Commercial due diligence as a strategy dialog
Homburg & Partner
16. September 2015
1. In which direction do you think commercial due diligence will develop?
“Commercial due diligence is often considered a standard product. I cannot agree with this opinion, because in every commercial due diligence different focal points play a role and exactly the company and the respective market situation must be dealt with. Of course, some standards must be met, especially when third parties such as banks are involved. From my own experience, however, I know that commercial due diligence is a highly individualized and complex consulting service in which different questions are and must be in the foreground, depending on the company and the market environment. This trend toward individualization will continue because investors are under high pressure to succeed and are following portfolio companies’ growth paths more closely than they were ten years ago. Investors today are very well informed, know the status-quo and the market forecasts of industry experts, so that commercial due diligence must go deeper for specific questions. At Homburg & Partner, we take great care to prepare commercial due diligence that is as forward-looking and action-oriented as possible. In my opinion, the predictive power of commercial due diligence is crucial: strategy-relevant questions such as growth corridors, technical substitutability or distribution and pricing strategies must be answered and, last but not least, exit scenarios must be examined in order to paint a complete picture. I am convinced that investors’ requirements in this regard will increase and that commercial due diligence will be attributed the character of a market strategy project in the future. The commercial due diligence will thus provide the basis for the strategy dialog between portfolio company and investor, so that a profitable growth path can be successfully pursued together right from the start.”
2. In your opinion, what is the significance of the plausibility check of the sales line?
“Personally, I attach the greatest importance to making the entire commercial due diligence as quantitative and fact-based as possible. The plausibility check of the sales line, the so-called “top line”, is of course of the utmost importance because it is essential for the investment decision. It is important that different scenarios are considered and that the opportunities and risks of the possible scenarios are evaluated in detail. There are several methods to forecast a “top line”. The market view is of course important, but in my opinion it should not be used exclusively; internal company issues such as the innovation pipeline or price potential must also be taken into account, because such issues provide important indications as to whether the company will grow above or below the market. I also think it’s particularly important to ensure a close exchange with financial due diligence so that the further models can be calculated through cleanly.”
3. What do commercial due diligence consultants need to bring to the table?
“Methodological knowledge is certainly an important building block, as M&A processes are usually conducted at a high pace and answers are needed quickly. If you have to think about which questions to ask first, you won’t get them answered in time. However, I consider a respective sector and industry specialization to be much more important. As a methodology specialist but industry generalist, industry specifics may not be sufficiently recognized or scrutinized, and a lot of time is lost in generating basic knowledge. This is of course at the expense of the crucial forecasting capability already mentioned. The commercial due diligence consultant must have three main types of expertise in this regard: First, understanding of the company’s value chain in order to assess the dynamics of the upstream and downstream stages. Second, understanding the business model in order to properly examine the portfolio company’s value creation approach. Third, an industry network to answer investment-related questions quickly and reliably. In proprietary processes, I also consider a good appearance to be essential. Small and medium-sized companies in particular are not necessarily used to armies of lawyers and consultants arriving with lists of data requests and detailed questions. The effect of a quiet, sensitive and yet professional appearance is, in my opinion, underestimated, even though it can bring a lot of trust and also motivation into a company.”