casemark/conducting-commercial-due-diligence

Conducting Commercial Due Diligence

Structures a comprehensive commercial due diligence (CDD) workstream covering market sizing, competitive positioning, customer validation, and growth sustainability for PE, VC, and growth equity transactions.

When To Use

• Evaluating a target company's commercial viability before LOI or post-LOI
• Validating management's revenue plan and growth assumptions during buy-side diligence
• Assessing market attractiveness, competitive moats, and customer concentration risk
• Supporting investment committee memos with independent commercial analysis
• Benchmarking a portfolio company's commercial performance for add-on or exit readiness

Inputs To Gather

• Company materials: CIM/management presentation, historical financials (3–5 years), revenue by product/segment/geography, customer list with revenue attribution, pipeline and bookings data
• Market data: Industry reports (IBISWorld, Gartner, Statista, etc.), trade association publications, public comp filings, regulatory filings relevant to market size [VERIFY availability per sector]
• Customer references: Minimum 8–12 reference calls; mix of top-10 accounts, mid-tier, recently churned, and recently won customers
• Expert network inputs: Former employees, industry specialists, channel partners, or competitors (typically 5–10 calls)
• Deal context: Investment thesis, hold period, target return profile, identified value-creation levers

Workflow

1. Define scope and thesis alignment

   • Confirm key commercial questions the deal team needs answered (e.g., "Is the TAM large enough to support a 3x return at this entry multiple?")
   • Map each question to a workstream: market sizing, competitive dynamics, customer diligence, or growth sustainability
   • Set timeline and deliverable cadence (interim readouts vs. final report)

2. Size and segment the market

   • Build a bottom-up TAM/SAM/SOM model using unit economics, customer counts, and pricing data
   • Cross-check with top-down estimates from third-party research
   • Identify market growth drivers and headwinds (regulatory, secular, cyclical)
   • Segment the market by geography, end-market vertical, product category, or buyer type
   • Flag where management's market size claims diverge from independent estimates [VERIFY with at least two independent sources]

3. Map competitive dynamics

   • Identify direct competitors, adjacent threats, and potential new entrants
   • Build a competitive positioning matrix on dimensions that matter to buyers (price, feature depth, integration, brand, switching cost)
   • Assess the target's share trajectory — gaining, stable, or losing — and the drivers behind it
   • Evaluate barriers to entry: proprietary technology, regulatory licenses, network effects, data moats, long-term contracts [VERIFY regulatory barriers per jurisdiction]
   • Stress-test the moat: what would it take for a well-funded competitor to replicate the target's position?

4. Conduct customer diligence

   • Analyze revenue concentration (top 5, 10, 20 customers as % of revenue) and trend over time
   • Calculate gross and net dollar retention rates; decompose into expansion, contraction, and churn
   • Execute structured reference calls covering: reasons for initial purchase, competitive alternatives considered, satisfaction with product/service, likelihood of renewal/expansion, and pricing sensitivity
   • Identify at-risk accounts (contract expiration within 12 months, declining spend, unresolved service issues)
   • Triangulate qualitative themes from references against quantitative retention data

5. Validate growth sustainability

   • Decompose historical revenue growth into volume vs. price vs. mix
   • Assess the pipeline: coverage ratio, conversion rates by stage, average sales cycle length
   • Evaluate go-to-market efficiency: CAC payback, LTV/CAC, sales productivity ramp time
   • Test management's growth plan: new product launches, geographic expansion, channel partnerships — assign a probability-weighted view
   • Identify risks to the plan: customer concentration, key-person dependency, channel conflict, regulatory change

6. Synthesize and deliver findings

   • Produce a CDD summary with a clear commercial verdict (strong/moderate/weak) tied to the investment thesis
   • Include a market-sizing exhibit, competitive landscape map, customer retention analysis, and growth bridge
   • Highlight the 3–5 critical findings that most impact deal valuation or structuring
   • Call out open items requiring further diligence or post-close monitoring

Output

• CDD Report (20–40 pages): Executive summary, market overview, competitive analysis, customer diligence findings, growth assessment, risk factors, and appendices with supporting data
• Market Sizing Exhibit: Bottom-up and top-down TAM/SAM/SOM with sources and assumptions clearly labeled
• Competitive Landscape Matrix: Visual positioning map with narrative on share dynamics
• Customer Diligence Summary: Retention metrics, reference call themes, concentration analysis, and at-risk account flags
• Key Findings Memo (1–2 pages): Condensed version suitable for IC discussion, with commercial verdict and critical risk/opportunity callouts

Quality Checks

• TAM/SAM/SOM built from at least two independent methodologies with reconciliation of any material gap
• Customer retention metrics calculated from raw data, not solely from management's reported figures
• Reference call sample includes churned and recently won customers, not only management-selected references
• Competitive analysis incorporates at least one source beyond the target's own view (expert calls, public filings, channel checks)
• All management claims flagged with independent corroboration status: confirmed, partially confirmed, unconfirmed, or contradicted
• Growth projections stress-tested under bear-case assumptions (e.g., higher churn, slower new logo acquisition, pricing pressure)
• [VERIFY] Regulatory and licensing requirements specific to target's operating jurisdictions reviewed for market access risks