Commercial due diligence (CDD) is the investigation of a target company’s market environment, competitive position, customer base, and growth prospects. It tests the buyer’s investment thesis against external evidence — market sizing, customer interviews, competitor benchmarking, and win/loss analysis — and is often the workstream that most directly influences valuation.
Financial diligence answers the question “are the numbers real?” Commercial diligence answers “will the numbers continue?” A target may have a clean historical P&L and still be exposed to a deteriorating competitive position, a saturating market, or a customer base on the verge of churn. CDD surfaces those risks before the buyer commits.
Most commercial diligence engagements cover the same six areas:
What is the total addressable market (TAM)? What are realistic served-addressable and obtainable shares? Has the market grown historically as expected, and what are the demand drivers going forward?
Who are the direct competitors? What are the relative shares? Where does the target win, where does it lose, and why?
What share of revenue comes from the top 5, 10, and 20 customers? Are key relationships under long-term contract, and how renewable are they? What is the net revenue retention?
Has the target raised prices, and did volume hold? How elastic is demand? What is the gross-margin trajectory?
In recent sales cycles, why did the target win, and why did it lose? Are wins driven by price, product, brand, or relationships?
Where does management plan to grow? Is the growth thesis supported by market evidence, or by internal optimism alone?
A typical CDD engagement, run by a consulting firm or specialist CDD provider, includes:
Engagements typically run 4–8 weeks and cost 200K–1.5M depending on deal size and scope.
A growth-equity firm is evaluating a $90M ARR vertical SaaS company in the construction industry. The target’s pitch claims a $4B TAM and 30% annual growth. CDD finds that the realistic served-addressable market in the target’s actual product configuration is closer to $900M, that two well-funded competitors have entered the segment in the past 18 months, and that net revenue retention has slipped from 115% to 102% in the last four quarters. The buyer revises its growth assumptions, reduces the offer multiple from 10x to 7x ARR, and closes the deal at a $630M valuation instead of the asking $900M.