Due diligence is one of the most recurring terms in business, but it’s often mistaken for a much more complex and vague process. In simple terms, due diligence is about researching and assessing risk. In an M&A context, due diligence refers to the process of the acquirer evaluating the potential target company and the environment it operates in to inform the investment decision.
Private equity investment in the UK has hit its highest level in five years, according to KPMG’s latest study on UK transactions. The study found that 377 mid-market deals were completed with a combined value of GBP20.7 billion, and the pandemic acted as a vehicle for private equity firms to back digital-first businesses to keep up with accelerated demand.
Considering the large volume of transactions, how can the Consulting industry bring in new ways of conducting CDD to cater for this growth?
What is Commercial due diligence (CDD)?
Commercial due diligence (CDD) is the process of assessing a company's commercial attractiveness to provide the prospective buyer or Private Equity Firm with in-depth knowledge of the target company and the market in which it is positioned.
It is typically conducted prior to the actual deal to assist the potential buyer in making informed decisions by understanding the risks and the market position of the target before making a bid. Commercial Due Diligence is usually part of a wider due diligence process, which will involve a range of areas from Financial, Accounting IT, Human resources to Legal and successful due diligence often involves a close cooperation between the different parties.
The Commercial Due Diligence process
Commercial due diligence provides acquirers with a full overview of the target company’s internal and external environment, including the analysis of the market, competitors, customer and company. CDD helps potential buyers identify risks and unearth any intricacies that may influence the investment decision, which enables them to make an informed decision on the bid.
The CDD process broadly involves the following key stages:
1. Collaboration with a Consulting Firm
A successful Due Diligence process involves close collaboration between the acquirer and the Consulting firm. A crucial element of this partnership is clear alignment and clarification with the parties involved on key project drivers, objectives and deliverables ahead of project kick-off. Additionally, regular engagement with stakeholders during the process who are periodically updated on interim findings.
2. Research, Analysis and Report Production
Following alignment and preparations, the consulting firm conducts the due diligence on behalf of the potential buyer. The research phase of the CDD comprises of the following methods:
Primary research - e.g. expert interviews, customer surveys, competitor interviews
Secondary research - e.g. desktop research and reports by trade associations or other businesses
The Consulting company would collect and compile data for analysis, and deliver a structured report to provide in-depth knowledge on the attractiveness of the target company and indicate any potential risks associated with the business.
3. Review of the CDD Report and Making an Investment Decision
Finally, the acquirer reviews all reports to assess the complete business health of the target and the risks involved. This is to provide the potential buyer with an in-depth overview of any intricacies involving the potential transaction and ensure return of profits for the investment.
How you can bring innovation in your mid-market deals
The Commercial Due Diligence market has been dominated by top Consulting companies, who have developed well-honed processes for CDD. Standardising processes has meant that traditional Consulting companies have been able to conduct CDDs at a large scale at a high-quality level. On the other hand, employing proven approaches has meant that the due diligence consulting has been characterised by a lack of innovation and repeat approaches.
Here are three ways Private Equity firms and acquirers can bring innovation to CDD processes.
1. Leverage on Expert networks to overcome scarcity of experts
Expert networks are here to support in identifying and speaking to relevant experts who could be key in the due diligence process. Most expert networks typically cover multiple geographic locations, which means acquirers can overcome any language barriers and capacity constraints around finding the right experts in their selected market. In turn, they can help speed up the process of building a target list of experts and interview arrangements.
2. Outsource research and/or analysis to work around tight schedule & high turnaround
Private equity firms and consultancies can choose to outsource specific stages of the commercial due diligence (such as the survey, expert interview programme or analysis phases) in order to overcome the challenges associated with a tight timeline. Most providers offer high turnaround and flexible solutions to collaborate with clients and work with their internal deadlines.
3. Collaborate with the right partner who can adapt to client requirements and project scope
Since CDD processes typically involve a large number of stakeholders, it’s important that clients choose the right provider to work with. Some considerations may involve the type of consultancy (generalist or specialised consultancy), the type of service (end-to-end CDD or only a specific service), cultural fit and methodology & modes of communication. Identifying the right provider will help Private Equity firms and acquirers conduct the Commercial Due Diligence effectively and in turn make an informed decision about the target company.
At Freshminds, we have a proven track record in conducting Commercial Due Diligence for mid-market deals and bolt-on investments ranging from £25 million to £220 million. Since the structure of the final report will remain largely the same across industries even if the content may differ depending on the nature of the target company, we have developed a flexible blueprint that can be adapted to each deal thanks to our project pillars. This includes our Global Freshminds Network that has been built up over the past 21 years, our flexible approach to CDD and high turnaround processes.