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The Market Intelligence Cycle to guide Commercial Due Diligence

Pre-investment phase: conduct a Commercial DD analysis

Performing Commercial Due Diligence (DD) is an indispensable part of the pre-investment phase for investors and private equity firms. It enables the potential buyer to evaluate the risks and opportunities of the target company prior to making an offer. In order to support a potential buying decision, it is vital to get a clear understanding of the target’s market positioning, competitive edge, commercial viability and growth potential.

To perform a successful commercial due diligence analysis, it is essential to have a well thought-out approach of what should be examined and how. In order to have such an approach, a highly useful tool is the intelligence cycle. This cycle guides in following the right steps in the commercial due diligence to substantiate key business decisions.

Step 1: Scoping

The first step in the intelligence cycle involves planning and direction of the entire commercial due diligence project (scoping). This step is crucial in outlining the goals and objectives of the project. The goals and objectives should be clear and concise: 

  • What is the geographical scope?
  • Which PMC's do we want to cover?

Once the scope of the analysis is clearly defined, key questions and hypotheses should be formulated that will guide the research. It is easy to cover all relevant geographical area’s and PMC’s in scope. However, this will lead to highly time- and cost consuming activity. Therefore, it is important to anchor the definition of the scope appropriately in the intended strategic rationale of the investor.

Step 2: Data collection

After the scoping phase, data collection is the next step. The research objectives must be divided into various information needs and datapoints, after which the data collection strategy can be shaped. This step should involve the identification or reliable sources and the categorization of the sources to enhance and simplify the processing and analysis of the data in the following steps.

During this step, various pieces of information and data are gathered to serve as input for analysis. These pieces of information can be obtained from a wide range of sources, including two distinct categories: open-source intelligence (OSINT) and human intelligence (HUMINT).

Reliable OSINT sources that can be used to analyze the internal and external environment of the targets’ company include: financial statements, news articles, journals, governmental reports, press releases and market reports.

HUMINT covers intelligence obtained by interpersonal contact. The value of interpersonal contact is enormous. A common way to collect HUMINT is via expert interviews. In the light of commercial due diligence relevant sources can be industry experts, competitors, (potential) clients and knowledge institutions (universities, research institutes etc.).

Step 3: Analysis

Subsequently, the analysis and production step involves analyzing the collected data and translating it into actionable insights. Trends and patterns need to be identified in the data to discover potential risks and opportunities. How actionable are the insights in the perspective of the strategic rationale? Do they provide red flags or confirm the most important presuppositions behind the potential acquisition?

The data should be presented in a clear and concise manner. For instance, visualizing the insights with charts and graphs will enhance the readability which is helpful in delivering key messages.

Step 4: Delivery

The final step in the market intelligence cycle is disseminating and evaluating the findings. The findings in the intelligence cycle can be used to substantiate business decisions and evaluate whether it would be beneficial for the acquirer to invest in or buy the target company. Based on the analysis in the commercial due diligence report the acquirer states its recommendations to proceed with the investment or pass on the opportunity.

In conclusion, performing a commercial due diligence is a complex analytic process that requires following the steps in the intelligence cycle. Thorough research, reliable data sources, identifying risks and opportunities, and disseminating the insights in a clear and concise manner are critical to writing a successful commercial due diligence report. The final outcomes support clients make informed investment decision leading to long-term success.

Source: Hammer Market Intelligence