Commercial Due Diligence

Due Diligence

• “Due diligence” is an analysis and risk assessment of an impending business transaction

• Careful and methodological investigation of a business

• It is basically a “background check” to make sure that the parties to the transaction have the required information

INTRODUCTION

• CDD is all about understanding customers and markets.

• What do customers think of the company you are thinking of buying?

• Customer referencing is a proper and valuable part of CDD.

• Key to the development of CDD in the UK was the Ferranti story

What is Commercial Due Diligence ?

Due diligence is usually badly done. The reason is threefold:

• It is usually left to the last minute.

• The aims of due diligence are not well understood.

• Fear and greed get in the way of a properly executed process.

Why due diligence is badly done

• identify issues that feed into price negotiations, and hence reduce the risk of paying too much;

• de-risk the deal by identifying points against which legal protection should be sought.

Using due diligence to reduce risk

• RISK

The market might not be as big as thought, or growing as quickly or may be structurally unsuited to making decent returns.

OBJECTIVE

• To establish the current market size and to forecast the expected growth in the segments relevant to the target.

Questionnaire on Market size, structure and growth

• How do the target’s markets segment? The chances of calling the market are improved if the target’s market is defined in terms of homogenous segments and diminish if it is not.

• How large are the market segments which the target serves today?

• What are the drivers of growth?

• How fast are those segments growing?

• Are there threats from substitute products, new technologies or new entrants?

• Can suppliers, regulations or other external influences change the basis of profitability in the market?

• What does all this mean for pricing?

• In which segments does the target have the capabilities to compete in the future?

QUESTIONS

RISKS

• That the segments served by the target are shifting.

• That the benefits delivered by the product or service are or will be better delivered by something else and therefore that sales volumes will decline.

• That customer sophistication will push the product or service to price-based competition.

OBJECTIVE

• To establish customers’ key purchase criteria and their future buying intentions.

Customer analysis

• Who are the target’s major customers?

• What are their purchase criteria? What do they value?

• How does the target perform relative to those criteria? Competitive position improves if the target company’s proposition is specifically targeted for each sub-market and if the target focuses on understanding and delivering the benefits expected by customers in each sub-market both now and in the future.

• Are there unmet needs?

• Are there likely to be changes in buying behaviour?

• What are customers’ switching costs?

QUESTIONS

RISK

• That the target company does not have adequate resources and capabilities to survive the competition.

OBJECTIVES

• To assess the competition’s relative strengths and weaknesses.

Competitor analysis

• Who are the major competitors?

• What is the degree of competitive rivalry? The target’s competitive position improves if it can avoid head-on competition.

• What are competitor strengths and weaknesses vis-a`-vis:

– Customer purchase criteria?

– The target?

QUESTIONS

RISK

• That the target company is outperformed in open competition.

OBJECTIVES

• To assess the target company’s relative strengths and weaknesses.

COMPETITIVE POSITION

• How is the target performing in the segments in which it competes?

• What does the target’s market offering produce in customer value, satisfaction and loyalty?

• What are the target’s strengths and weaknesses relative to the competition? The chances of success are best if the target plays to its strengths, minimizes its weaknesses and anticipates competitor moves.

• Does the target create sustainable value? To what degree has it chosen markets that give it a strong position based on differentiating capabilities that create a robust and sustainable value proposition to customers better than those of the competition?

QUESTIONS

RISK

• That management cannot deliver.

OBJECTIVES

• To assess the strengths and weaknesses and any gaps in the capabilities of the management of the target company/combined entity.

MANAGEMENT

• Can management drive the things that matter through the company to the marketplace?

• Can it deliver the strategy?

QUESTIONS

Conclusion