COMMERCIAL DUE DILIGENCE: Conducting effective due diligence in Italy
The acquisition of companies cannot only be based on the analysis of financial statements, but requires a complete analysis of the current prospects of the target company and its direction, in the context of environmental and market trends.
For this purpose, it is essential to conduct a commercial due diligence analysis. Such analysis will ensure the collection and verification of corporate, patrimonial, financial, economic, management and environmental information, relating to the target company, increasing the investors’ confidence in their investment.
Commercial due diligence is, in the case of M&A operations, carried out in order to offer a complete view of the entity being acquired. The main objective is to better determine the value of the company to be transacted. The primary benefit of conducting commercial due diligence is that it allows the buyer to make informed decisions during a potential acquisition and determine whether an acquisition of the target company is likely to yield a profitable long-term investment. At the same time, it can also be used by the buyer to provide comfort and reassurance to his bank, or other lenders, that the business will not fail.
Commercial due diligence is therefore usually carried out by a third-party prior to the start of negotiations, and provides a complete view of the activity of the target company, highlighting potential risks and potential growth.
The type of due diligence completed, is often determined based on specific requests made by the applicant, and also on the basis of the characteristics of the target company.
The common objectives are to verify that the business complies with the one proposed by the seller and meets the investors’ parameters. It also monitors and evaluate all risk factors, while allowing the buyer to understand if there are competitive advantages that the buyer can use.
The areas under investigation typically concern the business, and include product and market, structure, plus operating procedures and organisation charts. It also covers a company’s financial position and analysis of customer and supplier know how.
After defining the above-mentioned objectives, it is necessary to identify the phases of the process to be followed, in order to carry out a complete analysis. The whole process is based on the collection of detailed information.
Once the necessary information has been collected, the objectives are achieved through the implementation of various different levels of analysis, including;
• Analysis of the market and of the sector in which the target company operates (market mapping, segmentation and sizing)
• Analysis of demand drivers and key purchase criteria
• Analysis of customer portfolio development and customer referencing
• Analysis of market positioning, business performance and sustainability of strategy
• Analysis of industry dynamics and competitor behaviour
• Analysis of pricing and margins, including projection sensitivities
• Analysis of revenue and gross margin modelling
The third party in charge should then prepare a commercial due diligence report containing the information required for a potential acquisition. This commercial due diligence report is likely to highlight critical issues and affect the planned acquisition operation. This may lead to the adjustment of price, modification of the subject of the transaction, or the insertion in the contract of additional guarantees. In extreme cases, it may result in the negotiation being blocked.
Blocking negotiations is an extreme hypothesis that occurs when, in the context of the commercial due diligence, potential liabilities and risks, higher than the benefits obtainable from the acquisition of the company, emerge.