Commercial due diligence tests whether market, customers, competition and business plan support the assumptions behind a deal. It is the only review that answers how much of the revenue the buyer pays for will still be there in the future. It gives no guarantee, and it does not audit the numbers or review contracts for legal risk.
A health check, not a guarantee
The most common wrong expectation of commercial due diligence is a guarantee. There is none. What it delivers is comparable to a thorough health check: data, contracts, customers and market are examined to the best of our knowledge, with a depth and an outside view the buyer usually does not have. The findings hold for today. What happens tomorrow is up to the market.
What it covers
- Market: size, growth, drivers, and whether the market is as accessible as the teaser claims.
- Customers: why they buy, how strongly they are tied, how much revenue depends on a few names.
- Revenue quality: how much revenue is truly recurring, how much is one off, and what the contracts are actually worth.
- Competition and positioning: where the brand stands and how defensible that position will be in three years.
- Business plan: which growth assumptions are realistic and which are not.
What it does not cover
- no audit of accounts, balance sheet and quality of earnings: that is financial due diligence.
- no review of contracts for legal risk, liability and ownership: that is legal due diligence.
- no tax review: that is tax due diligence.
- no guarantee and no decision: the buyer decides, on a better basis.
| Commercial | Financial | Legal | |
|---|---|---|---|
| Guiding question | Will the business hold up? | Are the historical numbers right? | Which legal risks come with it? |
| Scope | market, customers, competition, plan | earnings, balance sheet, cash, working capital | contracts, corporate law, liability, IP |
| Typical providers | specialised institutes and strategy advisers | accounting firms | law firms |
| Feeds into | valuation, price, 100 day plan | purchase price and adjustments | warranties in the purchase agreement |
In which order to commission them
Financial and legal due diligence usually run in parallel, mostly with two different providers, because they are two professions: accountants and lawyers. Some firms offer both, but the teams remain separate. Tax due diligence is often attached to financial due diligence.
Our recommendation:
- Before the LOI: a commercial red flag review. It is the cheapest and tells you whether everything else is worth paying for. Commercial deal breakers are the most expensive ones to find late.
- In the confirmatory phase: financial and legal due diligence in parallel, plus the full commercial due diligence.
- Before signing: bring all findings together into price, warranties and the plan for the first 100 days.
The question only commercial due diligence answers
How much of the revenue you are paying for will still be there in three years? Behind it are four checks no other due diligence performs:
- What are the customer contracts really worth, compared with actual purchasing behaviour?
- How much of the recurring revenue is robust, and how much is one off or at risk?
- Are the growth assumptions realistic given the market and the sales effort?
- How is the brand positioned, and will that position hold against competitors?
When commercial due diligence is wasted money
- When the result changes nothing. If the acquisition is strategically decided at any price, no finding will change the decision. Then at most an integration plan pays off.
- When it comes too late. After signing, neither price nor warranties can be negotiated.
- When the deal is very small and the buyer knows the market. Then talking to the key customers yourself is often the better investment.
In all other cases the review either confirms the deal, gives arguments for a better price or prevents a bad acquisition. All three outcomes are worth the fee.
FAQ
What does commercial due diligence cover?
Market, customers, revenue quality, competition and positioning, and the assumptions of the business plan. In short: whether the business will hold up.
How does commercial due diligence differ from financial and legal due diligence?
Financial reviews the historical numbers, legal the legal risks, commercial the future of the business: market, customers, competition and plan.
In which order should buyers commission the reviews?
A commercial red flag review before the LOI, then financial and legal in parallel with the full commercial due diligence in the confirmatory phase.
Does commercial due diligence give a guarantee?
No. It is a thorough assessment to the best of our knowledge, comparable to a health check. Warranties are a matter for the purchase agreement.