A decision to acquire or sell a business needs thorough vetting, even if the deal size is one to twenty-five million dollars. A single discrepancy at any stage can ruin everyone’s experience. Due diligence is necessary since the modern business landscape has become dynamic. Business owners or sellers do due diligence to furnish potential buyers with trustworthy data that defines the fate of a transaction. They are also required to take this step to understand and solve any legitimate concerns of the prospective buyers or investors on a pre-emptive basis.
In the same vein, buyers and investors seek due diligence to have a fair knowledge of a business’s commercial performance and future. It helps them erode the chances of unpredictable risks appearing after acquisition or investment.
Due diligence activities can be related to finance, legal, tax, and commercial. What is commercial due diligence (CDD)? It can be a robust tool for every interested party to analyze the target business commercially to understand its environment and the opportunities it can leverage. The scope of CDD is vast and can be approached differently by different companies and audiences. Let’s delve into the most common CDD types for clarity.
- Buyer perspective
Buy-side CDD or buyer-initiated CDD is done by interested investors or buyers so that they know how the company performs and will perform in the future. Lenders, corporations, and private equity companies often initiate this process to learn the target business’s commercial potential accurately. They investigate the target’s past performance and predictions to compare their standing with their contemporaries and market proxies. It gives them an insight into market share, market segments, and the target’s position against the competitors.
- Vendor perspective
Vendor-initiated CDD is conducted by a vendor interested in selling their business. This type of CDD provides a neutral, futuristic view of the business and the market. Vendors usually consider financial performance, growth potential, competitiveness, and other business plan factors the management teams pursue. These analyses are often tailor-made to suit the needs of the bidders, whether a private equity company or an international corporate audience. Typically, private equity houses seek expansive sector analysis, whereas the other audience can be more interested in local market specifics and other differentiations.
- Other CDD types
Red flags and top-ups are the other areas. A red flag is a short version of this type of due diligence as it mainly considers exceptions, as required by a vendor or a bidder. Many small transactions rely on this reporting for its cost-effectiveness and adequacy. Users inspect the most critical parts of the business, which demand their attention. A reference to top-up is enough to comprehend that this particular CDD category involves an additional examination of the concerns that bother bidders even later. It is often a good tool that helps tackle uncertainties or questions before the deal materializes. Buyers usually initiate this process to provide management with the necessary details to catalyze the deal’s success and save their time.
CDD is an integral part of mergers and acquisitions. It creates enough room for the management team to manage their daily operations and save time for buyers and vendors. Other benefits are already well-known.
