1. what is commercial due diligence

Commercial Due Diligence (CDD) refers to the comprehensive, in-depth and objective evaluation of the business model, business prospects and profitability of the target company or project by investors or consulting institutions in investment transactions, so as to determine the real value and potential risks of the target company or project and provide support and basis for investment decision-making.

Commercial due diligence and financial due diligence and legal due diligence are the three major components of investment due diligence. Financial due diligence focuses on the financial status, financial statements and financial risks of the target company or project, legal due diligence focuses on the legal compliance, legal risks and legal documents of the target company or project, while commercial due diligence focuses on the commercial value, commercial competitiveness and commercial risks of the target company or project.

The importance of commercial due diligence is self-evident, which can help investors or consultants:

Understand the internal operation and external market environment of the target company or project, and judge the feasibility and sustainability of its business model;

Assess the core competencies and competitive advantages of the target company or project, and analyze its position and development potential in the industry;

Identify the main business risks and challenges of the target company or project, and formulate corresponding risk response and avoidance measures;

Validate the financial forecasts and assumptions of the target company or project and correct for possible overvaluation or undervaluation;

Determine the reasonable valuation and return on investment of the target company or project, and provide the basis for investment pricing and transaction structure;

Propose improvement proposals and value-added solutions for the target company or project to provide guidance for post-investment management and exit.

2.Commercial due diligencePurpose

The purpose of business due diligence is to support investment decisions, and the core of investment decisions is value judgment. Value judgment refers to the forecast and discount of the future cash flow of the target company or project, as well as the assessment of the uncertainty of future cash flow.

The value judgment of commercial due diligence mainly includes two aspects: value assessment and risk control.

Value assessment refers to the forecast and discount of the future cash flow of the target company or project to determine its intrinsic value or fair value. There are two main types of valuation methods: revenue-based and market-based. The earnings-based approach is based on the expected earnings of the target company or project, discounting future cash flows to the present at a certain discount rate to obtain its present value. Commonly used income-based methods are net present value method, internal rate of return method, economic value added method and so on. The market-based approach is based on the relative price of the target company or project to similar or similar companies or projects in the market, at a certain ratio or multiple, to obtain its market value. Commonly used market-based methods are the P/E method, the P/E method, and the P/E method.

Risk control refers to the assessment of the uncertainty of the future cash flows of the target company or project to determine its risk premium or risk discount. There are two main types of risk control methods: qualitative analysis and quantitative analysis. Qualitative analysis is the judgment and description of the potential impact on future cash flows based on the internal and external risk factors of the target company or project. Commonly used qualitative analysis methods include SWOT analysis, PEST analysis, and five-force analysis. Quantitative analysis is the calculation and measurement of the volatility and probability distribution of future cash flows of a target company or project based on its historical and forecasted data. Common quantitative analysis methods include sensitivity analysis, scenario analysis, Monte Carlo simulation, etc.

3.Commercial due diligenceContent

The content of commercial due diligence is based on the characteristics of the target company or project and the needs of investors or consultants, and there are no fixed models and standards. But in general, the content of business due diligence can be divided into five areas: macro-environment analysis, market analysis, competitive environment analysis, business process analysis and enterprise infrastructure analysis.

Macro-environmental analysis refers to the analysis of the economic, political, legal, social, technical and other macro factors in which the target company or project is located, and to assess its impact and trends on the target company or project. Macro-environmental analysis can use the PEST analysis model, that is, from the political (Political), economic (Economic), social (Social) and technical (Technological) four dimensions of analysis.

Market analysis refers to the analysis of the market involved in the target company or project to assess its market size, market structure, market demand, market growth, market potential, etc. Market analysis can be based on market segmentation, which divides the market into different market segments based on different segmentation criteria and analyzes their characteristics and opportunities separately.

Competitive environment analysis refers to the analysis of the competitors faced by the target company or project to assess its competitive strategy, competitive advantage, competitive disadvantage, competitive dynamics, etc. The competitive environment analysis can be analyzed using a five-force analysis model, which is based on the five forces of competitors, potential entrants, substitutes, suppliers and buyers within the industry.

Business process analysis refers to the analysis of the main business activities and processes of the target company or project to assess its business efficiency, business quality, business innovation, business risk, etc. Business process analysis can use the business process diagram method, that is, the order of business activities, interrelationships and information transmission in a graphical way.

Enterprise infrastructure analysis refers to the analysis of the human resources, financial management, information systems, organizational structure and other infrastructure of the target company or project to assess the degree of support and security for business operations and development. Enterprise infrastructure analysis can use the balanced scorecard method, that is, from the financial, customer, internal processes and learning and growth four dimensions, to develop the corresponding objectives, indicators, measures and evaluation.

4.Commercial due diligenceMethod

The commercial due diligence approach is chosen according to the characteristics of the target company or project and the purpose of the investor or advisory body, and there is no uniform specification and framework. In general, however, the commercial due diligence approach can be divided into three phases: the preparation phase, the implementation phase and the reporting phase.

The preparation phase refers to a series of preparatory work that investors or consultants need to carry out before the formal start of commercial due diligence, including determining the objectives, scope, time, team, budget, etc. of commercial due diligence, as well as collecting and collating relevant background information and preliminary information.

The execution phase refers to a series of execution methods that investors or consultants need to adopt in the process of formal commercial due diligence, including data collection, data analysis, data verification and data integration, as well as value assessment and risk control based on data results.

The reporting phase refers to a series of reporting documents that investors or consultants are required to submit after the completion of commercial due diligence, including summaries, conclusions, recommendations and attachments of commercial due diligence, as well as investment decisions and follow-up based on the contents of the report.

5.Commercial due diligenceCase

The case of commercial due diligence is a specific example of commercial due diligence by an investor or advisory body on a target company or project in an actual investment transaction, which can reflect the practical experience and lessons of commercial due diligence. The following are some examples of commercial due diligence for reference.

Case 1: Champ Consulting provided commercial due diligence services to a private equity fund to help it assess the value and risk of an investment in an online education platform. Through the analysis of the online education market, Shangpu Consulting found that the market has high growth potential and competitiveness, but there are also risks such as policy supervision, user loyalty, and teacher quality. Through the analysis of the target company, Shangpu Consulting found that the company has strong brand influence, technological innovation ability and operational efficiency, but there are also problems such as user loss, curriculum homogenization, unclear profit model and so on. Through its financial forecasts and valuations of the target company, Champ Consulting has found that the company's future cash flows are subject to significant uncertainty and that its valuation may be overvalued or undervalued. Shangpu Consulting provides investors with commercial due diligence reports, including the target company's business model, market analysis, competition analysis, business process analysis, enterprise infrastructure analysis, value assessment, risk control and investment advice, etc., to provide strong support for investors' investment decisions.

Case 2: Champ Consulting provided commercial due diligence services to a multinational pharmaceutical company to help it assess the acquisition value and risk of a biotechnology company. Through the analysis of the biotechnology market, Shangpu Consulting found that the market has high technical barriers and innovation motivation, but there are also risks such as immature technology, uncertain market, and imperfect supervision. Through the analysis of the target company, Shangpu Consulting found that the company has high scientific research capabilities, number of patents and partners, but there are also problems such as long research and development cycles, unlisted products, and financial constraints. Through the financial forecast and valuation of the target company, Shangpu Consulting found that the company's future cash flow has a large fluctuation and risk, and its valuation may have a large deviation. Shangpu Consulting provides investors with commercial due diligence reports, including the target company's business model, market analysis, competition analysis, business process analysis, enterprise infrastructure analysis, value assessment, risk control and acquisition recommendations, which provides strong support for investors' acquisition decisions.

Conclusion

Business due diligence is an indispensable part of investment decision-making, which provides investors with a basis for value judgment and risk control through a comprehensive, in-depth and objective assessment of the business model, business prospects and profitability of the target company or project. This paper systematically introduces the basic concepts and practical points of commercial due diligence from the aspects of the definition, purpose, content, method and case of commercial due diligence, and reveals the logic and principles behind commercial due diligence, with a view to providing useful reference and guidance for investors and consulting institutions.