Commercial due diligence

1. Commercial Due Diligence
Due Diligence

2. • “Due diligence” is an analysis and risk assessment of an impending
business transaction
• Careful and methodological investigation of a business
• It is basically a “background check” to make sure that the parties to
the transaction have the required information
INTRODUCTION

3. • CDD is all about understanding customers and markets.
• What do customers think of the company you are thinking of
buying?
• Customer referencing is a proper and valuable part of CDD.
• Key to the development of CDD in the UK was the Ferranti story
What is Commercial Due Diligence ?

4. Due diligence is usually badly done. The reason is threefold:
• It is usually left to the last minute.
• The aims of due diligence are not well understood.
• Fear and greed get in the way of a properly executed process.
Why due diligence is badly done

5. • identify issues that feed into price negotiations, and hence reduce
the risk of paying too much;
• de-risk the deal by identifying points against which legal protection
should be sought.
Using due diligence to reduce risk

6. • RISK
The market might not be as big as thought, or growing as quickly or may
be structurally unsuited to making decent returns.
OBJECTIVE
• To establish the current market size and to forecast the expected growth
in the segments relevant to the target.
Questionnaire on Market
size, structure and growth

7. • How do the target’s markets segment? The chances of calling the market are improved if
the target’s market is defined in terms of homogenous segments and diminish if it is not.
• How large are the market segments which the target serves today?
• What are the drivers of growth?
• How fast are those segments growing?
• Are there threats from substitute products, new technologies or new entrants?
• Can suppliers, regulations or other external influences change the basis of profitability in
the market?
• What does all this mean for pricing?
• In which segments does the target have the capabilities to compete in the future?
QUESTIONS

8. RISKS
• That the segments served by the target are shifting.
• That the benefits delivered by the product or service are or will be better delivered by
something else and therefore that sales volumes will decline.
• That customer sophistication will push the product or service to price-based
competition.
OBJECTIVE
• To establish customers’ key purchase criteria and their future buying intentions.
Customer analysis

9. • Who are the target’s major customers?
• What are their purchase criteria? What do they value?
• How does the target perform relative to those criteria? Competitive position improves if the
target company’s proposition is specifically targeted for each sub-market and if the target
focuses on understanding and delivering the benefits expected by customers in each sub-
market both now and in the future.
• Are there unmet needs?
• Are there likely to be changes in buying behaviour?
• What are customers’ switching costs?
QUESTIONS

10. RISK
• That the target company does not have adequate resources and
capabilities to survive the competition.
OBJECTIVES
• To assess the competition’s relative strengths and weaknesses.
Competitor analysis

11. • Who are the major competitors?
• What is the degree of competitive rivalry? The target’s competitive
position improves if it can avoid head-on competition.
• What are competitor strengths and weaknesses vis-a`-vis:
– Customer purchase criteria?
– The target?
QUESTIONS

12. RISK
• That the target company is outperformed in open competition.
OBJECTIVES
• To assess the target company’s relative strengths and weaknesses.
COMPETITIVE POSITION

13. • How is the target performing in the segments in which it competes?
• What does the target’s market offering produce in customer value, satisfaction and
loyalty?
• What are the target’s strengths and weaknesses relative to the competition? The chances
of success are best if the target plays to its strengths, minimizes its weaknesses and
anticipates competitor moves.
• Does the target create sustainable value? To what degree has it chosen markets that give
it a strong position based on differentiating capabilities that create a robust and
sustainable value proposition to customers better than those of the competition?
QUESTIONS

14. RISK
• That management cannot deliver.
OBJECTIVES
• To assess the strengths and weaknesses and any gaps in the capabilities
of the management of the target company/combined entity.
MANAGEMENT

15. • Can management drive the things that matter through the company to
the marketplace?
• Can it deliver the strategy?
QUESTIONS

16. Conclusion