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:

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, Director and 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, leave no stone unturned before papers are signed.

It comes as no surprise, then, that for the third straight year, CDD was the 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 TechDil 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.

According to KPMG, there are four types of commercial due diligence.

Here’s a high-level view of what the process entails:

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 during is their additional bandwidth. Because they aren’t being run to with projects across 8 different industries, they have the capacity to take on the projects that fall directly within their sweet spot.

Even when service provider constraints have strapped the market, BluWave has maintained a 100 percent fill rate with commercial due diligence requests. 

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 some steps the service providers in the BluWave-grade network take when performing commercial due diligence:

Comprehensive Market Analysis

This is where the target company’s market position, industry trends and competitive landscape are analyzed. This helps investors understand the target company’s growth potential and market opportunities.

“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. And then there’s usually, I’d say, a voice-of-the-customer piece”

Competitive Analysis

“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.

Financial Analysis

This important step includes a review of financial statements, balance sheets, income statements and cash flow statements. Doing so sheds light on profitability and liquidity.

Many firms seek outside help at this stage from a finance professional who’s gone through multiple commercial due diligence evaluations. In particular, an interim CFO may be a good resource in this situation.

Read More: Hire the Right Temporary CFO

Operations Analysis

This involves reviewing processes, systems and procedures to better understand efficiency, scalability and potential risks.

Just because a company isn’t operationally sound doesn’t necessarily mean it’s a bad acquisition target. A PE firm, however, will want to have a clear picture of its new asset before moving forward.

Legal and Regulatory Compliance

Evaluating the target company’s compliance with relevant laws and regulations helps minimize risks. Some examples include data privacy, product safety and environmental regulations.

Management Assessment

That is, looking at the management team, its experience, track record and alignment with the private equity firm’s strategy.

Preparing for Growth

The average holding period for PE assets is five years, which is a sound reminder that funds are often interested in forging long-term relationships with the companies in their portfolio. This is why it’s essential for the commercial due diligence process to be more than a routine vetting exercise and a perfunctory look at a company’s market.

It should help funds explore opportunities for growth and methods of adding value that can turn a company into something its leaders never imagined. 

We have recently seen many firms resort to a smaller, more specialized provider. They are permanently switching their processes to always using a specialized provider 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 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.

Commercial Due Diligence: Revenue Streams

Commercial due diligence (CDD) 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 help uncover hidden revenue opportunities.

By performing commercial due diligence, PE firms can improve their chances of maximizing profitability.

Read More: What is Commercial Due Diligence?

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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.

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.

Continue reading “Commercial Due Diligence: Revenue Streams”