Commercial due diligence (or business due diligence) is an assessment of how a company you believe to be an attractive acquisition option stands in the industry today, and how they are likely to find themselves positioned tomorrow. The partner you hire to conduct business due diligence on your target company should therefore be knowledgeable of the latter’s industry, key competitors, upcoming trends and more.
As experts in the payments and fintech space, Penser has conducted multiple commercial due diligence projects (CDDs) for our partners. Here are some of the key questions we ask in order to start putting together a comprehensive assessment of the target company:
1. How large is the market and is it growing?
When conducting CDD, it is important that the market environment is clearly understood. This allows the acquirer to get an understanding of the risks and opportunities faced by the target company. It also helps define both the immediate and the broader market that the target company operates within, assess the attractiveness of these markets, and size their future potential.
2. How competitive is the industry?
Getting an understanding of the competitive landscape helps one assess the relative strength of the target company. When looking at the competition, we take not just take a local perspective, but also a global one, especially in the fintech space. This will also help us understand the position of the target company in the market.
3. What does the business model of the company look like?
When conducting business due diligence, we want to understand just how strong the target company’s business model is, especially considering both the financial assumptions as well as their key performance indicators. We analyse the target company’s past performance as well as understand the feasibility of their projections, based on their capabilities and the current and future competitive and regulatory environment.
4. What is the potential of the target company after investment?
With knowledge of the client’s investment and plans for the future, we assess the scale of growth potential that the target has in the short, medium and long term. This also allows for an accurate representation of the potential downside risks and associated sensitivity to key assumptions or market factors. This analysis helps identify what value creation levers can be utilized by the investor.
5. What are the options for exit in the future?
After understanding the value of the investment today, we also try to provide a perspective on the exit opportunities that could be leveraged in the future. We look at both industry consolidation opportunities and evaluate the potential strategic and financial buyers that could be interested in the future.
At Penser, we provide our private equity, venture capital or corporate clients on how the target company is positioned commercially and can accordingly recommend if their investment in the target company makes financial sense.