sizes, trends, and competitors.

• Document Analysis of internal materials such as customer lists, pricing structures, contracts, or marketing plans provides insights into the target company’s positioning and customer relationships.

• Expert Interviews with industry specialists, associations, former employees, or suppliers enable external assessments of trends, competitive strengths, and the company’s reputation.

• Primary Interviews with the target company’s customers are conducted to directly collect expectations, satisfaction levels, and intentions to switch.

Depending on data availability and reliability, quantitative modeling may also be applied, for example, to estimate market potential or to evaluate customer value and risks.

The results are triangulated—that is, cross-checked from different perspectives and consolidated into an overall picture. Well-reasoned conclusions and assessments are essential—the Commercial Due Diligence is far more than just a collection of facts.

Challenges and Critical Success Factors

Conducting Commercial Due Diligence often involves particular challenges:

• Access to market and customer data is limited, sensitive, and competitive. Confidentiality and a “neutral” approach are essential.

• Primary data collection is time-consuming and requires careful sample selection. The time window for this within the transaction process is often tight.

• Analyses must strike a balance between necessary detail and pragmatic actionability within the overall project framework.

• Assessments of market and competitive developments inevitably involve uncertainties. Scenarios and sensitivity analyses are required.

To ensure that Commercial Due Diligence delivers real added value in the transaction process, several critical success factors must be observed:

• Early Involvement: The earlier Commercial Due Diligence begins, the more time is available for in-depth research and data collection.

• Close Coordination: Coordination with other workstreams is crucial to avoid duplication and to share critical information.

• Methodological Expertise and Industry Knowledge: The project team must master the appropriate analytical tools and have an understanding of the industry’s specific characteristics.

• Focus on Deal Breakers: Prioritizing aspects that significantly influence the value and feasibility of the transaction is important.

• Concise Presentation of Results: Preparing findings in clear key messages and compelling visualizations facilitates decision-making.

When conducted professionally, Commercial Due Diligence is far more than a mere “tick in the box” in the transaction process. It provides an external view of the target company, validates growth prospects, and reveals value enhancement levers. This helps the buyer avoid misjudgments and secure transaction success.

The key topics and procedural steps of Commercial Due Diligence are summarized again in this diagram:

Further details on the entire process of selling a company can be found in the article "Company Sale Step by Step".

In-depth information on all aspects of due diligence is available in the article "Step-by-Step Guide to Conducting Due Diligence".