Commercial Due Diligence

What Is Commercial Due Diligence?

Commercial due diligence tests whether a business's commercial story is true. Where financial due diligence asks whether the numbers are reliable, commercial due diligence asks whether the market, customers and competitive position support those numbers going forward. It examines the market the business operates in, how it makes money, who its customers are, how it compares with competitors and whether its business plan is credible.

The review looks at market size and growth, customer segments and concentration, customer retention and churn, pricing and margins by product, sales channels, competitive position and entry barriers, supplier dependence, technology and regulatory developments, and the assumptions behind the management's projections. It often draws on customer and industry interviews, industry data and the target's own commercial data.

The output is a view on the strength and sustainability of the business and on the risks to the plan. It is used by buyers and investors to test the investment thesis and by lenders to understand the business behind the borrower's numbers. Due diligence is an investigation of facts on the basis of documents and information provided, within an agreed scope. It is not a valuation, not an audit and not a formal legal, tax or accounting opinion, and it cannot detect what is not disclosed.

Who Needs Commercial Due Diligence?

• Buyers and investors testing the thesis for an acquisition or investment
• Private equity, venture and family office investors
• Lenders assessing the commercial strength of a borrower
• Promoters preparing for sale or fundraising who want to test their story first
• Joint venture and strategic partners evaluating market opportunity
• Companies planning to enter a new market or acquire a competitor
• Boards reviewing a growth plan

When Is Commercial Due Diligence Required?

It is not a legal requirement, but it is valuable when:

• The valuation depends on growth that has yet to happen
• Revenue is concentrated in a few customers or contracts
• The market is new, fast changing or poorly understood by the investor
• Competition is intense or changing
• Management's projections are significantly above history
• The investor is entering an unfamiliar sector
• The target's business depends on a regulation, licence or technology that may change

What Our Commercial Due Diligence Includes

The scope is tailored to the transaction and typically covers:

• Understanding the business, thesis and key commercial questions
• Market assessment: size, growth, segments, trends and regulation
• Customer analysis: concentration, retention, churn, contract terms and satisfaction
• Customer and industry interviews, subject to confidentiality and competition law safeguards
• Competitive analysis: position, pricing, differentiation and entry barriers
• Product, channel and geography analysis
• Pricing, margins and unit economics
• Supplier, partner and technology dependence
• Review of the business plan: assumptions, drivers and sensitivities
• Identification of upside and risk scenarios
• Findings report with implications for valuation, deal terms and the plan

Legal and Practical Considerations

Assumption and data based. Commercial due diligence relies on the data provided, public information and interviews. Market data in India can be fragmented, and conclusions are judgemental. It cannot guarantee future performance.

Competition law. Interviews with competitors, customers and suppliers should avoid exchanging competitively sensitive information such as prices or strategies, in line with the Competition Act, 2002. Information sharing protocols and clean teams are used where needed.

Confidentiality. Customer and supplier interviews risk disclosing the transaction, so they are done with the target's consent and under confidentiality arrangements.

Data protection. Where customer data is shared for analysis, the Digital Personal Data Protection Act, 2023 and its rules, as they come into force, may apply, and data should be minimised and protected.

Not a valuation or opinion. The review informs valuation and negotiation but does not itself estimate value or constitute a legal, tax or accounting opinion.

Independence of view. To be useful, the review should test the management's story rather than repeat it, and reflect the client's own questions.

Common Findings in Commercial Due Diligence

• Customer concentration higher than disclosed
• Revenue growth driven by discounts or one-off orders
• Market size or growth assumptions inflated
• Churn or repeat rates weaker than presented
• Competitive advantages easily copied
• Dependence on one supplier, platform or regulation
• Margins that fall as the company scales
• Projections not supported by the pipeline

Professional Fees, Government Fees and Timeline

Commercial due diligence carries no government fee. Costs of third-party market data, research subscriptions and expert interviews, if any, are separate. Our professional fees depend on the size of the business, the number of markets and segments, the extent of interviews and the speed needed. A review typically takes 15 to 25 working days after information is received, depending on the amount of primary research.

Commercial Due Diligence vs Financial Due Diligence vs Investment Due Diligence

Commercial due diligence tests the market, customers and plan. Financial due diligence tests the numbers. Investment due diligence combines the workstreams into an overall view for an investment decision. Related services include Financial Due Diligence, Investment Due Diligence and Pre-Investment Due Diligence.

Need Professional Assistance With Commercial Due Diligence?

Testing the commercial story before you commit can show whether growth is real. The Legal Bank can help you structure and carry out commercial due diligence. Share your requirement to discuss the next steps.