Commercial due diligence: Process, checklist, and deal implications

From 1 January 2026, Australia’s merger control regime introduced mandatory, pre-completion ACCC clearance, meaning transactions can no longer proceed without demonstrating that they will not substantially lessen competition.

This places far greater weight on evidence about a target company’s market definition, demand dynamics, competitive positioning, and future behavior — areas tested through commercial due diligence (CDD).

Against this backdrop, this article explains how commercial due diligence supports regulatory and investment decision-making.

It presents a comprehensive checklist to systematically assess commercial risk, validate growth assumptions, and, ultimately, make an informed investment decision.

What is commercial due diligence?

Commercial due diligence aims to assess a target company’s commercial activity, market position, revenue model, and future growth potential.

Unlike financial or legal due diligence, it is forward-looking and tests whether the company’s growth and margin assumptions meet its real market demand, competitive dynamics, and customer behavior.

Commercial due diligence vs other types of due diligence

Commercial due diligence differs from financial due diligence and legal due diligence in focus and time horizon.

Why commercial due diligence is critical in M&A and investments

Without sound commercial due diligence, buyers are exposed to material risks that are often invisible in financial or legal reviews:

• Overstated market size
• Aggressive growth assumptions
• Dependence on a small number of customers
• Underestimated competitive pressure

These risks typically arise from untested assumptions about how the business performs in its market and its future performance after the transaction.

These issues can lead to flawed deal rationale, overpayment, and weak post-transaction performance. 

“You can always deliver a higher valuation by playing with ratios and projections to make the new price work, but then you end up buying a spreadsheet that does not match reality anymore.” — Henri Servaes, a Professor of Finance and the Richard Brealey Professor of Corporate Governance at London Business School

However, when done right, commercial due diligence grounds investment decisions in verified market evidence rather than projections alone, delivering clear benefits:

• More credible valuation inputs
• Stronger investment conviction
• Better-informed negotiations
• Clearer post-deal priorities

Types of commercial due diligence

Commercial due diligence is not a single, standardized exercise. Its scope and depth vary depending on who initiates the work, where the transaction sits in the deal process, and what decisions need to be supported:

• Vendor-initiated (sell-side) commercial due diligence. The seller commissions this work to present a structured, market-tested view of the business to prospective buyers. It’s typically done by a third-party vendor on behalf of the seller, usually before or at the start of the potential sale process.
• Buyer-initiated commercial due diligence. The buyer commissions an independent analysis of the seller. It’s initiated during active deal evaluation after the letter of intent (LOI) has been signed.

Certain types of commercial due diligence are defined by what decision they are meant to support:

• Red-flag commercial due diligence. This is a narrowly scoped, early-stage review designed to identify potential deal-breakers before the buyer commits significant time, management attention, or advisory costs. It is typically conducted at the very start of buyer evaluation, often before or alongside initial valuation work.
• Top-up or confirmatory commercial due diligence. This is a targeted follow-on analysis conducted toward the end of the diligence process. It focuses on closing information gaps, testing sensitive assumptions, or updating earlier findings as negotiations progress toward signing or closing.

The commercial due diligence process

A typical commercial due diligence engagement takes three to six weeks, although it can become a long and complex process depending on the scope and data availability.

It is executed through a structured sequence of analyses that progress from scoping and information requests to market and business model, customer analysis, and the final report.

Step #1: Defining scope and information requests

Once due diligence formally begins, the buyer defines the key commercial questions linked to the investment thesis and areas of uncertainty. For commercial due diligence, this means specifying the market, customer, and sales information.

Step #2: Market and competitive analysis

In this step, commercial due diligence focuses on the target’s market environment and competitive position. Due diligence teams use a combination of internal data, external research, and structured analysis. Analysts typically size the market using: 

• Total addressable market (TAM) – overall demand
• Serviceable available market (SAM) — relevant segments
• Serviceable obtainable market  (SOM) — realistic share

Growth drivers and trends are assessed through industry reports, customer interviews, and benchmarking.

For private companies, limited public data often requires greater reliance on primary research and expert interviews. Public targets allow more external validation but may still obscure segment-level performance.

External advisors are commonly engaged to provide commercial due diligence services, such as conducting independent market analysis, competitor mapping, and customer referencing.

Step #3: Business model and revenue analysis

At this stage, commercial due diligence assesses how the target business generates revenue and whether its earnings model is sustainable. Analysis starts with using management and sales data to break down revenue streams by:

• Product
• Customer segment
• Route to market, such as direct sales, partners, or online distribution

Teams then review pricing logic, discounting, and the ability to pass through costs. They assess unit economics, including revenue per customer, cost to serve, and contribution margins. For private targets, this often requires data reconciliation and validation with the management of the target company.

Step #4: Customer and go-to-market review

In this step, commercial due diligence analyzes customer quality and demand sustainability, as well as customer concentration and dependency risk. This analysis begins with customer segmentation by:

• Size
• Industry
• Contract type
• Purchasing behavior

Teams then assess retention, churn, and revenue predictability, as well as sales and marketing effectiveness across the funnel. CRM data, cohort analysis, pipeline reviews, and customer interviews are commonly used to validate customer behavior and data quality.

Step #5: Commercial due diligence report

In the final stage, commercial due diligence teams consolidate findings from all workstreams and translate analysis into decision-relevant insights. The final report focuses on clear conclusions and their implications for value and risk:

• Summary of core value drivers
• Summary of material commercial risks
• Assessment of the sustainability of the investment case
• Impact on the valuation and deal structure
• Key areas requiring mitigation or further diligence
• Commercial considerations for post-acquisition strategy

Commercial due diligence checklist

This illustrative commercial due diligence checklist reflects how diligence teams structure analysis and ensure coverage of all material commercial risks and value drivers:

Business operations and positioning

• Core products and services, including the value proposition
• Target customer segments and end markets
• Go-to-market model (direct, indirect, digital, partners)
• Revenue model and primary sources of profitability
• Key cost drivers and margin structure
• Historical development and major strategic milestones
• Scalability of the business model
• Sustainability of the model under realistic market conditions
• Pricing logic and pricing governance
• Alignment between strategy, operating model, and market reality

Market size, structure, and dynamics

• Clear definition of relevant markets and segments
• Total addressable market (TAM)
• Serviceable available market (SAM)
• Serviceable obtainable market (SOM)
• Historical market growth rates
• Forecast market growth and outlook
• Principal demand drivers
• Key demand inhibitors and structural constraints
• Industry lifecycle stage (emerging, mature, declining)
• Demand–supply balance
• Regulatory, macroeconomic, and technological influences
• Sensitivity of demand to pricing or economic conditions

Competitive landscape

• Identification of key competitors and substitutes
• Estimated competitor market shares and concentration
• Competitor operating models and cost structures 
• Competitive intensity and pricing pressure
• Customer switching costs and loyalty dynamics
• Sources of differentiation and unique selling points
• Evidence supporting differentiation claims
• Defensibility of competitive advantages
• Barriers to entry and risk of new entrants
• Threat of industry consolidation or disruption
• Likelihood of competitive erosion over the investment horizon

Customer base and demand quality

• Customer segmentation by size, industry, geography, and behavior
• Revenue and profit concentration
• Customer retention, churn, and lifetime value
• Contract structures and renewal cycles
• Reasons customers choose the target over alternatives
• Performance against key customer purchase criteria
• Strength and depth of customer relationships
• Dependency on specific customers or customer groups
• Feedback from customer referencing or surveys
• Appetite for additional products, services, or expansion

Go-to-market execution and pipeline strength

• Sales model effectiveness by segment
• Marketing channels and lead generation quality
• Sales cycle length and conversion rates
• Quality, stage, and value of the sales pipeline
• Pipeline coverage versus revenue targets
• Historical pipeline conversion performance
• Risks by segment, geography, or product
• Reliance on key individuals or relationships
• Data quality and reliability of CRM or pipeline reporting

Growth opportunities and strategic options

• Organic growth opportunities within existing markets
• Potential for pricing optimization
• New customer segments or use cases
• Product or service extensions
• Geographic expansion opportunities
• Adjacent or ancillary offerings
• Capability gaps or investment requirements
• Execution risks associated with each opportunity
• Evidence supporting feasibility and timing

Key commercial risks

• Substantial market risk indicators (structural decline, demand volatility)
• Competitive risks (price erosion, share loss)
• Customer risks (concentration, churn, contract loss)
• Organizational risks
• Regulatory or policy risks affecting demand
• Sensitivity to macroeconomic conditions
• Risks inherent in the business model
• Execution risks related to growth initiatives
• Data limitations or information gaps

Company’s business model

• Consistency between the business plan and market evidence
• Alignment of growth assumptions with market dynamics
• Realism of pricing and margin assumptions
• Historical performance versus forecast trajectory
• Key assumptions underpinning revenue growth
• Margin expansion assumptions and cost leverage
• Sensitivity of forecasts to volume, pricing, and churn
• Identification of upside and downside scenarios
• Areas where assumptions lack evidentiary support

Additional reading: To see how commercial diligence fits into the wider M&A process, review our global due diligence checklist.

Significant risks and red flags identified through commercial due diligence

Not all issues uncovered during commercial due diligence are deal-breakers. However, every risk must be clearly understood before the buyer commits capital. Commercial due diligence strategy highlights red flags that indicate weaknesses in the target’s commercial fundamentals, including:

• Market size or growth assumptions not supported by evidence
• Limited ability to defend pricing or market share
• Excessive reliance on a small number of customers
• Structural or segment-level demand erosion
• Growth projections disconnected from historical performance or market realities

Some findings are typically treated as immediate deal-breakers because they materially undermine the investment case:

• Structural market decline with no credible mitigation strategy
• Customer concentration combined with imminent contract loss risk
• A business model that is fundamentally unprofitable at scale

Besides helping buyers avoid unforeseen downside after closing, commercial findings also provide a factual basis for price adjustments, deal structuring, and negotiations following due diligence.

The role of technology and data rooms in commercial due diligence

Manual tools such as email, spreadsheets, and shared drives do not scale in complex transactions, where multiple advisors, large data volumes, and strict confidentiality requirements must be managed in parallel. 

In practice, private equity professionals, M&A advisors, and corporate development teams use a combination of specialized tools, each addressing a specific need in the commercial due diligence process:

• Virtual data rooms (VDRs). Secure platforms used to store, organize, and control access to diligence materials, with full audit trails and user permissioning. Well-known due diligence data rooms in the Australian market include Ideals, DealRoom, and Ansarada.
• Financial and scenario modeling tools. Structured financial models are used to test assumptions and sensitivities, typically built in controlled spreadsheet environments and supported by analytics platforms such as Tableau or Alteryx.
• CRM and customer analytics tools. Systems used to analyze customer concentration, churn, and pipeline quality, such as Salesforce and HubSpot.
• Market research and benchmarking databases. External sources used for market sizing, competitor analysis, and trend validation, including IBISWorld, Statista, and PitchBook.

Additional reading: Compare leading virtual data rooms for due diligence at dataroomreviews.org to understand differences in functionality and identify the right solution for your process.

Bottom line

• Commercial due diligence confirms whether growth is supported by credible market size, repeatable customer demand, and realistic pricing.
• It starts with explicit growth hypotheses and tests them against market data, customer behavior, and unit economics.
• When executed well, CDD prevents overpayment and informs negotiation strategy and post-acquisition priorities.