3 items tagged "commercial due diligence"

  • Five fundamental topics in Commercial Due Diligence

    Five fundamental topics in Commercial Due Diligence


    Commercial Due Diligence (CDD) is a vital aspect of the pre-investment process for private equity firms and investors. CDD is typically conducted before buying negotiations begin, in order to allow the potential buyer to assess the risks and potential of the target company before proposing an offer. CDD is often performed alongside Financial Due Diligence and Legal Due Diligence.

    The purpose of CDD is to provide a holistic and comprehensive picture of the internal and external environment of the target company.

    Acquiring a business is complex and challenging. A solid CDD process is always necessary in order to support a buying decision. It is desirable to get a clear view of the targets’ commercial attractiveness, it is even more of interest to conduct solid CDD when investors are not familiar with the market their potential target is operating in. Markets have their own dynamics and characteristics and can easily appear attractive on the outside. CDD should warn investors from targeting a company that appears attractive (based on its prior financial results and historic growth) but is actually active in a market threatened by competitive innovation, new regulations, shift in demand or other disruptive events.  

    The specific structure of a CDD report depends on the party responsible for delivery, the target company, scope of the research, timeline and available budget. Still, some fundamental topics are (almost) always present in the report:

    Target Company

    Off course, intelligence needs to be collected about the target company. It is essential to make an assessment of the achievability of their business plan; is it realistic taken into account the internal and external environment? How does the current cost structure look? Additionally, it is vital to learn more about the company’s historic and future strategy.

    Also, recent developments within the company need to be considered. Was there a recent change in management team, restructuring, capacity expansion or lawsuit? The portfolio of the target company also needs to be assessed. How is their portfolio diversified and what are makes their products or services unique?This will provide a first indication of the competitive edge of the target company.In a further stage of the analysis this information is used to create a solid understanding of the ability to compete of the target company.

    Market

    In order to provide a decent assessment of the market the target is operating in; it is of utmost importance to get insight in where the market is heading. Is the market mature? Which growth drivers and key developments do we see? Is the market susceptible for disruption? Can we identify a regulatory framework?Which substitute markets are evolving?

    Sometimes, data about a certain market is not available. In that case it is necessary to estimate or model the actual and obtainable market value to get reliable insights in market shares and market growth. All the insights combined give a clear understanding about how market developments affect the (future) value of the target company. 

    Competitors

    Competition plays a major role in assessing the commercial attractiveness of the target company. Creating a better understanding of the competitive playing field is crucial. How are market shares divided among competitors? What is the intensity of the rivalry? Can the market be seen as consolidated or fragmented? Part of this is creating competitor profiles of the key competitors and identify howthe target company is positioned in the value chain.

    Next, it is necessary to estimate future competitive threats. Think about companies competing in a related market, or companies from other geographical markets with expansion drift. Depending on the level of competitive intensity within a market, new competitors will enter the playing stage. The entrance of new competitors in a market is more likely when there are high profit margins, no major entry barriers and when there is still a high future growth potential.

    Customers

    In analysis of customers of the target company, it is imperative to first define who we see as a (potential) customer. This demarcation helps to keep focus and narrow the scope. Next, customer profiles can be made with the right segmentation. Are the customers other companies or consumers? What is their purchasing behaviour? Are customers easily switching between different brands?What are they willing to spend? Also, conducting an order analysis and get understanding of the distribution channel is essential.

    A crucial element are the key buying criteria; are customers making their purchase decision based on price, quality or service, and how is the target company performing on those criteria?

    Relevant buying criteria provide context for solid competitor analysis, it enables to draw a framework in which the competitors and their products can be valued or scored. It also supports in assessing whether the target company has a strong and defendable position with respect to customers. Pinpointing the right buying criteria is a tough task, but when done right, the information is invaluable.

    Revenue and pricing

    Last but not least it is useful to take a deeper look into the balance sheet, P&L and cash flow of the target company. Where is the main revenue deriving from? Are cost and revenue projections reasonable? How much can the target company be expected to make over a set period of time? Prices can fluctuate over time; what is the forecast for prices in the future and what factors affect the price? Examining revenue and pricing structures can also be shared with activities performed in Financial Due Diligence.

    Of course this list is not complete. The exact content of a CDD report truly depends on the profile of the target company and the specific characteristics of the business environment. However, these five topics are always present and absolutely essential as building blocks for a solid CDD report.

    Source: Hammer - Market Intelligence

  • Five fundamental topics in Commercial Due Diligence

    Five fundamental topics in Commercial Due Diligence


    Commercial Due Diligence (CDD) is a vital aspect of the pre-investment process for private equity firms and investors. CDD is typically conducted before buying negotiations begin, in order to allow the potential buyer to assess the risks and potential of the target company before proposing an offer. CDD is often performed alongside Financial Due Diligence and Legal Due Diligence.

    The purpose of CDD is to provide a holistic and comprehensive picture of the internal and external environment of the target company.

    Acquiring a business is complex and challenging. A solid CDD process is always necessary in order to support a buying decision. It is desirable to get a clear view of the targets’ commercial attractiveness, it is even more of interest to conduct solid CDD when investors are not familiar with the market their potential target is operating in. Markets have their own dynamics and characteristics and can easily appear attractive on the outside. CDD should warn investors from targeting a company that appears attractive (based on its prior financial results and historic growth) but is actually active in a market threatened by competitive innovation, new regulations, shift in demand or other disruptive events.  

    The specific structure of a CDD report depends on the party responsible for delivery, the target company, scope of the research, timeline and available budget. Still, some fundamental topics are (almost) always present in the report:

    Target Company

    Off course, intelligence needs to be collected about the target company. It is essential to make an assessment of the achievability of their business plan; is it realistic taken into account the internal and external environment? How does the current cost structure look? Additionally, it is vital to learn more about the company’s historic and future strategy.

    Also, recent developments within the company need to be considered. Was there a recent change in management team, restructuring, capacity expansion or lawsuit? The portfolio of the target company also needs to be assessed. How is their portfolio diversified and what are makes their products or services unique?This will provide a first indication of the competitive edge of the target company.In a further stage of the analysis this information is used to create a solid understanding of the ability to compete of the target company.

    Market

    In order to provide a decent assessment of the market the target is operating in; it is of utmost importance to get insight in where the market is heading. Is the market mature? Which growth drivers and key developments do we see? Is the market susceptible for disruption? Can we identify a regulatory framework?Which substitute markets are evolving?

    Sometimes, data about a certain market is not available. In that case it is necessary to estimate or model the actual and obtainable market value to get reliable insights in market shares and market growth. All the insights combined give a clear understanding about how market developments affect the (future) value of the target company. 

    Competitors

    Competition plays a major role in assessing the commercial attractiveness of the target company. Creating a better understanding of the competitive playing field is crucial. How are market shares divided among competitors? What is the intensity of the rivalry? Can the market be seen as consolidated or fragmented? Part of this is creating competitor profiles of the key competitors and identify howthe target company is positioned in the value chain.

    Next, it is necessary to estimate future competitive threats. Think about companies competing in a related market, or companies from other geographical markets with expansion drift. Depending on the level of competitive intensity within a market, new competitors will enter the playing stage. The entrance of new competitors in a market is more likely when there are high profit margins, no major entry barriers and when there is still a high future growth potential.

    Customers

    In analysis of customers of the target company, it is imperative to first define who we see as a (potential) customer. This demarcation helps to keep focus and narrow the scope. Next, customer profiles can be made with the right segmentation. Are the customers other companies or consumers? What is their purchasing behaviour? Are customers easily switching between different brands?What are they willing to spend? Also, conducting an order analysis and get understanding of the distribution channel is essential.

    A crucial element are the key buying criteria; are customers making their purchase decision based on price, quality or service, and how is the target company performing on those criteria?

    Relevant buying criteria provide context for solid competitor analysis, it enables to draw a framework in which the competitors and their products can be valued or scored. It also supports in assessing whether the target company has a strong and defendable position with respect to customers. Pinpointing the right buying criteria is a tough task, but when done right, the information is invaluable.

    Revenue and pricing

    Last but not least it is useful to take a deeper look into the balance sheet, P&L and cash flow of the target company. Where is the main revenue deriving from? Are cost and revenue projections reasonable? How much can the target company be expected to make over a set period of time? Prices can fluctuate over time; what is the forecast for prices in the future and what factors affect the price? Examining revenue and pricing structures can also be shared with activities performed in Financial Due Diligence.

    Of course this list is not complete. The exact content of a CDD report truly depends on the profile of the target company and the specific characteristics of the business environment. However, these five topics are always present and absolutely essential as building blocks for a solid CDD report.

    Source: Hammer - Market Intelligence

  • The Market Intelligence Cycle to Guide Commercial Due Diligence  

    The Market Intelligence Cycle to guide Commercial Due Diligence

    Pre-investment phase: conduct a Commercial DD analysis

    Performing Commercial Due Diligence (DD) is an indispensable part of the pre-investment phase for investors and private equity firms. It enables the potential buyer to evaluate the risks and opportunities of the target company prior to making an offer. In order to support a potential buying decision, it is vital to get a clear understanding of the target’s market positioning, competitive edge, commercial viability and growth potential.

    To perform a successful commercial due diligence analysis, it is essential to have a well thought-out approach of what should be examined and how. In order to have such an approach, a highly useful tool is the intelligence cycle. This cycle guides in following the right steps in the commercial due diligence to substantiate key business decisions.

    Step 1: Scoping

    The first step in the intelligence cycle involves planning and direction of the entire commercial due diligence project (scoping). This step is crucial in outlining the goals and objectives of the project. The goals and objectives should be clear and concise: 

    • What is the geographical scope?
    • Which PMC's do we want to cover?

    Once the scope of the analysis is clearly defined, key questions and hypotheses should be formulated that will guide the research. It is easy to cover all relevant geographical area’s and PMC’s in scope. However, this will lead to highly time- and cost consuming activity. Therefore, it is important to anchor the definition of the scope appropriately in the intended strategic rationale of the investor.

    Step 2: Data collection

    After the scoping phase, data collection is the next step. The research objectives must be divided into various information needs and datapoints, after which the data collection strategy can be shaped. This step should involve the identification or reliable sources and the categorization of the sources to enhance and simplify the processing and analysis of the data in the following steps.

    During this step, various pieces of information and data are gathered to serve as input for analysis. These pieces of information can be obtained from a wide range of sources, including two distinct categories: open-source intelligence (OSINT) and human intelligence (HUMINT).

    Reliable OSINT sources that can be used to analyze the internal and external environment of the targets’ company include: financial statements, news articles, journals, governmental reports, press releases and market reports.

    HUMINT covers intelligence obtained by interpersonal contact. The value of interpersonal contact is enormous. A common way to collect HUMINT is via expert interviews. In the light of commercial due diligence relevant sources can be industry experts, competitors, (potential) clients and knowledge institutions (universities, research institutes etc.).

    Step 3: Analysis

    Subsequently, the analysis and production step involves analyzing the collected data and translating it into actionable insights. Trends and patterns need to be identified in the data to discover potential risks and opportunities. How actionable are the insights in the perspective of the strategic rationale? Do they provide red flags or confirm the most important presuppositions behind the potential acquisition?

    The data should be presented in a clear and concise manner. For instance, visualizing the insights with charts and graphs will enhance the readability which is helpful in delivering key messages.

    Step 4: Delivery

    The final step in the market intelligence cycle is disseminating and evaluating the findings. The findings in the intelligence cycle can be used to substantiate business decisions and evaluate whether it would be beneficial for the acquirer to invest in or buy the target company. Based on the analysis in the commercial due diligence report the acquirer states its recommendations to proceed with the investment or pass on the opportunity.

    In conclusion, performing a commercial due diligence is a complex analytic process that requires following the steps in the intelligence cycle. Thorough research, reliable data sources, identifying risks and opportunities, and disseminating the insights in a clear and concise manner are critical to writing a successful commercial due diligence report. The final outcomes support clients make informed investment decision leading to long-term success.

    Source: Hammer Market Intelligence 

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