Commercial due diligence requirements for digital business models
Digitalization has not only fundamentally changed the business models of companies, but has also had an increasing impact on due diligence reviews in the context of corporate transactions — especially in a commercial context. On the one hand, the proportion of pure digital companies in the portfolios of private equity companies has risen sharply in recent years; on the other hand, traditional companies are increasingly exposed to digital changes and more intense digital competition. It is apparent that digital components are not sufficiently appreciated, especially in companies with a classic non-digital business model.
Digital commercial due diligence consequently evaluates these topics and focuses both on the evaluation of digital companies or business models and on the assessment of the “digital readiness” of traditional companies. Especially when auditing pure online players, it is no longer sufficient to follow the classic commercial due diligence approach, as the differences between the value creation models are too high. Digital enterprises are “asset-light,” highly scalable, and generally more international in scope. The sales engine, culture and team also differ significantly, to name just a few examples. This requires the targeted use of digital tools and methods and a sound understanding of digital business models (e‑commerce, marketplace, network, etc.) in commercial auditing. For example, additional digital modules such as online performance and sales engine analysis (including cohort analysis, conversion rates, KPIs on CAC, CPC, SEO, SEA), user experience and usability, or the tech stack and IT infrastructure/technologies must be added to ensure a fully comprehensive and adequate audit.
For reasons just mentioned, we are seeing increased demand for performing Digital Commercial Due Diligences.
To begin with, digital issues are becoming increasingly important for financial investors as well. Essentially, the question to be answered is how strongly one is exposed to digital change, how well the company is prepared for it, and what risks and opportunities arise for the company as a result.
In particular, the degree of digitization and the target’s online presence play a decisive role here. This must be compared with the market and competition. Here we look in particular at the future market development in the online segment or the positioning of the target compared to the competition (e.g. online competencies vs. core competition). In addition, we analyze digital issues along the entire customer journey. The possible influence of new players or established online players, such as the Amazon, is analyzed and evaluated. For example Amazon in the consumer goods environment is increasingly purchasing categories with private label products, which in some cases represents a considerable risk for established players and thus has “game-changing” potential. Accordingly, the share of sales generated online today and in the future plays a decisive role, as this component also flows into the business planning of a target company.
As part of our Digital Commercial Due Diligence, we therefore conduct a Digital Readiness & Opportunity Assessment for companies with business models that are not purely digital in order to examine the above-mentioned topics. Key investment criteria are highlighted that would not have been addressed and examined in this form in a conventional commercial due diligence.
In transaction processes, an entrepreneur should prepare for these issues in advance of a sale. Basically, a Digital Readiness & Opportunity Assessment examines the degree of digitization of a company, i.e., how digitally is the company and in particular the business model positioned and are there sufficient digital competencies within the organization. Essentially, the task is to evaluate the extent to which the value chain is sufficiently digitized, starting with research & development and agile development methods and ending with the digital maturity of the supply chain. The decisive factor is which online sales channels are used and how sales are aligned with digital requirements throughout the entire customer journey and user experience.
Here, the existing processes, IT landscape and roadmap of a company are considered. The responsible personnel or in-house IT competencies also play an important role in assessing the extent to which relevant IT know-how is available in the organization. — Coupled with analyses of the market and competition, it evaluates how fit a company is for the future in terms of digitization and automation. For companies that are highly exposed to digital transformation, it is advisable to conduct a Digital Readiness & Opportunity Assessment in advance of a contemplated transaction and initiate necessary transformation initiatives. This leads to a significant improvement in the investment rationale.
Markus is managing partner of Bluemont Consulting. He has more than 25 years of experience in management consulting and industry. He has worked for renowned management consultancies, such as 12 years at A.T. Kearney as Head of Marketing & Communication for Central Europe. He laid the foundation of his profound experience in the consumer goods industry and trade as Head of Key Account Management at Chokoladefabriken Lindt & Sprüngli and as a consultant at MC Marketing Corporation. One of the main areas of consulting is Transaction Services. Here, Markus has been involved in more than 100 due diligences and around 200 consulting projects in various industries and in the digital environment. Markus studied business administration at the University of Mannheim.