Commercial due diligence checklist

How to use the checklist: Work through the phases in order and tick off every item. At the end of each phase there is a checkpoint at which an experienced consultant approves the results.

1. Preparation and kick-off

• Clarify the client’s core questions: what does the CDD have to answer for the investment decision?
• Define scope and depth: red-flag review or full CDD?
• Agree the timeline with interim milestones (red-flag update, draft, final report)
• Non-disclosure agreement (NDA) signed
• Access to the data room and to the contacts on the seller side clarified
• First hypotheses and issue tree drawn up
• Interview programme planned: customers, former customers, competitors, industry experts
• Alignment with the other due diligence teams (financial, legal, tax)

Checkpoint 1: Hypotheses and work plan approved by the project lead

2. Screening the data room

• Information memorandum and management presentation analysed
• Business plan including all assumptions captured
• Revenue analysed by customer, product, region and channel
• Key customer contracts reviewed: terms, termination rights, change-of-control clauses
• Existing market studies and customer surveys reviewed
• Sales and pipeline metrics captured
• Gaps identified and questions submitted to the Q&A process
• Every finding documented with its location in the data room

Checkpoint 2: First findings communicated to the client

3. Analysing the market

• Relevant market defined and delimited (products, customers, regions)
• Market divided into meaningful segments
• Market size determined and cross-checked in at least two ways (top-down and bottom-up)
• Historical market growth and forecast determined
• Growth drivers and risks identified (economy, regulation, technology, substitutes)
• Market assumptions of the business plan compared with own analysis
• Every number backed by a traceable source

Checkpoint 3: Market model approved by the project lead

4. Analysing competition

• Relevant competitors identified (direct, indirect, new entrants)
• Market shares and development estimated
• Positioning compared: offering, price, quality, service, sales
• Competitive advantages of the target company checked: are they evidenced and sustainable?
• Barriers to entry and threat from new entrants assessed
• Price pressure and pricing power estimated

5. Gathering the customer view

• Customer concentration analysed: how strong is the dependence on individual customers?
• Customer retention and churn analysed over several years
• Customer interviews conducted, spread across segments, sizes and regions
• Conversations held with former customers and non-customers
• Purchase criteria and satisfaction captured
• Perceived strengths and weaknesses relative to competitors documented
• Interview statements analysed and weighted by frequency and relevance

Checkpoint 4: Competition and customer picture approved by the project lead

6. Reviewing the business plan

• Bridge from historical figures to the plan traced
• Revenue drivers broken down: price, volume, new customers, new products, new markets
• Plan growth reconciled with market growth and competitive position
• Pipeline and order backlog checked against the plan
• Margin assumptions checked for plausibility
• Own scenarios created (cautious, base, optimistic)
• Sensitivities of the most important assumptions calculated
• Results aligned with the financial due diligence

Checkpoint 5: Assessment of the business plan approved by the partner

7. Checking red flags

• High dependence on a few customers, suppliers or key people
• Important contracts expire or contain change-of-control clauses
• Plan growth clearly above market and historical growth (“hockey stick”)
• Declining customer retention or rising churn
• Increasing price pressure or new, aggressive competitors
• Shrinking or highly cyclical market
• Regulatory or technological changes that endanger the business model
• Contradictions between management statements, data room and interviews

8. Report and handover

• Executive summary answers the client’s core questions
• Red flags clearly named and put into context
• Every statement and every number backed by a source
• Report in corporate design, slide titles as clear statements
• Final quality review by a consultant not involved in the project
• Presentation to the client prepared
• Insights secured for future projects without confidential client data

Checkpoint 6: Final report approved by the partner

Sample timeline for a four-week CDD

The timeline is an example. Scope and duration depend on the engagement; a red-flag review is often done within a few days.