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Commercial Due Diligence

Commercial Due Diligence (CDD) is an essential part of deals for owners, potential buyers, or management involved in the transaction process. Unlike other forms of due diligence, CDD is lighter on management time, focusing on external commercial factors through research leverage on data analytics and market intelligence.

Types of CDD:

Buyer-initiated CDD:
  • Commissioned by potential buyers (private equity or corporate) or lenders.

  • Tailored analysis of the target company's historical performance, market share, competitor landscape, and long-term viability.

In the context of 'buy-side' Commercial Due Diligence (CDD), the report's responsibility is to the potential buyer, usually a private equity firm or corporation, or a lender. The CDD provider is specifically engaged to counsel the buyer on various aspects of the target company's present and future commercial performance. This process is meticulously customized to meet the specific requirements of the buyer and typically covers:

  1. Evaluating the historical performance and forecasts of the target company in comparison to peers and market benchmarks.

  2. Analyzing the size of the end market segments served by the target, along with its current market share and projections.

  3. Gathering perspectives from peers, customers, suppliers, and relevant regulators on the competitive landscape and the target company's position within it.

  4. Considering commercial integration or carve-out factors, particularly for corporate clients.

  5. Examining market conditions and the long-term viability of the management strategy, including the sustainability of market drivers over the next 10+ years (private equity audiences will have their own approximately 5-year exit strategy to consider for future bidders).

Vendor-initiated CDD (VCDD):
  • Commissioned by a vendor considering a sale.

  • Provides an independent, forward-looking view for potential buyers.

  • Less demanding on management time compared to multiple buy-side CDDs.


Vendor-initiated Commercial Due Diligence (VCDD) or Vendor Due Diligence (VDD), as the name implies, is initiated by a seller contemplating a sale but is conducted independently. The agreed-upon liabilities related to the report typically transfer to the eventual buyer. The provider must offer an unbiased, forward-looking assessment of the market, objectively scrutinizing key assumptions supporting business growth forecasts, financial performance, competitive differentiation, and other aspects of the management's business plan.


In such instances, the provider tailors the analysis of the target business to accommodate the various types of expected bidders (e.g., private equity audiences less familiar with sector fundamentals versus an international corporate audience familiar with their sector but less acquainted with the target's specific differentiation or certain local market characteristics).


The advantage of vendor-initiated CDD lies in its lower demand on management time. Compare this singular process to managing multiple concurrent buy-side CDDs from various bidders. While the CDD provider must uphold independence in reporting, a vendor-initiated CDD realistically allows target management more opportunities to clarify distinctions and have early access to drafts compared to buyer-initiated reporting.


'Red Flag' CDD:
  • Shortened reporting focusing on key items by exception.

  • Can be vendor- or buyer-initiated and is cost-effective for smaller transactions.


Another term you might come across is 'red flag' reporting – this can be initiated by either the vendor or the buyer and is a concise report that concentrates solely on noteworthy issues. For smaller transactions, 'red flag' reporting is often satisfactory and typically ranges from 20-50% of the cost of a comprehensive Commercial Due Diligence (CDD).


Top-up CDD:
  • Buyer-initiated, focused on specific concerns after a preferred bidder enters exclusivity.

  • Aims to keep the demand for management time low.


A vendor-initiated report, especially a brief 'red flag' report, may frequently be supplemented. This supplementation is initiated by the buyer and, instead of revisiting the same aspects covered in the Vendor-Initiated Commercial Due Diligence (VCDD), it is designed to zero in on particular concerns that the bidder might still harbor. Typically, this process takes place only when a preferred bidder has entered exclusivity to minimize demands on management time.


Vendor Assist

  • Vendor Assist involves developing business plans and articulating growth ambitions without a duty of care to prospective buyers.

  • Helps present the growth story in a concise, investor-friendly manner.

  • Pre-empts bidder concerns, making the subsequent CDD process more efficient.


Benefits of CDD for Business Owners:

  • Pre-empts buyer due diligence questions and provides early warnings of potential impediments.

  • Offers reliable figures and analysis for buyer valuation and due diligence.

  • Minimizes time spent in the deal process, allowing management to focus on day-to-day business.

  • Enables potential bidders to gain a focused, independent understanding of the business.

  • Underpins management forecasts.

  • Increase the synergies of the transaction and avoid sunk costs


In conclusion, CDD serves all interested parties in M&A transactions, saving time and resources, providing reliable information, and facilitating a comprehensive understanding of the business for both buyers and sellers.



Zhiyu Wang

Partner

ZImark Advisory

Whatsapp: +86 15021463427

Wechat: zimarkofficial

Line: +1 7745389536

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