Using Commercial Due Diligence to drive value creation

Commercial due diligence (CDD) is a vital part of the private equity investment process, for both investors and owners. But it’s not only to be deployed for the crunch time of the deal itself. Tom Raymond, Chair of Armstrong – an award-winning management consultancy – and a PepTalks Advisory Member, tells us how CDD creates value for your business both pre- and post-investment.

In this article you’ll discover:

  • What effective CDD looks like
  • How and where CDD drives value
  • The four key stages of CDD
  • Top tips for improving your attractiveness to potential buyers

But before we dig into how to use CDD to drive value creation, let’s take a look at what a gold-standard CDD process looks like.

The CDD discovery process

The role of commercial due diligence is to provide an honest, unbiased picture of the business to determine a fair price and highlight where barriers and opportunities lie. As Tom explains: “A well performed CDD process should drive all the four key value drivers of the business… increase revenue growth, increase profit margin, increase your enterprise value multiple and really articulate what the sustainable differentiator is of the business.”

“A well performed CDD process should drive all the four key value drivers of the business… increase revenue growth, increase profit margin, increase your enterprise value multiple and really articulate what the sustainable differentiator is of the business.”

Tom Raymond, Chair of Armstrong:

Great CDD should be:

  • Evidence-based
  • Rigorous
  • Constructive
  • Forward-looking

Driving value creation through CDD

Accurate, detailed, and recent data is not always available in-house, which is where a trusted research partner really adds value. Resist the urge to produce a ‘happy report’ that shows every objective met and market dominance achieved, where then are the opportunities for investors to grow the business further?

As Tom points out, investors are multi-tasking generalists; they need to see clearly and succinctly where the opportunity lies with your business. Crucially, they also need to understand what makes you different and unique. This is where the real magic is – the sustainable differentiator. In his words: “probably just under 50% of businesses know what their sustainable differentiator is… under half can articulate that in one or two sentences that are impactful, memorable and will leave the audience with a very clear picture of what makes the business different and therefore why they should pay more for it.”

“Probably just under 50% of businesses know what their sustainable differentiator is… under half can articulate that in one or two sentences that are impactful, memorable and will leave the audience with a very clear picture of what makes the business different and therefore why they should pay more for it.”

Tom Raymond, Chair of Armstrong

The four stages of CDD

Good commercial due diligence helps shape business strategy before, during, and after the deal:

  1. Pre-deal. Discretion is vital at this early stage, and a good CDD partner can frame market and customer data collection as process improvement feedback. Evidence informs strategy, and where issues are highlighted at this early stage they can be addressed. This also proves to investors that you are collaborative and proactive.
  2. Deal. At this stage the focus is on maximising value for the business. Analysis should be rigorous and honest, Illustrating upsides and making recommendations.
  3. Immediate post-deal. Timings vary, depending on when private equity investors want to initiate your value creation plan. This is when there is maximum focus on the business, and also when there is most money available!
  4. Long-term post-deal. Continued due diligence at this stage ensures strategies stay on track, collecting (and acting on) customer insight maximises value.

Done well, CDD drives value creation as early as 18 months out, helping to inform not only the current exit strategy, but also the next one:

“Any good CDD process should add value, not just for the transaction, but actually, for the lifetime of the investment and well beyond the transaction. It should be informing the next exit as much as it does this one.”

Tom Raymond, Chair of Armstrong

Top Tips to attract buyers

If you’re looking for PE investment in your business, it pays to stand out. You want to show that your business is well-run and has a bright future. CDD allows you to do just that, through a structured, detailed and open process. Honed over twenty years in the business, Tom’s five top tips for driving value creation through CDD are:

  1. Identify your sustainable differentiator
  2. Carry out sell-side CDD early and properly
  3. Highlight and fix any value erosion
  4. Demonstrate that you act on advice
  5. Find trusted advisors and nurture long-lasting relationships

“Ultimately, commercial due diligence is going to happen anyway, so shape it and get as much value for the good of the business in the long and short term.”

 

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