When it comes to mergers and acquisitions, having a strong understanding of a target business’s market and competitive position – and its commercial risks and opportunities – is essential.

Commercial due diligence (CDD) isn’t a new concept. However, its use has ramped up since the global financial crisis as acquirers and investors have recognised the need to move beyond historical financials to understand the outlook for a potential acquisition, and as M&A processes have become more sophisticated.

And yet CDD best practice guidance remains thin on the ground – but a new and hotly anticipated CDD guideline produced by ICAEW and due to launch on 10 September at Moorgate Place is set to change that.

Broad range of topics

The guideline, sponsored by ICAEW and co-authored by the KPMG Strategy Group and Luminii Consulting, will cover a broad range of topics including scope of work and methodology best practice, commissioning guidelines, ethical considerations, and the impact of AI on CDD.

Lushani Kodituwakku, Managing Director of Luminii Consulting and co-author of the ICAEW CDD guideline, says the guideline was incredibly timely as CDD grew in imoirtance, driven by increased market volatility together with changes to CDD practice fuelled by new technology.

Kodituwakku, a 25-year veteran of CDD, says the increasing volatility of markets has seen CDD evolve into a strategic tool. “Thirty years ago, CDD was a ‘nice to have’. But over time, people have realised a business that is doing well financially doesn’t tell the full story. 

“Understanding market opportunity, competitive position, customer retention, growth levers and risks that impact the achievability of a target’s business plan and its ability to maintain a sustainable differentiator are extremely important for a potential investor – whether that’s private equity, venture capital, a corporate or lenders,” Kodituwakku explains. 

Role and value of CDD in a deal process 

Fellow co-author David Larsson, KPMG UK’s lead partner for Deal Strategy and a long-standing CDD practitioner, concurs: “Market participants now recognise the role and value CDD plays in a deal process. At the same time, CDD has evolved and become a much more useful tool for all stakeholders, moving from being somewhat of a ‘tick-box’ exercise in the past, to becoming the starting point of the acquirer’s value creation plan. Much more of the focus is now on what can be achieved in the future, and how.”

For commissioners of CDD, ICAEW’s best practice guideline offers advice on the CDD methodology, the typical scope of work, practitioner selection and commissioning, and on getting the most out of the process. It also delves into ethical issues including confidentiality and commissioning guidelines on independence, and details of legal requirements. There’s also a section on use of AI in CDD.

“Practitioners can use AI tools to automate time-consuming manual tasks,” Kodituwakku explains, “and when used with care to mitigate the risk of ‘AI hallucination’, the combination of human and machine can deliver a more innovative and enhanced CDD product. This puts the onus on practitioners to stay on top of technology developments and implement them in our work processes.” 

Breadth of sources and analyses

For clients, one of the appealing elements of CDD is the breadth of sources and analyses practitioners make use of to reach conclusions, but this is also a reason why it has taken so long for guidelines to emerge, Larsson says. 

“In writing the document, we were very conscious that we wanted to offer commissioners a baseline of what they could ‘normally’ expect a CDD to do and how,” he says. “We also wanted to make it clear that, probably unlike most other forms of due diligence, CDD should consider a wide range of data sources, tools and methodologies to get to the right answers. Strong CDD execution is highly structured and efficient, anchored in factual analysis, but also creative in thinking and conclusion.”

Kodituwakku adds: “Getting the scope of work right is probably the most important part of commissioning a CDD and this document will give commissioners insight on how to get the best out of the practitioners.”

Setting the standard on CDD

From a practitioner perspective, Kodituwakku says the guideline sets the standard on how to deliver CDD. “The ICAEW Corporate Finance Faculty’s initiative to develop a comprehensive CDD guideline is a highly welcome advancement. It brings much-needed clarity, rigour, ethical standards, and innovative tools to a discipline that has evolved over 30 years. 

“We believe this guideline will serve as a valuable and practical resource, not only for CDD practitioners, but also for investors, lenders, CF advisers and businesses involved in transactions. By outlining the key steps to maximise the effectiveness of CDD, both during the deal process and in shaping post-deal strategy and value creation, it sets a new benchmark for best practice in the field.”

David Petrie, ICAEW’s Head of Corporate Finance, says: “In the age of AI, understanding and development of commercial opportunities is changing very quickly. Advisers and investors need to understand how and why a good CDD report has become a fundamental part of so many deals.”

Book your place at the launch event on 10 September, after which time the guideline will be made available both in print and online.