Buy-Side Commercial Due Diligence: What is it?

PE Firms
Deal Team
Due Diligence

Commercial due diligence is a make or break process in mergers and acquisitions.

In buy-side due diligence, the focus is on the acquiring party, rather than the target company. This makes it distinct from sell-side due diligence, which is conducted by the organization that may be acquired.

“It’s standard operating procedure for private equity firms if they’re buying a company,” says Scott Bellinger, Bluwave’s co-head of research and operations. “No matter how good a company is, if the market is bad, it won’t succeed.”

Buy-side commercial due diligence looks extensively at the target company’s overall viability. It’s typically conducted by private equity firms, investors or other acquiring entities to evaluate risks and opportunities before signing on the dotted line.

We’re going to explore the key aspects of this process in private equity acquisitions, including financial analysis, commercial viability assessment and target company analysis.

Financial Analysis

Understanding a company’s financial health is a crucial aspect of buy-side commercial due diligence.

At this stage, the buyer reviews the target company’s financial statements, including balance sheets, income statements and cash flow statements.

A qualified finance professional can be invaluable in this step.

Market Size

Market size is also an important pre-acquisition consideration.

It helps identify potential financial red flags, such as declining revenue, which could suggest a shrinking market. If too many warning signs arise, the buyer may reconsider moving forward.

Working with an industry-specific service provider can help with this, saving your firm from a bad deal, or confirming a good one.

READ MORE: What is Commercial Due Diligence?

Total Addressable Market, Commercial Viability Assessment

A successful acquisition is contingent on the future growth potential of the target company. That’s why a commercial viability assessment forms an integral component of the process.

Here, the total addressable market (TAM) for the target company’s products or services is evaluated. Understanding the TAM provides insights into the potential growth and profitability of the target company, making it a critical metric for prospective buyers to consider.

Competitive Landscape

Another important factor is the competitive landscape within the target company’s market. This evaluation gives the buyer a comprehensive understanding of the company’s positioning, its main competitors and the regulatory environment in which it operates.

A thorough understanding of the competition and industry regulations can provide valuable insights into the target company’s resilience and adaptability in the face of market changes.

Target company analysis is another aspect of buy-side due diligence, and it usually comes toward the end of the process.

While the entire due diligence process evaluates a target company, the goal at this stage is to review operations, management and culture. This is how the buyer identifies issues that could affect the acquisition’s long-term success.

Voice of the Customer

Assessing customer satisfaction, identifying potential customer concerns and understanding customer loyalty can all help better understand the target company’s potential long-term success.

An exact-fit service provider will focus on things like customer lifetime value, retention and how products and services can be improved.

READ MORE: 5 Steps to an Effective Voice of the Customer Strategy

Target Company Evaluation

While the entire commercial due diligence process involves looking into the target, firms should also take a close look at a company’s operations, management and culture.

Before signing on the dotted line, it’s important that you not only align on values, but that the teams are a good fit for working together.

This also helps the buyer – usually a private equity firm – understand the potential synergies between the target company and their existing portfolio companies.

Bellinger says that working with an expert third-party to conduct buy-side diligence can be a huge advantage.

“You can get providers who have deep experience in a certain industry or certain types of companies that can perform the study on a lower cost profile than a brand name firm who will have to spend time getting up to speed,” he says. “Our providers already know everything about that industry and have prior experience.”

Buy-side due diligence is a critical process in private equity acquisitions, enabling buyers to make informed investment decisions.

BluWave has expertly vetted commercial due diligence resources on standby to provide comprehensive support during the buy-side due diligence process.

Our research and operations team will connect you with the best fit for your project, ensuring that you have access to the right expertise at every step of the process. Set up a scoping call today.

Bellinger adds: “We have the most amazing bench of buy-side commercial due diligence providers, so we know every buy-side firm in middle-market private equity.”


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