Commercial Due Diligence
Commercial due diligence is the buyer's investigation of a target's market and its position in it: the size and growth of the market, the competitors and their pricing, what customers actually think of the product and whether they would leave, and whether the forecast the price rests on is one the market will allow. Financial diligence tests the numbers the business reported; commercial diligence tests the numbers it promises.
- Also known as
- CDD, Commercial DD, Market due diligence
- Used at
- second-round diligence in any acquisition where the price depends on growth — which in fintech is almost all of them; also by lenders funding a leveraged deal
- Binding
- no — a report to the buyer (and often to its lenders under a reliance letter); its findings shape the price, the plan and sometimes the decision to stop
- Typical scope
- market sizing and growth; competitive landscape and share; pricing and take-rate trends; customer interviews (20–60 of the target's customers and lost customers, under confidentiality); churn and cohort analysis; the forecast's assumptions tested against all of the above
- Typical cost and time
- €100,000–500,000 and four to six weeks from a strategy consultancy or a specialist; less for a narrow scope
- Parties
- the buyer, its lenders, the consultants, and the target's customers — whose willingness to be interviewed is negotiated with the seller
How commercial due diligence works in practice
The seller's information memorandum says the market is growing 20% a year, the target has 8% share, and revenue will double in three years. Commercial diligence asks whether any of that is true. The consultants size the market from the bottom up — how many merchants, how much volume, what take rate — and from the top down against public data; they map the competitors and what they charge; and, most valuably, they talk to customers: why they chose the target, what they pay, what they would pay, whether they have looked elsewhere and what would make them leave. Lost customers are interviewed too, if the seller allows it.
The output is a view on the forecast. A plan that assumes 20% growth in a market growing 12%, with a take rate the interviews say is under pressure and a churn rate the cohorts say is rising, is a plan the diligence reprices — not by rejecting it but by producing the consultants' own base case, which the buyer's model then uses. For a lender funding the deal, that base case is the one the debt is sized on.
In fintech the questions have a shape: is the growth the target's or the market's (a payments company growing with e-commerce is not the same as one taking share); is the take rate holding; are the customers integrated deeply enough to stay; and is the product something a large competitor could add in a quarter.
Example
A fund bidding for a payments company with €40m of revenue commissions commercial diligence at €220,000. The seller's plan: €80m in three years, 26% a year. The consultants size the target's segment at 11% growth, find the take rate down from 1.3% to 1.1% over two years, and interview 35 merchants: satisfaction is high, integration is deep (switching would cost each merchant three months), but 9 of 35 have received cheaper offers and 4 are testing a competitor. Their base case: €58m in three years — 13% growth, half the plan. The fund reprices from 10× to 8.5× the current EBITDA, structures €5m of the price as an earn-out on the plan the seller believes in, and its lenders size the debt on €58m. The seller accepts, because the second bidder's diligence said the same.
Common mistakes
- Commercial diligence scoped to confirm the memorandum rather than to test it. - No customer interviews, because the seller refused; a seller who refuses has answered the question. - Sizing the market from a trade-body report that the seller's adviser also used. - Confusing market growth with the target's — a rising tide is not a moat. - Buying the plan the diligence cut, because the auction's price required it.