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 within which it operates to inform the investment decision.
In 2024, Commercial due diligence (CDD) has become more data driven and agile, responding to the fast-paced market shifts, especially in private equity investment. With mid-market deals surging, driven by a post-pandemic focus on digital-first businesses and ESG (Environmental, Social and Governance) factors, there's a growing need for innovation in how CDD is conducted.
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 a crucial step in mergers and acquisitions (M&A), where acquirers evaluate the target company's risks and opportunities to make informed decisions.
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. 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 to 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. In 2024, communication between private equity firms and consulting partners is more streamlined than ever, with real-time collaboration tools ensuring stakeholders stay updated on key findings. Clear objectives and milestones are essential from the outset to ensure alignment.
2. Data-driven 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 the following methods:
Primary research - Interviews with industry experts, customers and competitors
Secondary research - Market reports, data analysis, and desktop research
Consulting firms produce reports that deliver comprehensive insights into the target company's strengths, market dynamics, and any risks that could impact the investment decision.
3. Review of the CDD report and making an investment decision
The final stage involves reviewing the CDD report, which includes all findings from market assessments, competitor analysis and customer data. 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 that 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 in which 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 manage tight deadlines & 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.
Why Freshminds is the right choice for CDD in 2024
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.
With over 21 years' experience and a global network, we offer a flexible, data-driven approach to CDD.
Our expertise lies in:
Agile CDD Processes: We adapt to tight deadlines and client needs, ensuring high-quality outputs in a fast-paced environment
Expert Networks: We leverage AI-powered tools to provide unique insights across multiple industries and geographies
High Turnaround Processes: Our streamlined approach ensures thorough research without sacrificing speed, making us the chosen partner for mid-market private equity firms.
FAQs
What is commercial due diligence (CDD)?
Commercial due diligence is the process of evaluating a company's market position, competitive landscape, and business health before making an investment decision. It helps private equity firms to assess risks and opportunities.
Why is CDD important in private equity?
CDD provides detailed insights into the target company's external environment, helping investors to make informed decisions by evaluating market risks, opportunities, and the competitive landscape.
How has CDD evolved in 2024?
In 2024, CDD has become more data-driven, leveraging AI, expert networks and advanced analytics to provide faster and more in-depth insights into target companies.
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