Commercial Due Diligence in a New Economic Reality

Covid-19 has not only held the world in its grip but has also triggered a lasting digital revolution. The world has taken a digital quantum leap. A shift towards widespread adoption of new digital tools and processes that would normally take a decade has suddenly become a reality. Digital meetings have become standard, extensive business travel to meet or prospect clients has ended, and digital signatures are widely accepted. Companies are no longer confined to physical borders; recruiting talent across borders is now a fact. This shift not only concerns processes but has also transformed the labor market. Employees have experienced the benefits of remote work and are hesitant to return to the daily commute to the office.

As if the impact of Covid wasn’t enough, in 2022, we were again shaken by the largest military conflict in Europe since World War II. Suddenly, geopolitics became an unavoidable subject. Adding to this, supply problems, including vital raw materials and energy, combined with the consequences of lockdowns, led to an unprecedented surge in prices and inflation levels not seen in decades.

Companies are entering a new reality with challenges and opportunities:

• Digitization is inevitable

• Unprecedented price hikes challenge companies to adjust their cost structures

• Consumer purchasing power has taken a hit and calls for creative approaches

• Sustainability has become an undeniable factor in the business landscape
Globalization is under discussion, requiring new strategies

• Risks on both the supply and demand sides call for resilient business planning.

Are companies facing an impossible task in this new economic reality? On the contrary, these challenges create opportunities for those willing to adapt and innovate. At Braintower, we believe that every challenge is an opportunity to grow and excel. Therefore, we introduce a powerful ally to guide you through this complex reality – our Commercial Due Diligence (CDD) in the form of a Commercial Stress Test.

What is Commercial Due Diligence?

Commercial Due Diligence is a thorough examination that helps companies make informed decisions in situations like mergers, acquisitions, or strategic changes. It involves analyzing commercial aspects such as market trends and competition through data collection and discussions with experts. The goal is to gain in-depth insight into current and future business performance, identifying risks and opportunities. Based on these insights, companies can refine their strategies and optimize growth plans, leading to better business decisions and competitive advantage.

What does a Commercial Stress Test entail?

In a time when speed is crucial in credit applications, we often see that business reviews are limited to financial figures such as annual statements, updated balances, and cash flow planning. But is it sufficient to ‘know’ the customer based solely on these data and assess the application? Especially now, in times of unprecedented challenges, it’s crucial to look beyond the usual routine to make an accurate assessment.

This is where the Commercial Stress Test comes in. It’s more than just an evaluation; it’s an in-depth analysis that touches the core of every business: its customers and the products or services it offers. This test not only provides an objective insight into a company’s chances of success in the post-Covid19 period and the new geopolitical world but also reveals the essential elements that determine a company’s success.

The Commercial Stress Test goes beyond superficial analysis. It delves deep into the context in which the company operates and investigates what factors determine its ability to thrive. It assesses the commercial foundation using key figures and a critical evaluation of the updated business plan. But that’s not all – we also look at the processes, the people involved, and the required competencies. Because these elements make the difference between stagnation and growth.

The Key to Success: Our Market Context Analysis

To assess both the short-term potential and long-term perspectives of a company, it’s important to understand what will happen to the sector or industry in the post-Covid19 and new geopolitical period and whether the company has what it takes to be a promising player.

The key to success begins with understanding the driving forces behind an industry. What are the crucial factors that determine which players are at the top and which lag behind? Our analysis delves deep into these core questions and reveals the strategic rules that every successful enterprise follows.

Whether it’s acquiring essential certificates required by the market and customers, cultivating an agile company culture, achieving a low cost structure, or embracing groundbreaking R&D and innovation, we reveal the key to success that can elevate your company to new heights.

But that’s not all – in today’s world, a solid digital/multichannel market approach is indispensable. Our analysis not only identifies success factors but also provides insight into how you can effectively leverage them to outperform your competition and increase your market share.

The Power of a Healthy Commercial Foundation

A foundation for success begins with a thorough evaluation of a business dossier’s commercial base. Is it healthy and resistant to current market challenges? Let’s dive deeper to understand the essence.

1. Thorough analysis of key figures

Every company finds its reason for existence in the loyalty of customers willing to embrace the value of its products and services. Without this support, no salaries, no growth, no future.

We meticulously examine the development and stability of the customer portfolio, payment behavior, revenue, and margin contributions of different customers and products/services. When analyzing revenue and margins, we also critically assess the dependency on sales channels and geographic distribution. Particular attention is paid to the company’s ability to pass on cost increases to its customers and the impact of these price increases on the demand for its products and/or services. In some sectors, a shift may have occurred in terms of the purchasing channel; the question is whether these customers will return to their old purchasing channel and whether the company efficiently serves the growing, and sometimes new, channels.

2. Feasible “post-COVID-19 new reality commercial plan”

In a world full of changes, it is crucial for businesses to find stability not only in the present but also in the future. This calls for a new (medium to long-term) plan that seamlessly aligns with the rapidly evolving market context. This context presents both risks and opportunities.

The “old” plans will often no longer be relevant…(and should be at the very least evaluated against the new reality). A critical evaluation of all assumptions within such a plan is essential to determine if previous goals, on which prior business financing was based, are still achievable. Assumptions about market developments, potential customers, and margin increases often turn out to be too optimistic, while the necessary resources (people, systems, commercial efforts) for success are frequently underestimated.

When assessing such a plan, it’s necessary to understand how revenue and margin development has occurred in recent years through a thorough analysis of the contribution of different customers, various products/services, and pricing in the outcome.

One additional aspect in scrutinizing the plans is the state of the company’s digitalization. A future-oriented approach requires a strong focus on digital transformation. This involves not only embracing technological innovations but also seamlessly integrating these digital solutions into all aspects of your business operations.

A robust ‘new reality plan’ goes beyond strategy alone; it also involves preparation for unforeseen circumstances. Therefore, having clear contingency plans for all critical business processes is vital. This includes the supply chain, pricing, and order-to-cash processes.

3. Audit of processes and people generating sales, margin, and profit

Analyzing the processes and teams responsible for generating sales, margin, and profit is an extremely important step. It’s crucial to gain a clear understanding of the organization and processes that should lead to a successful commercial approach. A top priority here is the entire order-to-cash process.

In a market context where traditional client visits and trade fairs (often the places where new customers are acquired) have lost importance, it’s necessary to check if the company has prepared or implemented alternative processes. This includes marketing and sales automation, as well as targeted training for the sales team and customer service. With customer interactions now becoming hybrid, involving digital/remote communication alongside personal meetings, it’s crucial to ensure that companies focus even more on customer acquisition. Setting up these initiatives requires a robust CRM system, thorough cost calculations, and a well-thought-out multi-channel approach.

Another process deserving special attention is the supply chain and demand planning. This is crucial to ensure that the company doesn’t experience shortages in service levels while also preventing the accumulation of excessive inventories that need to be financed.

In the longer term, it’s also advisable to examine the innovation and NPD (New Product Development) process. This helps ensure continuous renewal and competitiveness.

Moreover, attention is given to the KPIs used to monitor business performance, such as revenue, margins, market shares, and evolution compared to market and sector benchmarks, as well as the supporting systems.

4. Assessment of required sales & marketing competencies

To effectively execute a “recovery plan” and seamlessly transition to implementing the business plan, certain skills in sales and marketing are absolutely essential. Mapping out both the required and already present skills, and engaging in discussions with the commercial management, quickly reveals strengths and whether the knowledge, expertise, and structure are in place to successfully execute the plan.
5 crucial questions in A Commercial Stress Test:

• What is the quality of the customers?

• is the quality of the products/services? To what extent can these be easily (and sustainably) replaced?

•’s the status of digitalization? How does the company compare to the sector?

•’s the geographical spread? How dependent is the company on other countries/regions, both on the sourcing and customer sides?

• Can the company structurally pass on cost increases to the customer without impacting sales?

In today’s challenging world, having answers to these five core questions is crucial. They provide insights that not only strengthen your business performance but also offer strategic guidelines to navigate these new times with confidence and resilience.

Benefits of a Stress Test

1. Increased success rate and lower credit risk:

A good understanding of the market context and competitive position, along with assessing a “margin protection plan,” allows for better evaluation of additional financing needs and thus reduces risk.

2. Objectivity:

A Commercial Stress Test provides additional objective arguments for evaluating a credit application. All stakeholders receive an independent second opinion on the business case and the “new reality plan.” This is not influenced by personal interests and therefore provides the most realistic view possible.

3. Operational efficiency and improvements:

The audit for due diligence reveals opportunities for improvement within the company. It forms the basis for a refined recovery plan and, subsequently, a commercial plan. It provides insight into potential short-term initiatives that can be set up to quickly regain traction and align the (medium-term) plan with the new reality.

Our Expertise

BrainTower was one of the pioneers in Commercial Due Diligence. The Commercial Stress Test is based on the same foundations. The CDD was developed based on insights gained by individuals like Vincent Lanckmans and Jan De Lancker, who were involved in corporate activities during acquisitions and observed insufficient consideration of commercial aspects, leading to unpleasant consequences afterward. Drawing from this practical experience, BrainTower developed its own methodology, which has also been deployed in the Middle East since 2008. Since the first CDD in 2003, BrainTower has been involved in transactions in FMCG, retail, OTC (pharma), consumer electronics, telecommunications, services, media & entertainment, and construction. BrainTower Middle-East, led by Salim Al-Barami, is based on combining cultural understanding with best practices from Western Europe.

Methodology

Our methodology is based on a combination of data analysis (internal data supplemented with external data where possible) and interviews with company management and industry insiders. By employing a project team with diverse skills and practical experience, we can systematically analyze every aspect of the commercial plan and the organization.

Based on qualitative and quantitative data, a report is generated. This report provides an objective judgment based on thorough market knowledge and a deep understanding of commercial processes and business models. …and of course, confidentiality is ensured.

Timing & budget

Speed is crucial. That’s why BrainTower deploys a team of experts for every Commercial Due Diligence Stress Test. This way, we can deliver a report within 2 to 4 weeks. The timeline depends on the availability of data (which should be fundamental data) and management.

A Commercial Due Diligence Stress Test is the best insurance against misguided business financing. A basic assessment starts from €17,500. Take the first step toward a strong future today and contact us for an exploratory conversation.