Conducting commercial due diligence in B2B markets

Introduction

While M&A due diligence focusing on financial, legal, and operational issues is vital, leaving out or deprioritizing commercial due diligence can be a costly oversight.

After the initial shock caused by COVID-19, the M&A market quickly rebounded and private equity firms invested over $2 trillion in 2021, according to McKinsey.

To make an investment as profitable as possible in the long term, arguably you need to first answer some key commercial due diligence questions that will set out the path to growth.

What is commercial due diligence?

A commercial due diligence process analyzes an asset’s attractiveness in its current market, as well as its potential to improve further, to a prospective buyer like a private equity firm.

As the prospective buyer, you would agree on a commercial due diligence checklist of information to collect. Useful and relevant data includes details about market share, market size, and room for growth – to help you make informed decisions, before and during negotiations. 

Commercial due diligence assesses the strengths and weaknesses of the company’s business plan to date. 

It also evaluates the challenge presented by competitors and any nascent disruptive forces.

Results are often presented in a manner resembling a longer, much more comprehensive version of a SWOT analysis including strengths, weaknesses, opportunities, and threats.

Benefits of commercial due diligence in B2B markets

You can use commercial due diligence to inform your negotiation strategy.

The research provides reassurance that you’ve reduced the risk of overlooking some crucial information and it increases the chances of a profitable M&A deal in the long term.

Commercial due diligence improves your understanding of the market, to ascertain some key reasons behind the target company’s success and how to improve results further.

Benefits of commercial due diligence using B2B audience research include:

• Reducing deal risks
• Identifying competitive advantages
• Discovering growth opportunities
• Uncovering weaknesses or threats
• Hypothesizing strategies for long-term business objectives

Conducting commercial due diligence in B2B markets

These are some key areas to explore as part of your commercial due diligence checklist in a market research project:

• Customer segmentation
• Product and service analysis
• Competitor research
• Brand perceptions
• Growth opportunities
• Employee satisfaction

Taking each of these in turn:

#1 Customer segmentation

If you don’t know already, start by finding out the essentials – how many customers does the target company have and how much do they spend?

Within that, which customer segments are the highest priorities – the biggest spenders, or those with the most potential to spend more in the future?

Good results here will significantly boost your company’s business plan. For a fuller picture though, also start understanding customers’ needs and wants.

Different customers may have contrasting needs and wants too. You can start segmenting them now, for more accurate targeting through your company’s marketing strategy post-acquisition. 

Then, consider running a more complete B2B audience research segmentation later.

#2 Product and service analysis

Product and service questions to answer during commercial due diligence could include:

• What are the product or service strengths?
• What are the areas for improvement?
• How unique is the target company’s offering?
• To what extent is the current offering satisfying demand?
• If not well enough, do you see enough scope to fulfill these jobs for customers in the future?

You need to cross-reference results here with some competitor analysis, to make sure the long-term future of the offering looks secure too.

#3 Competitor research

Seeking feedback from customers and prospects will give you the market’s perception of the competition. What are competitors doing better or worse?

One of the most important themes to establish is whether or not there are any significant rivals. These could include effective monopolies, a significantly strengthening competitor, or a new game-changing disruptor with a different business model.

If there is growing competition, how well-placed are you to counter it?

#4 Brand perceptions

Taking a step back, your commercial due diligence report will look favorable if it confirms you’re acquiring a very strong brand.

If the brand is strong, many customers will:

• See you as their first choice
• Understand the benefits of buying from you
• Be willing to pay a premium in many cases

It’s important to understand why the brand is strong though, so you know how to maintain this reputation post-acquisition.

Similarly, if there are some negative brand perceptions, find out why and how much it will take to improve this image.

Long-term, B2B brand tracking research is a reliable way to measure and monitor brand health.

#5 Growth opportunities

The target company may be performing well, but how much room for growth is there?

And what do the growth opportunities look like? The possibilities are:

• Inorganic: Entering a new market, expanding the customer base, or increasing the number of products and services via further mergers, partnerships, and acquisitions
• Organic: Expanding by improving current operations, using current resources
• External: Creating new products or services to grow by reaching more customers, or more higher-spending customers
• Internal: Optimizing internal processes to improve revenue – for example, by cutting wasteful spending, or running leaner operations through more automation

Understanding the different potential growth business models in B2B will help you assess the opportunities.

Also, beyond competitors, are there any threats – for example, upcoming regulations? 

#6 Employee satisfaction

In addition to assessing the target company’s reputation among customers, it may be worth doing likewise with current or former members of staff.

Hopefully, you’ll get enough reassurance that the culture is good and that the majority of employees are satisfied. 

Naturally, finding high-quality recruits takes a long time and can be expensive, so make sure that you’ll be able to retain most of the top talent that’s already there.

If the company’s ability to grow depends on retaining key staff, make sure there’s little risk of significant churn.

Commercial due diligence process: best practices in B2B

#1 Begin with a phase of secondary research

You may be able to find the answers to some of your commercial due diligence questions via secondary research. 

There might be data online that can help you size the market – more on this later.

Moreover, secondary research can also yield a long list of businesses that will be either customers or prospects for the target company.

Their contact details may be useful – if the audience is very niche, respondents for due diligence commercial research will be hard to find.

There may not be enough reliable participants on B2B panels, which are very hit-and-miss in the first place – so if you don’t have a list of customers to reach out to, secondary research is a good starting point.

#2 Choose the right methodology for your market and objectives

When weighing up quantitative vs qualitative research, the former is more popular for commercial diligence research.

Ideally, you want robust numbers but if the audience is very niche, that may not be possible. 

An online survey is usually the easiest and most cost-effective way to conduct quantitative research. However, if only phone numbers are available for potential respondents, telephone or CATI quant is required.

Quantitative research ensures consistency and you can easily combine the results with other data sources.

You may want to run some qualitative research in addition though, particularly if there are aspects of the market you need to understand in more detail.

#3 Include an indicative market-sizing exercise

Ideally, through a combination of secondary and quantitative research, you’d be able to work out the:

• Total addressable market (TAM): Including all potential customers and sales channels
• Serviceable addressable market (SAM): The proportion of the TAM within the product or service range’s scope
• Serviceable obtainable market (SOM): The proportion of the SAM likely to buy from the target company, based on factors including demand and market share

Again, for highly niche B2B markets, it may not be possible to size the market in an accurate and statistically robust way.

In this case, collect data from as many relevant respondents and sources as possible and treat the results as indicative. 

#4 Choose the right incentive for a B2B audience

The most powerful incentives in B2B research are usually soft ones – e.g. by leveraging a healthy relationship, appealing to curiosity, or outlining the benefits of the research.

But often, these aren’t relevant in due diligence commercial research. Hard incentives are more common in B2C – but budget permitting, they are also possible in B2B due diligence research.

A common alternative is to offer smaller charity donations. These reward decision-makers for their time, without any legal or ethical issues.