In mergers and acquisitions (M&A), success often depends on the thoroughness of the commercial due diligence process. This long and complex process helps ensure that buyers and investors have a comprehensive understanding of a target company’s growth potential.

By analyzing market dynamics, competitive positioning, and commercial activity, commercial due diligence helps stakeholders make informed decisions. It’s no wonder the need for commercial due diligence only continues to grow.

According to recent surveys, private equity clients and other investors are increasingly prioritizing diligence efforts. 43.2% of M&A professionals expect diligence requirements to potentially increase over the next year. Additionally, 40.7% of firms plan to pursue one to two deals in 2025, which further emphasizes the importance of robust commercial due diligence.

This guide will take you through the essentials of conducting commercial due diligence, its key trends, and a detailed commercial due diligence checklist.

Commercial Due Diligence

What is commercial due diligence?

At its core, commercial due diligence evaluates whether the target business can succeed within its market. It assesses the target company’s financial performance and its long-term viability.

Unlike the financial due diligence process, commercial due diligence focuses on external factors. While financial due diligence focuses on internal evaluations of the company’s performance — like balance sheets, legal reviews, or employee data — commercial focuses on external factors like market size, customer base, and competitive dynamics.

That said, commercial due diligence serves several key objectives:

  1. Risk identification – Spot substantial risks, including organizational risks, legal issues, and financial risks like poor revenue margins or rising capital expenditure.
  2. Opportunity assessment – Highlight areas with strong revenue growth or adjacent markets to pursue.
  3. Strategic fit – Ensure the business model of the target company aligns with the growth strategy of the potential buyer or private equity firms.

By focusing on the target company’s commercial potential, commercial due diligence offers a comprehensive overview of the market position and specific advantages of the business.

Types of commercial due diligence

Commercial due diligence is not one-size-fits-all. It adjusts to the needs of the deal, depending on the buyer, seller, and transaction context. According to KPMG, the most common types of commercial due diligence are:

  1. Buyer-initiated commercial due diligence
    This is conducted by prospective buyers to ensure the target business aligns with their objectives. Buyer-initiated commercial due diligence focuses on areas like market assessment, business plan validation, and identifying potential liabilities.
  2. Vendor-initiated CDD
    Also known as seller-initiated CDD, this type helps sellers address potentially substantial risks and prepare their company for sale. Sellers use it to proactively correct weaknesses in the target’s competitive position or improve the management structure.
  3. Red flag commercial due diligence
    A high-level assessment designed to quickly identify substantial market risk indicators. It helps determine whether further evaluation is necessary.
  4. Top-up CDD
    Used to address gaps in previous diligence efforts. This is particularly useful when additional in-depth analysis of key trends or market shifts is required.

Conducting the commercial due diligence process

A well-structured commercial due diligence ensures no critical detail is overlooked during the deal preparation. Here’s an overview of the key steps.

Preliminary assessment

The process starts with defining diligence aims and gathering initial data to shape the scope of the evaluation. At this stage, key activities include:

  • Defining focus areas: Identify what matters most — such as the business model, market dynamics, and growth potential of the target business.
  • Analyzing the market: Examine the overall market, assess key trends, and flag substantial market risk indicators that could affect the deal.
  • Flagging risks and opportunities: Highlight critical issues, such as emerging legal risks, gaps in the management structure, or potential revenue growth opportunities.

This stage lays the foundation for targeted and efficient due diligence.

Data collection & analysis

Data collection forms the backbone of commercial due diligence, providing the insights needed for an informed evaluation. Key steps include:

  • Reviewing financial data: Analyze three years of financial data, focusing on revenue growth, profit margins, and projected capital needs. Confirm the validity of the business plan and assess potential financial risks.
  • Examining market position and competitive dynamics: Evaluate the target company’s commercial activity, its market share, and its competitive advantages. Understand how the business operates within the context of adjacent markets and industry trends.
  • Assessing customer base and operations: Review customer retention rates and operational efficiencies. This can identify areas for optimization or risks in the business operations.
  • Verifying legal and organizational risks: Investigate the company’s legal structure, compliance with regulations, and any employee agreements or outstanding legal obligations.

This phase ensures a comprehensive overview of the target company’s business model, highlighting areas for further focus.

Stakeholder interviews

Interviews with key personnel and stakeholders provide qualitative insights that complement quantitative data. These conversations often reveal issues or strengths that are not immediately obvious in reports. Focus on:

  • Engaging leadership: Speak with executives to understand the company’s vision, strategy, and approach to addressing organizational risks.
  • Consulting operational teams: Gather insights from managers and key employees to assess how day-to-day business operations align with strategic goals.
  • Engaging external stakeholders: Interview customers and suppliers to gain a better understanding of the market position and long-term competitive positioning of the business.

These discussions are invaluable for identifying potential liabilities and gauging the company’s long-term viability.

Report compilation & presentation

Once data and insights have been collected, they must be synthesized into a detailed commercial due diligence report. A strong diligence report should:

  • Summarize key findings: Provide a clear snapshot of the company’s market dynamics, financial performance, and growth potential.
  • Highlight risks and opportunities: Outline significant risks, such as legal or financial risks, alongside areas with strong future growth prospects.
  • Offer actionable recommendations: Suggest clear next steps for the prospective buyer, whether proceeding with the deal, renegotiating terms, or conducting further analysis.

Presenting the findings in a clear, structured format ensures that all stakeholders can make informed decisions based on the report.

Final evaluation

The final step is reviewing all findings to confirm that every critical area has been addressed. This phase includes:

  • Cross-referencing the diligence checklist: Ensure the process covers all essential areas, from market size to competitive positioning and legal structure.
  • Weighing risks and opportunities: Balance the potential for revenue growth or market demand against significant risks like volatile market conditions or unresolved compliance issues.
  • Making a decision: Determine whether to move forward, renegotiate, or walk away based on your commercial findings.

A thorough commercial due diligence not only provides a comprehensive understanding of the business but also empowers stakeholders to make confident, data-backed choices.

Essential components of a commercial due diligence report

An effective commercial due diligence report provides a comprehensive evaluation of a target company, enabling informed investment decisions. You can review an example of a due diligence report here.

Key components include:

  • Company overview: This section offers detailed insights into the business model, strategic objectives, and alignment with the overall market of the target company. It assesses how the company’s products or services meet market needs and evaluates its positioning against competitors.
  • Financial analysis: A thorough review of the company’s financial health, including historical revenue growth, profit margins, and future projections. This analysis should validate the feasibility of the company’s business plan and identify any risks or capital expenditure requirements.
  • Operational insights: An assessment of the company’s operations, focusing on supply chain efficiency, workforce capabilities, and potential organizational risks. This includes evaluating the management structure, employee agreements, and the resilience of operations during transitional periods.
  • Competitive landscape: An analysis of the target’s competitive position, market share, and unique advantages. This involves a SWOT analysis to understand the company’s strengths, weaknesses, opportunities, and threats within the industry.
  • Legal considerations: A review of any legal risks, including compliance gaps, pending litigation, and contractual obligations. This ensures that the company adheres to relevant regulations and identifies potential liabilities that could impact the transaction.

Incorporating these components ensures a holistic view of the target company, facilitating a well-informed and strategic investment decision.

Challenges in commercial due diligence and how to overcome them

Commercial due diligence can be complex and challenging, even for seasoned teams. The most common hurdles include incomplete data, tight timelines, and market volatility. However, adopting structured strategies and advanced tools can help overcome these obstacles effectively:

1. Incomplete or misleading data

One of the biggest challenges in commercial due diligence is incomplete or inaccurate information. Missing data can lead to misinformed decisions, while discrepancies in reports may hide critical risks. To address this:

  • Verify data from multiple sources: Cross-reference financial statements, customer metrics, and operational data to ensure accuracy.
  • Leverage virtual data rooms (VDRs): Centralize all documents in a secure, accessible platform. VDRs streamline the sharing and organization of data, allowing teams to spot gaps and validate information faster.
  • Engage stakeholders: Conduct interviews with management, employees, and external partners to uncover insights not apparent in documentation.

2. Time constraints

Tight deadlines often accompany M&A deals, especially in competitive bidding scenarios. This pressure can lead to rushed processes, increasing the risk of oversight. Solutions include:

  • Focus on high-impact areas: Prioritize key performance indicators (KPIs) such as market share, revenue growth, and operational risks.
  • Adopt integrated due diligence methods: Combine financial, operational, and commercial reviews into one cohesive process to reduce redundancies and save time.
  • Utilize collaborative tools: Platforms that enable real-time collaboration, such as cloud-based systems or VDRs, can speed up workflows and improve team efficiency.

3. Market volatility

Dynamic market conditions can add significant uncertainty to the due diligence process. External factors like economic downturns, regulatory changes, or supply chain disruptions may impact the target company’s performance. To address market volatility:

  • Conduct scenario analyses: Model multiple market scenarios to assess the target company’s adaptability to external changes.
  • Evaluate the business model’s resilience: Examine how well the company can adjust to shifts in demand, competition, or adjacent markets.
  • Analyze industry trends: Stay updated on key market developments, such as emerging technologies or changes in customer behavior, to gauge future growth opportunities.

Commercial due diligence checklist

Conducting effective commercial due diligence requires a structured and thorough approach to assess the viability, risks, and opportunities associated with a target. A detailed checklist ensures no critical areas are overlooked, enabling stakeholders to make informed decisions.

Below is a ready-to-use commercial due diligence report checklist you can adjust.

Here you can also find a financial due diligence checklist that you can tailor to your needs.

1. Market trends and growth dynamics

  • Key market drivers and trends, such as technological advancements, regulatory changes, and evolving customer demands.
  • Competitive landscape, including market share and the company’s advantages.
  • Market demand and positioning to determine how well the company’s offerings align with customer needs.
  • Adjacent markets for potential expansion opportunities.

2. Customer base analysis and satisfaction metrics

  • Customer base segmented by demographics, purchasing behavior, and lifetime value.
  • Evaluate customer satisfaction metrics:
    • Net Promoter Score (NPS)
    • Customer Satisfaction Score (CSAT)
    • Customer Effort Score (CES)
  • Acquisition and retention strategies and their effectiveness in driving revenue growth.
  • Churn rates and repeat purchase rates to gauge loyalty.
  • Key customer dependencies, ensuring revenue is not overly reliant on a small number of clients.

3. Sales performance and future forecasts

  • Historical financial performance, including revenue trends and past growth patterns over the last 3-5 years.
  • Future sales projections for alignment with market potential and industry benchmarks.
  • Revenue diversification across products, services, or regions to minimize risk.
  • Efficiency of the sales funnel and pipeline, focusing on conversion rates and customer acquisition costs.
  • Seasonal or cyclical trends that affect sales performance.

4. Operational risks and resource allocation

  • Operational efficiency by analyzing cost structures, productivity metrics, and supply chain performance.
  • Resource allocation, including labor, technology, and capital deployment.
  • The company’s technology infrastructure for scalability and competitive advantage.
  • Risk concentrations, such as reliance on key suppliers, geographies, or personnel.
  • Environmental, social, and governance (ESG) compliance, ensuring alignment with ethical and regulatory standards.

5. Financial sustainability and cash flow projections

  • Profitability metrics, such as gross profit margins, EBITDA, and net income trends.
  • Liquidity and leverage ratios, including debt-to-equity, current, and quick ratios.
  • Cash flow management.
  • Financial projections and assumptions.
  • Capital expenditure and its alignment with long-term business goals.

Leveraging virtual data rooms for commercial due diligence

Virtual data rooms (VDRs) are transforming the commercial due diligence process, offering robust solutions to simplify workflows, enhance collaboration, and ensure informed decision-making. Here’s how:

  • Centralized data management: Consolidate all essential documents, including the diligence checklist, in one secure, organized repository for instant access and streamlined navigation.
  • Real-time activity tracking: Monitor document access, edits, and downloads to identify areas of interest and ensure transparency throughout the process.
  • Granular access control: Set detailed permissions to control who can view, edit, or comment on specific files, minimizing the risk of unauthorized access.
  • Audit trails for accountability: Automatically log all actions taken within the platform, providing a clear record for compliance and post-deal analysis.
  • Faster deal timelines: Streamline every step of the diligence process, from document preparation to stakeholder reviews, enabling quicker and more efficient deal closures.

By integrating due diligence data rooms into your deal-making efforts, you gain not just a tool, but a strategic advantage that saves time, minimizes risk, and ensures a more efficient and effective evaluation process.

Conclusion

Commercial due diligence is essential for uncovering a target company’s growth capacity, market position, and operational risks, as outlined in this guide’s detailed checklist. By evaluating critical areas like customer satisfaction, financial sustainability, and sales forecasts, stakeholders can make well-informed decisions.

Using tools like virtual data rooms further streamlines the process, ensuring secure data management and actionable insights. In today’s quickly evolving M&A landscape, thorough and strategic due diligence remains the key to successful transactions.