Across five decades of mid-market investing, ECI has reviewed and commissioned commercial due diligence on thousands of transactions, on both sides of the table. Most deals have CDD, whether commissioned by the vendor, the buy side, or both. That means we’ve seen examples of where it genuinely builds not just investor conviction, but also real value for the company, and, sadly, many where it falls flat.
Lewis Bantin, Partner and Head of ECI’s Commercial Team, explains how management teams can get more from CDD, across the investment lifecycle.
1. Treat CDD as a strategic lever, not just a validation step
Good CDD should work in two steps. The first and essential part needs to establish foundations – size of market, trends, the full competitive set. The second step should build on this foundational layer – how does it relate to your business plan? Is that plan consistent with customer behaviour, the competitive landscape and your own performance?
Unlike financial DD, this isn’t (just) a rearview mirror exercise. It’s forward looking and open to debate. For that reason, the best CDD prompts discussion and helps set the strategic direction – not just validating trends. ECI’s Commercial Team gets involved in the deal so that the commercial insight developed during due diligence carries straight through into the post-deal strategy work with management. CDD should (in our view!) be genuinely strategic rather than confirmatory; the latter being shelved once the deal completes. The best CDD we have seen opens your eyes to new market opportunities, new lines of business – it’s how we understood the scale of opportunity in IoT and led to us backing the founders at Wireless Logic!
2. Choosing the right provider: start early
When selecting a CDD advisor, the most important thing isn’t the name on the door. It’s about the team who will be working with you. They should have spent years immersed in their sector, can talk knowledgeably about stronger and weaker performers as they genuinely know the competitor set, and therefore bring insight and pattern recognition, rather than a template.
Scale matters too, but mainly as it defines cost. There’s a real spread from the global and MBB strategy houses to the boutiques, and in some cases even sole specialists. The right solution is not always the cheapest, but you probably also don’t need a six-figure budget for a customer referencing project. Lean on your network here. Your corporate financier and/or investor will have worked on comparable projects and should be able to direct you to the relevant specialists and right size the pitch. The important thing is timing – you don’t want to be meeting providers as you go. Getting to know the right people in your sector well before a process starts means you’re choosing based on fit and insight, not availability.
3. Build the data foundations for CDD
One of the delays that often happens during the CDD process is unstructured or missing data, with providers spending their time knitting together various sources and making assumptions, rather than being able to present a coherent picture at the start. Pipeline and conversion data is often an important part of this. Without a quarterly view of how the pipeline is moving, it’s genuinely difficult to predict what the next six to twelve months will look like. Churn is the other areas we tend to see businesses underinvest in data quality. Many companies capture a high level 30,000 ft reason as to why a customer left, often because a drop-down box gets completed by an account manager who understandably wants to move onto the next deal. Things you can set up early, such as recording and transcribing exit conversations, and asking directly whether it was budget, competition, product etc, gives you a better pattern to work with from the start. The same applies to customer referencing more broadly: it’s most useful when it’s a routine habit rather than something commissioned for the first time in the run-up to a sale. Research shows that management-curated references are unsurprisingly 30-40% more positive than independently sourced customers, so few investors will rely on it wholly. With that in mind, it’s better to have the time to understand and remedy any likely outputs from customer referencing, rather than trying to curate the answer.
4. Be honest about the plan, and don’t overplay your hand
Management teams, and sometimes their investors, unsurprisingly take the view that a more ambitious plan can support a stronger valuation. But massaged figures or overselling as established strategy something that is no more than a twinkle in the eye, often end up with teams discussing why something isn’t right, rather than why it is – and that can actively hinder conviction. Even if overplaying your hand on AI capability or sales traction gets you through a hot process, it tends to catch up post-deal, ending up with a difficult first year and often a disappointed investor.
The best CDD providers will put you on the right side of the ambition line. Because they aren’t paid on completion, they’re often the most objective read a management team will get on how bullish their own plan really is. That’s why it’s best to treat time with them as a genuine conversation rather than a test to pass.
5. New frontier: AI and defensibility
If you think about the classic Michael Porter Five Forces framework, that has shaped most of CDD thinking, barriers to disruption and substitution used to sit low on the list of diligence priorities. Technological change and AI now mean that it’s central. Management teams should expect to answer the defensibility question re AI-native entrants and should have a considered view. We cover this in more depth in: How are investors thinking about AI defensibility and opportunity.
