Introduction

We’ve received a lot of questions from our clients about how commercial due diligence can be done. The basic answer: CDD is an integral part of corporate due diligence, which is an important part of any investment decision. We also get asked why CDD is necessary, what data and analysis should be included in a commercial due diligence report, who should write CDRPs (commercially-focused reports), and what should be included in these reports. So we thought we'd share some insights into how this is done. Read on to find answers to all these questions!

What is CDD and why do we need to do it?

A Commercial Due Diligence (CDD) report is a document that outlines the findings of your investigation into a research topic. It’s used by investors and others who are looking at buying or investing in a company to determine if it will be a sound investment. The CDD report is created after you’ve done research into all aspects of the business. Some of these aspects include its structure, finances, and people behind it. You want to make sure that everything checks out before you decide to invest any money or time into this company because once you sign on, there may be no turning back!

If we don't do our due diligence as buyers or investors, then what happens? Well for one thing: you might end up paying more than necessary for something less than quality. And secondly, there could be hidden problems with what's being sold to you. These problems can be avoided if you have access to good information beforehand.

In the same way, you can use a CDD report as a tool to determine if it’s worth investing in a business. It gives you the information needed to make an informed decision about whether or not this company is right for your needs. 

A definition of the term by KPMG can be found here.

CDD is a key part of corporate due diligence

CDD is a key part of corporate due diligence. It is a way to evaluate the commercial viability of a business and identify hidden risks. In addition, it helps you understand the market and industry you are entering.

Due diligence is a fundamental part of any business transaction, but it can be challenging to get right. Companies that do not perform adequate due diligence may discover hidden risks and liabilities after they have already invested in the target company. To ensure you are getting the information you need before making an investment decision, commercial due diligence is conducted. A typical CDD report may include the following elements:

-Business and market analysis

-Competitor analysis

-Legal due diligence

-Financial due diligence (including financial projections)

-Regulatory due diligence (including IP and IT systems review)

-Industry trends analysis

For more types of due diligence that you can conduct, check out Financier's article here. They describe three types of categories: legal, financial, and commercial due diligence. They also go over what 'hard' and 'soft' due diligence mean.

What data and analysis is included in the CDD?

The following are some of the most important areas that you might want to include in your commercial due diligence report:

• Market sizing. You need to know how big your market is, whether it's growing or shrinking, and what's driving that change.
• Industry trends. Where does the industry stand now? Which direction is it moving in? What will be its future state? Is there any impact on your business model from these trends?
• Customer satisfaction (CSAT). How happy are customers with their experience using your product or service? This can be measured through surveys, interviews, or other methods. It's likely that CSAT will correlate well with revenue growth but not necessarily with profitability. If a customer has a poor experience but pays well for it (think Amazon Prime), they may still rate you highly even though they aren't actually making much money by using your product or service over time.
• Competitive analysis. Who else is providing similar products or services in this space right now? What features do they offer over yours? Which ones do not exist at all yet but could provide unique value for customers if added into yours (or removed)?

Why is market sizing important to CDD and corporate due diligence?

Market sizing is a key component of market research, and it's important for two reasons.

First, market sizing helps you understand how big your company's share of that market is. Second, it can help you understand how much growth there is in the market.

If you're doing due diligence on a business with an established presence in its industry (or one that's growing), then understanding its relative size compared to competitors is vital. This is because it helps determine whether the business has room to grow or needs more work before entering another country or expanding into new products or services.

The market sizing process can be broken down into three steps.

The first step is to identify the market you want to research. This may seem like a basic task, but it's important that you're clear about what kind of product or service you're researching and how it fits into its industry. For example, if you're looking at restaurants with delivery services in your area, then you should only include those that offer delivery. If you're looking for businesses that sell more than one type of product or service, then be sure to account for all the different options when calculating your market size. The second step is to identify the competitors within that market and determine how they fit into the overall landscape. This can be tricky because there are many ways to define competition. It could mean direct competitors (those who offer similar products or services), indirect competitors (those who don't provide similar products or services but compete with your company based on price, location or customer loyalty), complementary products (products or services offered by other companies in a complementary industry.)

Why conduct deeper market research for CDD?

Commercial due diligence is an important part of the corporate due diligence process. A thorough review of your industry and competition helps you understand how the market is changing and where new opportunities to grow your business exist. CDD can help you understand how customers are buying from you, which can inform any acquisitions or merger deals that you may be considering.

Market research and CDD are also extensively useful in the realm of marketing. Want to learn how? Check out our recent blog post titled: '5 reasons commercial due diligence and B2C surveys are helpful for marketers'

Who should write the commercial due diligence report?

• The report should be written by a third party who is independent of the company and transaction.
• The third-party should have experience in commercial due diligence, especially with that specific industry or type of business.
• The report should include a summary of their findings and recommendations.
• The report should also include a list of all issues that were identified during the due diligence process. These issues should be ranked from most to least critical, and the report should include an explanation of how each issue may impact your business or investment.
• The report should also include a recommendation on whether or not you should proceed with the transaction based on these findings and recommendations.

What should be included in the commercial due diligence report?

This is the first question you should ask yourself before starting your report. For instance, consider that you are writing a commercial due diligence report on a business that manufactures toys. You need to understand the business model, revenue generation, and cost structure of that company before writing a commercial due diligence report.

The revenue model of a company indicates how it makes money. For example, if you are looking at an e-commerce company then its revenue model will be different than that of a manufacturing company or an infrastructure services provider.

Revenue (or turnover) is one of the most important parameters while analysing a company’s financial performance; therefore, knowing how much revenue they generate helps you make decisions based on real numbers rather than estimations. This will also help you determine whether your initial investment thesis is right or not by comparing actual results with projected figures given in financial statements or documents provided by management during the due diligence process. The revenue model will also help you understand how the company makes money and whether it is viable for a long-term investment.

Interviewing clients of your target company is also an aspect that should be included in a CDD report, but is often overlooked. Find out more about the perils of traditional due diligence in IMAA's article.

The role of surveys in commercial due diligence

To get a picture of growth prospects as well as customer perceptions about the industry, surveys are often used in commercial due diligence. This information can help you understand why customers are buying from your company. It also allows you to identify future opportunities that may exist. A sample survey could include questions like these: "What's been your experience over the past year in this industry?"

"What are your expectations for the next year?"

"As a customer, what would you like to see more of from this industry?"

"How are customer expectations changing?"

"Are there any new trends in this business, technology, or product area that you'd like to see in the future?"

Still wondering how commercial due diligence is done?

If you’re still wondering how commercial due diligence is done, you’re not alone.

Commercial due diligence is an investigation into the financial and legal aspects of a company. It can help you make an informed decision about whether or not to invest in that company. A commercial due diligence report is a written summary of all your findings during the investigation. It should include details about the company’s operations, management, history (if applicable), finances, and legal structure.

If you have decided to invest in a new venture (or buy some property), then it’s likely that someone will need to do some kind of commercial due diligence on your behalf before making any decisions. However, if you are simply interested in learning more about specific businesses or industries then personal research may suffice. Although it may still be worth getting advice from experts involved in this area too!

You should always make sure that you have a good understanding of what you are getting into before making any decisions. For example, if buying property, then it’s important to find out whether there are any planning restrictions on the land or building that might affect its value in the future. If investing in a business, then it’s vital to assess whether it is likely to be profitable and what risks may be involved in doing so. In a nutshell, this is exactly what commercial due diligence is about.

Conclusion

This is just a sample of the information that may be included in the commercial due diligence report. The important thing to remember when writing a commercial due diligence report is that it’s not just about numbers and figures, but about what those numbers mean for your company and its future growth potential. Still have questions? Reach out to us here and we’d be happy to help.