lev-os Conducting Buyout Commercial Diligence
Commercial due diligence (CDD) validates the revenue thesis behind a buyout by stress-testing market size, customer durability, competitive positioning, and organic growth assumptions. This skill structures CDD into discrete workstreams that map directly to the investment committee memo.
When To Use
- Pre-LOI screening when the deal team needs a quick market landscape read before committing resources
- Confirmatory CDD post-LOI, typically during a 30–60 day exclusivity window
- Validating management projections against independent market data before IC approval
- Assessing add-on acquisition targets where commercial overlap or white-space expansion matters
- Growth equity investments where revenue sustainability replaces asset coverage as the primary underwrite
Inputs To Gather
- Company materials: CIM, management presentations, historical financials (3–5 years), customer lists with revenue by account
- Market data: Industry reports (IBISWorld, Gartner, Frost & Sullivan), trade association publications, public comp filings [VERIFY availability for niche verticals]
- Customer intelligence: Win/loss logs, NPS or churn data, contract terms (duration, auto-renewal, escalators), top-20 customer interview notes
- Competitive landscape: Competitor pricing, product feature matrices, market share estimates, recent M&A in the sector
- Management access: Calls or Q&A sessions with CEO, VP Sales, and VP Product to probe assumptions behind the hockey-stick forecast
Workflow
1. Define TAM/SAM/SOM and Market Growth
- Build a top-down TAM using industry reports, then cross-check with a bottom-up build (unit count x ASP, or customer count x ARPU)
- Identify the served addressable market (SAM) by filtering for geography, customer segment, and product applicability
- Estimate the target's obtainable market (SOM) given current share and realistic penetration assumptions
- Quantify market growth drivers (secular tailwinds, regulatory catalysts, technology adoption curves) and headwinds (commoditization, substitution risk)
- Flag any market sizing discrepancy >15% between top-down and bottom-up as requiring reconciliation before IC
2. Analyze Customer Concentration and Revenue Durability
- Calculate top-1, top-5, top-10, and top-20 customer revenue concentration percentages
- Assess contract structure: recurring vs. non-recurring split, weighted-average contract length, renewal rates, and churn cohort analysis
- Evaluate net revenue retention (NRR) by vintage — distinguish between logo churn and dollar churn
- Identify switching costs: integration depth, workflow dependency, data lock-in, retraining burden
- Score customer health using a tiered framework (green / yellow / red) based on tenure, growth trend, and relationship depth
- [VERIFY] Whether customer interview sample size (typically 15–25 accounts representing 40–60% of revenue) is achievable within the diligence timeline
3. Map Competitive Dynamics
- Identify direct competitors by tier (scaled incumbents, mid-market peers, emerging disruptors)
- Build a competitive positioning matrix across price, product breadth, service quality, and geographic reach
- Assess barriers to entry: regulatory licenses, capital intensity, network effects, proprietary data or IP
- Evaluate pricing power by analyzing historical price increases vs. volume growth and gross margin trends
- Document recent competitive moves: fundraises, product launches, geographic expansion, or exits
4. Stress-Test Growth Sustainability
- Decompose historical revenue growth into volume, price, mix, and acquisition components
- Benchmark organic growth against market growth to determine share gain or loss trajectory
- Evaluate the sales pipeline: coverage ratio, conversion rates, average sales cycle length, and quota attainment distribution
- Assess expansion levers: cross-sell penetration, upsell attach rates, new product roadmap credibility, geographic whitespace
- Model downside scenarios: loss of top customer, market growth deceleration by 200–300 bps, or competitive price compression of 10–15%
- Triangulate management's base case projections against independent findings — flag gaps exceeding 10% CAGR variance
5. Synthesize and Deliver CDD Report
- Produce an executive summary (2–3 pages) with go/no-go recommendation and key risk callouts
- Organize detailed findings by workstream with supporting exhibits (market maps, concentration charts, competitive grids)
- Include a "Key Assumptions and Risks" table linking each growth driver to its evidence base and confidence level
- Append a data room index referencing source documents for every material claim
Output
The final CDD report should contain:
- Executive summary with investment thesis validation or challenge, top 3 opportunities, and top 3 risks
- Market overview with TAM/SAM/SOM framework, growth rate substantiation, and key driver analysis
- Customer analysis with concentration tables, cohort retention curves, and customer health scorecard
- Competitive landscape with positioning matrix, barrier-to-entry assessment, and pricing power evaluation
- Growth bridge decomposing forward projections into organic components with probability-weighted scenarios
- Appendices with methodology notes, data sources, interview summaries, and sensitivity tables
Quality Checks
- Every market size figure must cite a primary source or clearly state the derivation methodology
- Customer concentration metrics must reconcile to the audited revenue figures within 2% tolerance
- Competitive claims must be sourced — no unattributed assertions about competitor market share or strategy
- Growth projections must include at least a base, upside, and downside scenario
- All management representations used as inputs must be flagged as such and distinguished from independently verified data
- [VERIFY] Jurisdiction-specific regulatory requirements that could affect market access or expansion assumptions
- Final report must be reviewed against the original IC question set to confirm no gaps in coverage