Commercial Due Diligence in Singapore: What It Is & How to Do It Right

The success of any M&A activity depends on the thoroughness of the due diligence (DD) process, and commercial due diligence (CDD) is one of the key types of DD. Commercial due diligence ensures investors and buyers have a complete understanding of the growth potential of the target company.

Here is a detailed guide on commercial due diligence in Singapore, its key components, and best practices.

What is commercial due diligence?

Commercial due diligence is a detailed assessment of the target company from a commercial perspective. It evaluates whether the company will be able to succeed in its market. Commercial due diligence assesses factors like a company’s business model, market position, and growth potential.

Commercial due diligence serves three main objectives:

• Risk identification. Identifies major risks related to the target company. These may include legal risks, organizational issues, and financial issues.
• Strategic fit. Assesses whether the business model of the company aligns with the potential buyer’s growth strategy.
• Opportunity assessment. Helps identify the areas that have strong potential for growth.

CDD usually takes place in the early stages of the transaction. It usually follows a preliminary screening and then comes legal, technical, and financial due diligence.

It is important to note that commercial due diligence is different from financial due diligence. Financial due diligence is primarily the evaluation of a company’s past financial performance. It focuses on financial practices and performance, while commercial due diligence focuses on growth potential and future opportunities.

Here is a brief comparison of commercial due diligence and other types of due diligence.

When and why is commercial due diligence conducted?

Commercial due diligence is a key component in the following processes.

1. Pre-investment

CDD is an early screening before investing. It is a mandatory process when PE firms and venture capitalists are about to make an investment decision. Commercial due diligence helps decision makers assess if there is a reasonable potential for business growth.

2. Pre-acquisition / pre-merger assessments

Commercial due diligence is a key segment in mergers and acquisitions. CDD helps the acquiring company assess if the target company is a strategic fit or not. It helps buyers assess if the company can grow in the current market and expand to new ones.

3. Strategic partnerships, new market entry

Businesses entering into new partnerships or exploring new markets also conduct commercial due diligence. CDD helps them understand the demand in the market, competition, and customer needs. Assessment of these factors helps investors make smart decisions.

Commercial due diligence plays an important role in rapidly changing markets like Southeast Asia. It helps investors evaluate how strong current market players are, customers’ buying trends, and the opportunities to scale.

• Market size, trends, and growth forecast. Assesses the current size of the market and future growth potential. It also helps determine if the target company is operating in an expanding or declining industry.
• Competitive positioning and benchmarking. Provides a comparison with the main competitors in the industry. CDD assesses the market share, strengths, and areas where it stands out or falls behind.
• Customer base and retention analysis. It reviews who the customers are and how loyal they remain over time. Identifies churn risks and customer concentration issues.
• Business model evaluation. CDD evaluates how the company makes money and delivers value. It examines if the business model is sustainable, profitable, and adaptable.
• Revenue stream reliability and scalability. Tests the stability and predictability of the revenue of the target company. It also provides insights on whether it is possible to grow revenue without incurring massive costs.
•  Management team and execution capability. Looks at the leadership team’s experience and track record. It also assesses their ability to execute plans and drive growth.
• Go-to-market strategy fit and risk factors. Reviews how well the company’s sales and marketing align with market needs. CDD also highlights strategic risks and barriers to entry.

Who performs commercial due diligence in Singapore?

Who performs commercial due diligence in Singapore depends on the size, nature, and complexity of the transaction. The following are commercial due diligence providers in Singapore.

1. Internal corporate strategy teams

Large-sized organizations usually have their internal M&A or in-house strategy teams who lead the process. These teams thoroughly understand the strategic goals and whether the target company aligns with those goals. Internal teams may also collaborate with external experts for deeper insights.  

2. Investment banks and PE firms

Private equity firms and investment banks play a key role in business deals in Singapore. These entities have in-house investment teams and analysts to perform commercial due diligence. Private equity firms conduct CDD to test their growth assumptions and identify value creation opportunities after the acquisition.

3. Independent advisory consultants

Many investors or companies hire third-party advisors for unbiased and detailed reviews. The big four firms or boutique strategy consultants like L.E.K. or Roland Berger offer specialized CDD services in Singapore. These firms know the science of how to conduct commercial due diligence. They offer investors detailed market data, industry knowledge, and benchmarking tools.

4. Specialized local research teams

Local consulting firms or research agencies often support the commercial due diligence process in Singapore. These firms provide insights into local consumer behavior, regulations, and competitors that global firms may miss. Their understanding of cultural and market dynamics is especially valuable in cross-border deals.

How virtual data rooms support commercial due diligence

Virtual data rooms and due diligence are closely related. Dealmakers and investment firms use data rooms for due diligence for the following reasons.

1. Fast and secure access to sensitive business data

Data rooms are online document repositories that ensure secure file sharing for businesses and dealmakers. They are cloud-based solutions that allow users to safely store and share data from anywhere in the world.

Virtual data rooms are not just ordinary data storage platforms. They are secure data management solutions that provide industry-grade security and advanced data management tools. Users can organize data in folders or subfolders or import data directly from an external source.

Data rooms ensure fast access from remote devices like mobile phones and tablets. The data retrieval process is simplified through the smart search feature, which allows accessing any document in seconds.

2. Real-time collaboration between the buyer, advisor, and legal teams

VDRs are comprehensive solutions that also ensure seamless collaboration between all parties involved in the due diligence process. They don’t have to rely on emails or other outdated tools, as data rooms allow real-time communication between users.

Advanced virtual data rooms for investors offer Q&A modules that allow users to ask questions and give answers. VDR users can make comments in the documents and seek clarity. Data rooms also have built-in chat messengers and allow third-party app integration for online meetings.

3. Features that matter

As mentioned earlier, virtual data rooms offer industry-grade security for maximum data protection. It has advanced features you won’t find in other data sharing tools. For example, VDR admins can set access permissions for every single user in the data room. They can set restrictions on downloading, editing, and printing documents.

Digital watermarking helps trace activities performed on the document, while fence-view mode hides content that should not be shared with external parties. Admins can also revoke document access from any user without any prior notice. Multi-factor authorization ensures there are no unauthorized entrants in the data room while data is encrypted during transit and at rest.

4. Local hosting and PDPA compliance for Singapore-based businesses

Global virtual data room providers have local data hosting centers and comply with the Personal Data Protection Act (PDPA) in Singapore. This ensures that sensitive data is shared or handled according to the legal frameworks in the country. Key data rooms in Singapore include ideals, Datasite, and Ansarada.

Commercial due diligence checklist

Any commercial due diligence checklist has the following elements.

Red flags to watch for during commercial due diligence

The following are the major red flags to spot during commercial due diligence.

• Overly optimistic forecasts. The target company may have projections that assume unrealistic growth rates or ignore market risks, which signals poor planning or inflated valuations.
• Heavy customer concentration. A company that heavily relies on a small number of customers is risky. It may suffer if those customers stop doing business with the target company.
• Weak or undefined competitive advantage. The company may fail to maintain its market position if there are vaguely defined competitive edges.
• Poor understanding of market dynamics. It may include limited knowledge of trends, demand drivers, or regulatory shifts, suggesting weak strategic awareness and planning.
• No clear growth roadmap. A lack of defined goals or action plans for scaling the business can indicate limited long-term planning.

Best practices for a successful due diligence process

• Always start the due diligence process as soon as possible and outline specific objectives. This will help you stay focused and efficient.
• It is better to hire external consultants or advisors to get unbiased insights and industry knowledge.
• Organize all insights and other important data in a clear due diligence report to make things easy for decision makers.
• Use tools like virtual data rooms to manage documents and ensure smooth collaboration.
• Protect sensitive information and ensure safe communication between concerned parties to avoid misunderstandings.

Final thoughts

Commercial due diligence involves a detailed examination of the target company’s growth potential, market position, and business model. It comes early in the due diligence process and helps investors assess if it is worth going forward.

Commercial due diligence is usually carried out by in-house teams or third-party firms. The process becomes smoother with the help of tools like virtual data rooms. VDRs simplify data sharing and online collaboration between all parties involved.

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