Commercial Due Diligence: A Complete Guide for PE Investors

Commercial due diligence (CDD) is a critical component of any private equity investment process. While financial due diligence examines the numbers, commercial due diligence answers the fundamental question: Is this business strategically sound?

In this comprehensive guide, we draw on our experience advising PE investors across the Nordic region to outline the key components of effective commercial due diligence, common pitfalls to avoid, and specific considerations for Nordic market transactions.

What is Commercial Due Diligence?

Commercial due diligence is a systematic assessment of a target company's market position, competitive environment, and commercial sustainability. Unlike financial due diligence, which focuses on historical performance and accounting quality, CDD is fundamentally forward-looking.

The core objective is to answer three questions:

1. Market attractiveness: Is this a good market to be in?
2. Competitive position: Can this company win in this market?
3. Sustainability: Will the business model remain viable?

Key Components of Commercial Due Diligence

Effective commercial due diligence covers four primary areas, each providing essential insight into the target's commercial viability.

1. Market Analysis

Market analysis establishes the foundation for understanding growth potential and competitive dynamics. Key elements include:

• Market size and segmentation (TAM, SAM, SOM)
• Historical and projected growth rates
• Key growth drivers and inhibitors
• Regulatory environment and trends
• Technology disruption potential

In Nordic markets, particular attention should be paid to cross-border dynamics, as many targets serve multiple Nordic countries with varying regulatory requirements.

2. Competitive Landscape Assessment

Understanding competitive dynamics is essential for assessing both current position and future sustainability. This includes:

• Competitor identification and mapping
• Market share analysis and trends
• Competitive positioning and differentiation
• Barriers to entry and competitive moats
• Threat of new entrants and substitutes

3. Customer Analysis

Customer analysis provides insight into revenue quality and sustainability:

• Customer concentration and dependency
• Customer satisfaction and loyalty metrics
• Switching costs and retention dynamics
• Pricing power and margin sustainability
• Voice of customer research (interviews, surveys)

4. Management Assessment

While often conducted separately, commercial due diligence should include assessment of the management team's commercial capabilities:

• Track record and credibility
• Strategic vision and execution capability
• Alignment with investment thesis
• Key person dependencies and succession

Common Pitfalls to Avoid

Based on our experience, the most frequent CDD pitfalls include:

1. Confirmation bias: Approaching diligence to justify a decision already made, rather than to inform the decision.
2. Insufficient primary research: Over-relying on secondary sources without conducting customer and expert interviews.
3. Narrow competitive scope: Focusing only on direct competitors while missing adjacent threats and substitutes.
4. Static market view: Analyzing current state without adequately assessing future market evolution.
5. Disconnect from value creation: Treating CDD as a risk exercise without connecting findings to post-acquisition strategy.

Nordic Market Considerations

Commercial due diligence in Nordic markets requires attention to several region-specific factors: