Untapped potential in the Commercial Due Diligence process

Throughout the acquisition process, Commercial Due Diligence (CDD) has traditionally been viewed as a necessary, but typically routine, exercise. While its importance in informing investment decisions remains undeniable, the current approach to CDD may be overlooking its full potential. Traditional CDD tends to focus mainly on commercial numbers, market potential, and trends, potentially leaving a blind spot. It largely overlooks the underlying drivers— the very engine behind these results.

Acquisitions are successful for reasons beyond simply financial health. It's essential to strengthen the CDD process. By going deeper than the surface level, this involves examining a company's sales productivity, marketing effectiveness, and other operational strengths that determine its true value. Understanding these hidden aspects can significantly boost the value and success of your acquisition.

Ultimately, it is the sales organisation and productivity that are most likely to unlock the greatest increase in value post-acquisition.

What is Commercial Due Diligence?

As we see it, CDD involves a thorough evaluation of a company's business model, market position, and capacity for achieving future growth targets. This process encompasses the analysis of the value proposition, product offerings, pricing strategies, and go-to-market strategies. Additionally, it rigorously examines the company’s operating model, which includes data management, technology, systems, and organisational structure, with a particular focus on operational excellence in marketing and sales performance.

While traditional CDD often focuses on commercial financials, market potential, and a high-level company overview, a robust CDD uncovers the hidden gems: value proposition, positioning, operational efficiency, and the quality of the technology and data setup that fuels sales and marketing performance. By gaining a comprehensive overview, you can make informed decisions that significantly enhance the value and long-term success of your acquisition.

Key steps in conducting CDD

1. Defining the scope 

The first step involves defining the breadth and depth of the due diligence process. This includes identifying the specific aspects of the business that are most relevant to the acquisition goals, such as market dynamics, customer base, competitive positioning, and product viability.

2. Market analysis

In this step, the focus is on assessing the target company's market environment to understand market trends, customer segments, and competitive landscape. It helps in determining the market demand and the positioning of the company’s products or services within the market.

3. Evaluation of the value proposition and business model

Analysts assess the alignment of the company’s value proposition with customer needs and expectations through a comprehensive review of its product or service offerings, pricing strategies, and the effectiveness of its overall business model.

4. Operational review

A critical examination of the company's operational processes, data systems quality, technological infrastructure, and organisational structure is conducted to gauge efficiency and scalability.

5. Financial performance analysis

While primarily a focus of financial due diligence, understanding financial performance within the context of commercial operations is crucial. This analysis includes evaluating sales effectiveness, marketing ROI, and the overall impact of commercial strategies on financial health.

6. Risk assessment

Identifying potential risks associated with the business's commercial aspects, including market, operational, and strategic risks, is crucial for assessing future growth and profitability.

7. Future growth opportunities

This step involves forecasting future growth based on current and projected market conditions, operational capabilities, and the strategic fit of the target company with the acquiring entity's long-term goals.

Benefits for both sellers and buyers

For sellers, CDD not only identifies areas for improvement that can enhance the business's value pre-sale, but also highlights potential growth opportunities to share with prospective buyers. For buyers, CDD is essential as it provides insight into the strategic direction and growth potential of the target company. This understanding is crucial for ensuring the acquisition aligns with the buyer's long-term business objectives.

Why Commercial Due Diligence is often overlooking its full potential?

The advantages of enhanced CDD are clear: it can help identify hidden risks, uncover valuable opportunities, and provide a more comprehensive understanding of the company on more than just financial health. Yet, despite these benefits, implementation of enhanced CDD remains limited. This can largely be attributed to:

• Lack of benchmarking data: Businesses may be hesitant to invest in enhanced CDD due to a perceived lack of industry benchmarks.
• Specialised knowledge: Conducting a thorough enhanced CDD requires a specific skill set and expertise in more than just financial analysis, legal matters, and industry-specific knowledge. It also involves analysing the commercial engine, examining everything from sales and marketing strategies to operational efficiencies throughout the value chain. Companies may not have the internal resources and expertise to conduct a comprehensive CDD themselves.
• Concerns around operational disruption: Worries regarding operational disruption often arise in the context of M&A due diligence. There's a widespread concern that this process might disrupt daily operations, hence the push for a quick process. However, such disruption isn't a certainty. A comprehensive upfront approach can actually facilitate smoother integration and avoid costly surprises down the line.

These factors can lead businesses to underestimate the need for enhanced CDD and believe it can be handled internally without external expertise. However, this can be a risky approach, potentially leading to missed opportunities or hidden liabilities.

Fabian, CEO and Co-founder of RocketX, emphasises, “In our experience, enhanced CDD has been instrumental in uncovering hidden risks and opportunities that would have otherwise been missed. It provides a much deeper understanding of the company, which is essential for making informed decisions about a potential merger or acquisition.”

By investing in enhanced CDD, companies can gain a significant advantage in the M&A process, ultimately making better decisions and achieving their strategic goals.

The changing landscape of M&A

According to Maarten Reinders, CCO at Dealsuite, the dynamics of mergers and acquisitions have evolved significantly. “Factors such as rising interest rates have made the traditional buy-and-build strategies less feasible, and the focus has shifted towards realising value through operational efficiency and scalability. In this environment, every additional euro of EBITDA generated through operational improvements can significantly increase the return upon exit.”

The role of specialised firms in CDD

Given the complex nature of CDD, it is advisable to engage specialised firms rather than relying solely on the more generalised services of larger consultancies like the Big Four. Firms that specialise in CDD, such as RocketX, not only offer expert knowledge and cost-effectiveness but also provide deep insights critical for both successful acquisitions and subsequent post-merger integrations.

Looking for a specialised firm to help with your due diligence?

If you are considering an acquisition and need expert guidance in conducting a comprehensive CDD, get in touch with RocketX. Their specialised knowledge and dedicated approach can help ensure that your investment decisions are well-informed, and boost the value and success of your acquisition.