What Makes a Commercial Due Diligence Firm ‘Specialized’?

Private equity firms face fierce competition for new deals. Even when the economy is strong, there could be dozens of groups vying for the same target.

When the deal market is stagnant, though, it can seem impossible to find a viable acquisition, let alone have the winning bid.

BluWave founder and CEO Sean Mooney encountered this challenge in his nearly 20 years in private equity.

“As the competitive tension of supply and demand intersected in private equity with more and more capital under management, chasing the same supply of deals was causing pressure for me to say, ‘I can’t just be a market taker anymore,’” Mooney recently shared. “’The surplus is being skimmed. I have to see something that no one else can see.’”

Mooney since started the Business Builders’ Network to help other leaders solve this very problem. He recently spoke with Andrew Joy, partner at Hidden Harbor, about how PE firms use specialized commercial due diligence providers to cut through the noise and rise above competitors.

So how do the world’s top private equity firms distinguish themselves in this cutthroat environment? One way is through commercial due diligence.

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What is Specialized Commercial Due Diligence?

Specialized commercial due diligence can only be performed by firms that have deep experience in the target’s specific industry and are ready to go well below the surface to provide exclusive insights.

At a high level, a commercial due diligence project usually involves looking at a company’s market size, its total addressable market, conducting a competitive analysis and performing a voice of customer study.

READ MORE: What is Commercial Due Diligence?

“The goal of commercial due diligence is to validate the story that the target’s telling or to identify the reality of the marketplace out there so they can make an informed decision,” according to Don Jenkins*, the founding partner at one of the specialized diligence firms in the BluWave network.

While the details of the process are much more nuanced, a world-class CDD firm will be able to get up to speed faster, give private equity firms a deeper understanding of the business and equip them with a significant competitive advantage over other PE firms that conduct more general due diligence.

Looking Beyond the Acquisition

When PE firms consider buying a business, they aren’t just thinking about its present-day value. They’re also evaluating what an exit will look like and how much value they can create long-term once the company is no longer in their hands.

That’s why it’s so important for them to thoroughly investigate every potential target. Mooney said that PE firms have moved beyond a “trust but verify” mindset and are looking even longer term than they may have been a decade ago.

“You’re not building for the next five [years] because if nothing else, if you’re going to sell to the next person, there’s got to be some cream left to build it,” Mooney said. “If you’re only thinking three to five years ahead, you’re playing a chess versus checkers game.”

Differentiated Data

“As information and data have become more commoditized and more accessible, it’s becoming harder and harder to really find areas where you have a competitive advantage,” Joy said. “We like to say, ‘What’s our angle on this target or deal?’”

Mooney noted that investment banks do a great job exposing as much value creation as possible within a company. But PE firms that don’t dig deeper are going to be working from the same perspective as everyone else.

READ MORE: Data Consolidation: Benefits, Challenges, Processes

“The undifferentiated commercial diligence firm is calling the expert networks to get the insights about the markets that they’re sharing,” Mooney said. “Odds are if one over the other is not using a specialized group that sees something that the expert networks don’t, everyone’s getting beta. They’re spending hundreds of thousands of dollars on the sell-side study, which is calling two or three market network expert networks.”

Joy said that when PE firms use the same tools as everyone else, “that’s just the ante to get into the game.”

He added: “You really have to then figure out how this target or this opportunity fits within an angle that you can play. Whether that’s operationally, whether that’s commercially, so that you can justify to your committee why we think this asset is more valuable and we’re going to be the winning bid.”

Closing with Confidence

When commercial due diligence is done right, private equity firms can make acquisitions with confidence.

“By the time we close on a transaction, we have a really strong hypothesis around what are the value-creation levers that we are going to pull over our whole period to create outsized market returns,” Joy said. “And that’s informed by the commercial due diligence.”

When Hidden Harbor is deciding on a target, Joy said they like to ask where the company’s right to win is, and how they can get there.

“It’s amazing to see sometimes and that when you do a full cycle of investment from closing to selling and you look back and you say, ‘What were the three biggest value-creation drivers of our return?’ And you’re able to say, those were the three that we identified in diligence. That’s pretty powerful to have that amount of conviction and be right about that and being validated.”

BluWave has a close relationship with a deep bench of world-class, specialized commercial due diligence providers.

Each one has been vetted before joining the invite-only network and is re-vetted before they’re matched with private equity firms.

When you contact our research and operations team, they’ll connect you with a shortlist of service providers – with industry-relevant experience – in less than 24 hours.

Start your project today to get the differentiated insights that a specialized commercial due diligence provider can uncover.

*Privacy is important to us. While the source and company name have been changed, these are real quotations from a real service provider in the BluWave Business Builders’ Network.

What is Commercial Due Diligence?

Private equity firms perform commercial due diligence (CDD) to evaluate the growth and profitability of a potential target acquisition.

A process that was once reserved for large cap funds with extra capital to spend on evaluating the soundness of the investment, CDD is quickly becoming a necessary standard operating procedure for all proactive PE funds.

“Each deal’s different and may require a different slate of providers to get the most out of each diligence phase or diligence stream,” says Keenan Kolinsky, co-head of research and operations at BluWave.

Private equity firms have discovered that in order to drive alpha in a sea of beta, smaller, more specialized commercial due diligence providers can provide them with more unique insights quicker. 

What is Commercial Due Diligence?

Commercial due diligence is a systematic evaluation of a target company’s commercial viability before making an investment decision. It’s an extremely thorough process that, when done well, leaves no stone unturned before papers are signed.

“Commercial due diligence is a term of art for a market study. It’s typically provided by market strategy firms,” BluWave founder and CEO Sean Mooney shared on a recent webinar. “It is standard operating procedure by the best private equity investors in the world.”

It comes as no surprise, then, that CDD is consistently No. 1 due diligence category in the BluWave Activity Index.

That’s why the invite-only network of third-party resources is loaded with world-class diligence providers, such as Don Jenkins* of CommDil Inc.

“When you think about commercial due diligence, there’s often a fairly typical set of objectives,” Jenkins says. “Those will include understanding the market size, how big is the market, how is it segmented, what are the key segmentations or different types of businesses that constitute that market.”

From start to finish, it usually takes weeks, if not several months, depending on the target’s size and complexity.

Specialized Due Diligence

Any consultant can provide intelligence on a target’s total addressable market, prospects for growth, competitors, risks and other vital information through initial industry research. But specialized consultants with pre-existing industry knowledge don’t have to waste their time to gain a sense for the industry.

Instead, they can provide a heightened sense of value by using their base knowledge to dig deeper and therefore provide more in-depth insights in the same amount of time.

READ MORE: What is Buy-Side Commercial Due Diligence?

These steps give investors a deeper understanding of the target company’s business model, financial performance, competitive landscape, and operational and legal risks.

A benefit of specialized commercial due diligence providers is their ability to get up to speed faster. Because they aren’t being run to with projects across various industries, their recent experience primes them to hit the ground running. Generalist firms, on the other hand, will run expert network calls to get smart on an industry.

“We have thousands and thousands of projects, tens of thousands of their quals built into this cognitive engine that we’ve built, and then we’re constantly checking with them on a capacity,” Mooney shared on the webinar of BluWave’s matchmaking process. “By the time the PE firms calls, we already know who they need, why they need it, what their quals are, what their availability is, and then have the ability to compel them to bring the A team to our clients.”

How is CDD Performed?

Kolinsky says there are several variable diligence factors to consider, “such as the target’s industry, the deal size, target technology or operational nuances, timing and more.”

BluWave supports private equity clients by connecting them with the diligence providers whose functional capabilities, expertise and experience account for these different factors.

Here are the four key steps the service providers in the BluWave-grade network take when performing commercial due diligence:

1. Comprehensive Market Analysis: Size

This is where the target company’s market position as well industry trends and growth potential are analyzed.

“We’ll be doing market forecasting, understanding the headwinds and tailwinds that affect growth,” Jenkins says. “We’re looking at trends that exist out there, whether it’s technology trends, regulatory trends, just other emerging competition.”

On the commercial due diligence webinar hosted by BluWave, Andrew Joy of Hidden Harbor talked with Mooney about the importance of looking beyond a private equity firm’s holding period when evaluating a business.

“It’s answering the fundamental question of, ‘What do we believe this business will grow at over our whole period and beyond?'” Joy said. “[The scope is] more 10, 20 years because just as important as the next five years’ growth is what matters just as much as the growth beyond that as you think about your exit and the exit multiple.”

2. Comprehensive Market Analysis: Total Addressable Market

Here’s how Scott Bellinger, BluWave’s co-head of operations, defines this step:

“Of the overall market, how much is currently addressable by the target? What else could they do to get into new markets and increase their total addressable market?” Bellinger says.

He added that businesses that already have a high penetration rate may need for new markets if they want to continue to grow.

Joy shed more insight on this stage in the webinar.

“By the time we close on a transaction, we have a really strong hypothesis around what are the value creation levers that we are going to pull over our whole period to create outsize market returns,” he said. “What adjacent markets should this target enter…and how do you capitalize on that?”

3. Competitive Analysis

Bellinger says there are key questions to answer at this stage: “Who does your business compete against? How are they viewed in the market against competitors? Who else has taken up market share? What’s the differentiation between your business and others?”

Jenkins agrees, and noted that this is a fundamental part of hits firm’s commercial due diligence exercises.

“Typically we’re looking at understanding the competitive landscape that the target company is competing against, and how they’re positioned in terms of share and their offering, and how they position themselves in the marketplace,” Jenkins says.

Read More: Hire the Right Temporary CFO

4. Voice of the Customer

Finally, PE firms and other acquirers need to know how current and potential future customers view the target business.

That’s why Jenkins says “there’s usually a voice-of-the-customer piece.”

There are many ways this can be done, but getting first-hand information from clients and customers is essential to understanding the business. Expert third-party firms will not only know which tactics to use for specific industries, but also how to connect with the customers in a meaningful and insightful way.

READ MORE: 5 Steps To an Effective VoC Strategy

We have recently seen many firms turn to more specialized providers due to the valuable insights gained.

In times where other PE firms are struggling to get the right information on the timeline they need, equipping yourself with unique data quickly will provide you with competitive edge.

“The deal process is laborious and it’s fatiguing, but really taking the time upfront to find the right group that will answer the critical questions that you’re really have to will pay dividends,” Joy said on the webinar. A lot of groups that’ll say yes to the project, but the ones that will provide real value is a lot smaller.”

The expertly vetted service providers in the BluWave network have performed countless commercial due diligence analyses for hundreds of PE firms.

“In private equity, one size does not fit all,” Kolinsky says.

We vet each resource before they’re admitted into the network, and again before connecting them to you. After your initial scoping call with our research and operations team, you’ll meet the two or three “best fits” within a single business day.

Tell us about your project now, and we’ll get started with selecting your tailor-made solution.

*Privacy is important to us. While the source and company name have been changed, these are real quotations from a real service provider in the BluWave Business Builders’ Network.

A Wave of Deals is Coming: Commercial Due Diligence Webinar

The private equity deal market has been slow in 2023. There are signs, however, that that could change soon.

In fact, BluWave founder and CEO Sean Mooney believes PE is ready to “call a bottom” based on proprietary internal data. That means that firms must have their due diligence resources lined up ahead of the anticipated wave of deals this fall and beyond.

Mooney was recently joined by BluWave Head of Technology Houston Slatton and Hidden Harbor CP Partner Andrew Joy to discuss the intricacies of commercial due diligence on a live webinar.

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Here are some of the top takeaways from their conversation:

Understanding Target Markets

The panel touched on how commercial due diligence is pivotal in assessing market conditions.

“The definition of commercial due diligence in my mind is a synthesis of all factors, both historically and in the future that affect the growth and the competitiveness of the target in that particular model,” Joy said.

This “synthesis” involves myriad factors, from end-market demand drivers to regulatory inputs and global competition. The goal is to understand not just the immediate future but to project growth and trends 10-20 years ahead.

“Commercial due diligence is a term of art for a market study,” Mooney added. “It’s standard operating procedure by the best private equity investors in the world.”

READ MORE: What is Commercial Due Diligence?

The Role of Due Diligence in Bid Strategy

The competitive landscape of private equity demands a unique approach to bid strategies.

Mooney said private equity firms aim to see something unique in their investment targets that others don’t.

“One of the big trends is investment bankers are starting to put sell-side commercial due diligence studies in the data rooms,” Mooney said. “The incentive may be for private equity firms, ‘Oh, this is great, I can rely on the money that they’ve spent and I’ll just take their word for it.’ “But a newsflash is, if you’re buying the market study, you get to pick what it says so you can frame it.”

He added that that’s one of the reasons the private equity industry still uses its “own source of truth.”

Joy elaborated on other challenges PE firms are facing.

“I think as information and data has become more commoditized and more accessible, it’s becoming harder and harder to really find areas where you have a competitive advantage,” he said.

Finding that unique angle in a saturated market can make all the difference for a firm.

READ MORE: Buy-Side Commercial Due Diligence Strategies

Choosing the Right Commercial Due Diligence Provider

The choice of a due diligence provider can make or break a deal.

Mooney emphasized the importance of team experience and relevance.

“When you’re vetting your group, I’ll show exactly how we do it. It’s ‘What is your experience in the defined industry you’re exposing? Which projects have you worked on in this industry?’ When did they work on it? Who is the team that worked on it?”

In the end, he said, it comes down to ensuring that the diligence team has relevant experience with the target, the market and the industry.

“I think it’s really finding the right team that has the most relevant experience and just knows the market cold,” Joy added.

Mooney also warned against trying to pull an up-market firm down to your budget. Because of scarcity of resources, this could mean they don’t put their best team members on your project.

As the PE world braces for influx of new deals, having your diligence sources lined up ahead of time is key. To learn more about how to prepare, you can watch the webinar on demand.

If you would like to hear about the commercial due diligence resources in the Business Builders’ Network, contact our research and operations team to scope your need.

Panelist Bios:

Sales Due Diligence: Revenue Streams

Sales due diligence is an essential aspect of the investment process for private equity firms. It not only helps PE firms evaluate the financial health of a target company, but it can also uncover hidden revenue opportunities.

READ MORE: What is Commercial Due Diligence?

A man typing on a computer with his right hand. His sleeves are rolled up. You don't see more than his right arm, part of his left hand, and the very front of his torso.

Understanding the Revenue Streams of a Target Company

Before a PE firm can maximize a target company’s revenue streams, it must first understand them.

Analyzing the company’s financial statements and sales data gives a clear picture of current revenue sources. The PE firm can use these to assess the strength of the potential acquisition’s stability, growth potential and profitability.

Here are five in particular to pay attention to:

Income Statement

This provides an overview of the company’s revenue and expenses, giving a clear picture of overall profitability.

Balance Sheet

Here’s where a PE firm can find the company’s assets, liabilities and equity.

Cash Flow Statement

This document gives insight into the company’s cash inflows and outflows, and can help identify potential revenue streams and cash flow issues.

Statement of Changes in Equity

This provides information about the changes in the ownership structure of the company, which can impact its revenue streams.

Sales Reports

Provides a detailed breakdown of the company’s sales and revenue by product, market, and region.

Identifying Revenue Leaks and Opportunities

Once the PE firm has a thorough understanding of the revenue streams, it can begin to identify areas where the company may be losing revenue or where new opportunities may exist.

It may discover, for example, that the target company has missed out on new market opportunities, is not effectively pricing its products or services or is failing to fully utilize its existing customer base.

By identifying these leaks, the PE firm can take steps to plug them and capture additional revenue.

READ MORE: Buy-Side Commercial Due Diligence: What is it?

Revenue Stream Diversification

In addition to identifying leaks, the PE firm can also research how it might diversify.

One way to do this is by developing new products and services. Another would be entering new markets or acquiring complementary businesses.

The key is to identify areas of growth and to develop a strategy that leverages these opportunities to maximize revenue.

Implementing Revenue-Driven Strategies

Finally, a PE firm can implement revenue-driven strategies to maximize existing revenue streams.

Here are a few ways they could do this:

  • Streamlining processes
  • Improving customer service
  • Enhancing marketing efforts
  • Investing in new technologies or equipment

The ultimate goal is to increase the target company’s revenue, profitability, and overall success.

By performing sales due diligence to assess the revenue streams of a target company, private equity firms can uncover hidden revenue opportunities and maximize profitability.

Our research and operations team is standby to connect you with an exact-fit resource from the Business Builders’ Network.