Commercial Due Diligence Services in Dubai and UAE
It is an established fact that a robust Due Diligence exercise is the backbone of any prospective transaction. As it is often said, the cost of not doing a proper due diligence far outweighs the costs involved in conducting a good due diligence exercise. When potentially investing millions in the course of an acquisition, needless to mention the effort, time, and reputational factors involved, conducting a thorough due diligence is not an option but a necessity.
While it was largely confined to financial information till a few years ago, an acquisition due diligence now covers other dimensions of a target company too – including strategy, operations, marketing and sales, leadership, and human resources.
This is where commercial due diligence steps in and when conducted by a good due diligence consultant, it becomes an integral part of an acquisition.
What is Commercial Due Diligence (CDD)?
Commercial due diligence is the process through which a buyer analyzes a target company from a commercial context. The aim of a CDD is to provide the buyer with an overall context of the company, based on its positioning in its operating markets, its quality of management, organizational structure and policies etc. Further, a CDD will also assess how these aspects are likely to evolve in the future, by either validating the target company’s own business plans or by the due diligence consultant forming an independent opinion.
What are the areas that should be covered in a good commercial due diligence process?
While of course relying significantly on financial data and other organizational facts pertaining to the target company, a CDD should specifically focus on the following aspects.
- Market size for the company
- Total Available Market / Serviceable Available Market / Serviceable Obtainable Market
- What are key drivers in the market?
- How is it likely to grow or change in the future?
- What are the market channels and their relative importance? Online vs In-person? B2C vs B2B?
- Where is the target positioned within the market?
- Where is the market heading? How could this affect the value of the target company?
- Competitive Landscape
- Who are the main competitors?
- What advantages/disadvantages do they have relative to the target?
- How does the target perform against its competitors?
- How do their products/services differ?
- What are the barriers to entry for new competitors?
- Review of the company’s Business Plan
- Does it provide a clear path to income growth?
- How realistic is the business plan?
- Could the business plan be improved upon after an acquisition?
- How does the business plan fit with the buyer’s own strategic objectives?
- What is the typical customer profile within the market?
- What are the psychographic and demographic characteristics of the company’s customers?
- Are there certain customer segments that the target company is currently not serving?
- How is the average lifetime value of a customer?
- What is the company’s customer churn level?
- Pricing and Margins
- How have average prices fluctuated historically?
- What is the forecast for prices in the future?
- Are the industry margins sustainable at current levels? What are the trends?
- Are the target company’s margins in line with industry levels?
- Sales and Marketing
- How much of the annual budget is spent on sales and marketing?
- How could sales and marketing be improved?
- What is the average customer acquisition cost? Is it higher/lower than the market average?
- Are the company’s products and services being marketed effectively?
By using such an exhaustive Commercial Due Diligence process as illustrated above, the primary benefit is that it provides the prospective buyer with a thorough understanding of the target company’s position before negotiations begin. This allows the buyer to make informed decisions during a potential acquisition – this could be in relation to acquisition pricing, exit terms, assessment of potential synergies etc.
In addition, it provides an assessment of the external market landscape and what effect this may have on the target’s ability to reach its forecast results. It will also analyse competitors’ performance and market share and thus allows a potential buyer to assess if the transaction is likely to generate benefits in the long run.
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