Commercial Due Diligence Training and templates

Commercial Due
Diligence
Training & Templates
By Former Deloitte and
McKinsey Management
Consultants

22
Table of content
Background Knowledge
Business Toolkit
1
5
Templates you can easily reused for your own project4
The use of a hypothesis driven approach to undertake your CDD
Project
2
Key steps to follow during your CDD Project3

33
There are 3 key types of Due Diligence
“What is the past and present
performance of the company?”
Financial
Due
Diligence
1
“What is the likely future performance
of the company?”
Commercial
Due
Diligence
2
“Is there any legal/tax issues or
opportunities the acquirer company
needs to be aware of before making a
decision?”
Legal Due
Diligence
3
Key question the Due Diligence
tries to answer
Who usually performs the Due
Diligence?
The Financial Advisory team of a
Consulting firm (i.e. Deloitte, KPMG,
McKinsey)
The Strategy team of a Consulting firm
(i.e. Deloitte, EY, McKinsey)
Business Lawyers from a law firm (i.e
Ashurst)
These 3 key types of Due Diligence are usually initiated by the acquirer company. However
sometimes the Commercial Due Diligence can be initiated by the Vendor or seller company. In
that case the term “Vendor Due Diligence” is often used

44
A Commercial Due Diligence (CDD) is usually performed alongside a
Financial Due Diligence and a Legal Due diligence
InternalExternal
FuturePast
Financial Due
Diligence &
Legal Due
Diligence (i.e.
past and present
Income statements,
Balance Sheet
statements, Cash
Flow statements, tax
records, etc)
Commercial Due
Diligence
Due Diligence Focus

55
In the following slides, we will focus on the Commercial Due
diligence
InternalExternal
FuturePast
Commercial Due
Diligence

66
A CDD should help investors answer 1 key question
Should we invest in this
company in light of the future
performance of the target
company?

77
In order to answer this key questions, the CDD will have to answer
multiple sub-questions
Should we invest in this company in light of the future performance
of the target company?
• Strategy
• Company key products and services
• Company capabilities
• Revenue
• Cost structure
• Profitability
Company
• Market size and growth?
• Market segments?
• Market segments size and growth?
• Market KPIs
• Supplier an distribution landscape
• Potential threats and opportunities
Market
• Competitive intensity
• Company’s position in this market?Competition
• Segmentation
• Price willing to pay by the customers
for the company’s products and
services?
• Purchasing behavior
• Trends
Customers
1.Landscape Analysis
• Company revenue
drivers
• Past revenue
growth
• Future revenue
growth
Are revenue
projections
reasonable?
• Company cost
drivers
• Past COGS &
Operating cost
• Future COGS &
Operating cost
Are cost
projections
reasonable?
2.Projection Assessment 3.Conclusion
• Base case,
upside case and
downside case
Scenarios
• Potential
challenges and
risks to achieve
projections
Challenges
and risks
• Considerations
of exit options
Exit options

88
Download all the editable
Powerpoint document at
www.slidebooks.com
Download the editable Powerpoint document at www.slidebooks.com

99
The most common clients of a CDD are Banks, Private Equity Firms
and Big Corporations
Banks Private Equity Firms Big Corporations

1010
CDD services are usually provided by the top Consulting firms

1111
There are many stakeholders involved in a transaction
Sell-side
Management
team
Shareholders
M&A Bankers
Consulting firms
(Vendor Due
Diligence)
Buy-side
Management
team
Shareholders
Banking advisers
Consulting firms
(Commercial Due
Diligence)
Financial
Advisers
(Financial Due
Diligence)
Legal Advisers
(Legal due
diligence)
Experts (e.g. tax,
human capital)
The target
Business
Financial
Advisers
(Financial Due
Diligence)

1212
Table of content
Business Toolkit
1
5
Project
2

1313
The simplest way to undertake a CDD projects is to use a hypothesis
driven approach
Develop working hypothesis
for resolution
Identify key assumptions
that will
prove/disprove hypothesis
Gather data
Analyse data to test key
assumptions of hypothesis
Draw conclusions and
structure final deliverable
Frame the problem by
breaking it into small pieces
Refine hypothesis if
necessary

1414
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1515
The simplest way to undertake a CDD projects is to use a hypothesis
driven approach
Develop working hypothesis
for resolution
Identify key assumptions
that will
prove/disprove hypothesis
Gather data
Analyse data to test key
assumptions of hypothesis
Draw conclusions and
structure final deliverable
Frame the problem by
breaking it into small pieces
Refine hypothesis if
necessary
Use logic trees to
break down the
problem into smaller
pieces
Use a Hypothesis
tree including your
hypothesis,
assumptions, sub-
assumptions, etc.

1616
Example of hypothesis
The Target Company
profit forecasts provided
by the Board are
reasonable

1717
Example of assumptions that must be true to validate our hypothesis
The Target Company
by the Board are
reasonable
The projected Revenue is
reasonable
The projected COGS is reasonable
The projected Operating Cost is
reasonable

1818
Example of sub-assumptions that must be true to validate our
assumptions
The Target Company
by the Board are
reasonable
The projected Revenue is
reasonable
The projected COGS is reasonable
The projected Operating Cost is
reasonable
There is no illogical trend between
historic revenues and projected
revenues
The company core capabilities will
support the future revenue growth
The revenue drivers have been
identified correctly and projected in
a reasonable way

1919
Once you’ve got your “Hypothesis tree” with your Hypothesis,
Assumptions, Sub-Assumptions,…it is time to create your work plan
Work Plan to validate or invalidate the Assumption
“The projected Revenue is reasonable”
Sub Assumptions
Expected
answer
Actual Answer Analyses Data Sources End Product Responsibility Deadline
There is a logical trend between
historic revenues and projected
revenues
Yes Yes
Compare Historic and
forcasted revenue CAGR
Financial Due
Diligence
Vertical Histogramme
chart
Raphael 10 of October
The revenue drivers have been
identified correctly
Yes No
Check list of key revenue
drivers identified by the
management
Industry report Driver tree John 13 of October
Insert Sub assumptions
Work Plan
Check the Excel sheet
provided with the
Powerpoint

2020
Table of content
Business Toolkit
1
5
Project
2

2121
www.slidebooks.com

2222
Example of CDD Project Plan
Step 1: Background
Documents
Step 2: Internal Kick-Off
Step 3: Management
meeting
Step 4: Analysis of
management data
Step 5: Desk research
Step 6: Interviews
Step 7: Financial Modelling
Step 8: Report preparation
and presentation
Days M T W T F M T W T F M T W T F M
Week 1 Week 2 Week 3

2323
Step 1: Identify, gather and read background documents
What is it? Why is it useful?
Information
Memorandum
Sale document prepared by Vendor
and/or management
Management views, industry context, business overview,
historical performance and projections, strategy
Vendor Due Diligence Financial and sometimes Commercial
Due Diligence prepared by advisers to the
Vendor
Financial - more detail on business activities,
performance, the market and financial position.
Commercial – review of market, competitors, customers
and a view/rationale behind the business projections. Be
wary of VDDs – they can mislead or try to ‘dress up a
business’
Specialist market
reports
Supplemental specialist reports – e.g.
property, environmental, expert and
technical reports
More detail on the business in key areas. Tends to be
specialist in nature and may require similarly specialist
reviewers
VDD presentations Presentations by report authors with
opportunity for Q&A
Chance to ask questions and challenge VDD (approach,
data, who spoke to, conclusions). Prepare questions in
advance and usually only get one or two chances
Management
presentation
Presentation by Management with
opportunity for Q&A
Chance to hear Management’s views in their words, form
a view on them and ask questions. Usually get one
chance so prepare beforehand and work with
client/advisers to form a joined-up set of questions and
meeting strategy
Trading update Latest trading performance, often an
appendix of the VDD
Up-to-date information on business performance. Beware
if this looks late or suspect and ask yourself why
Possible documents involved in a CDD

2424
Step 2: Internal Kick-off
• Meet your team
• Establish key role and responsibilities
• Ensure a shared understanding of the question we try to answer
• Understand the context of the project leveraging the documents read prior
to the meeting
• Create logic trees to break down the problem into pieces
• Run through the scope
• Create hypothesis tree including our key hypothesis and assumptions
• Talk through the “blank pack”
• Present your plan of actions with the “what”, “How”, “Who” and “When”
• Discuss key challenges
• Prepare for the management meeting
Objectives
• Ensure that everyone has an open mind
• Ensure that everyone has a shared understanding of what needs to achieve
and how
• It is important to be well-rested as a CDD project can be intense
Tips

2525
Step 3: Management meeting
• Introduce your team and build a relationship with the management team
• Hear the management team describe their business and future plans
• Ask questions to the management to clarify key points
• Build an understanding of what management data might be available and
submit a data request
Objectives
• Ask your consultant to take notes and write down a minutes after the
meeting
• Bring a USB key
Tips

2626
Step 4: Analysis of Management Data
Management Data Analysis Tips
Objectives:
• Extracting management data and carry out
detailed data analysis
• To build a detailed view of how the company
has been performing
• To understand how management have built
up their forecasts
• To identify key areas that require probing
with management or through market
research
Method:
• Via an excel spreadsheet
Outputs:
• Chart-Driven Slides that may be included in
the final presentation
• Quickly draw up data request based on the
assumptions you try to validate or invalidate
• Sometimes it may be more efficient to ask the
management team to request data on your
behalf
• Analyse initial data by product, business unit,
customer, channel, geography, etc.
• Understand Management’s forecast model
and its underlying assumptions in details
• Create chart driven slides to facilitate
understanding
• If you can’t access some key data, let the
management team know asap

2727
Step 5: Desk Research
Desk research Tips
Objectives:
• To identify and gather key sources of
information on the industry and company
(e.g. Industry report, experts, publications,
Industry association, and press comments)
Method:
• By searching on the internet, leveraging the
“Data Research” team of your company, or
by contacting companies such as RMI
Outputs:
• Quantitative and qualitative data on the
industry and the company
• Triangulate: don’t rely just on one source of
information
• Note all sources of data in you report or in
your financial model
• Be tenuous as gathering data can be a
fastidious task

2828
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2929
Slide Template to compare the target company with its key
competitors
20
15
10
5
0
-5
A
B
C
Gaining market share
Losing market share
Average
market
growth
0 10 20 30 40 50
CompanyGrowth(%)
Market Share (%)
= $ xx million in sales
Insert your key message
60
D

3030
Slide Template to present the company’s revenue and profit forecast
Insert your key message
0
0.5
1
1.5
2
2.5
3
3.5
4
2014 2015 2016 2017 2018
Revenue Profit
Revenue and Profit forecast

3131
Slide Template to create a revenue bridge using a waterfall chart
Revenue bridge Comments
• Insert your own comments related to the revenue
bridge or waterfall chart on the left
• Insert your own comments related to the Insert your
own comments related to the revenue bridge or
waterfall chart on the left
• revenue bridge or waterfall chart on the left
Go to the Excel sheet provided with this document to access the chart

3232
Slide Template to create a CAGR tree which represents a high level
view of the Target’s financial model
CAGR tree
• A Revenue CAGR tree is a high level view of
the Target’s financial model. It includes the key
revenue drivers and assumptions
• The revenue can be split based on products,
Business Units, geography, customers, etc
• A Revenue CAGR tree shows past and
projected revenue growth
• A Revenue CAGR tree represents the Target’s
management projection
Comments
CAGR
2010-
2015
Key
Value
in
2015
CAGR
2015-
2020
xx%
Net Sales
€xxm xx%
xx%
Sales B
€ xxm xx%
xx%
Sales A
€xxm xx%
xx%
Driver A1
xx xx%
xx%
Driver A2
xx xx%
xx%
Driver B1
xx xx%
xx%
Driver B2
xx xx%
Xx%
Driver A3
xx xx%
= Key assumption
X
+
+
+
+
xx%
Sales C
€ xxm xx%
xx%
Driver C1
xx xx%
xx%
Driver C2
xx xx%
x Insert your own text
and figures

3333
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Commercial Due Diligence Training and templates

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