What are the three types of due diligence?

The three ordinarily commissioned in a transaction are commercial, financial and legal. Operational and technical workstreams are added where the business depends on process or on systems, and tax, environmental and insurance reviews follow the nature of the asset.

What is the difference between financial and commercial due diligence?

Financial due diligence, or FDD, examines the quality of reported earnings, working capital and cash. Commercial due diligence, or CDD, examines the demand that produced them: who buys, why, and whether they will continue. FDD looks backwards; CDD looks forward.

How does financial due diligence differ from an audit?

An audit gives an opinion, under a defined standard, on whether statements are properly prepared, and it is performed for shareholders. Financial due diligence is commissioned by a buyer, follows no set standard, and asks which earnings are sustainable and what the buyer would inherit.

How long does commercial due diligence take?

Three to six weeks is usual. The determining factor is not the length of the window but how precisely the questions were framed before it opened. Work that begins from a fixed set of testable propositions reaches a conclusion sooner.

Who commissions commercial due diligence?

Usually the acquirer. Lenders commission it where the debt quantum depends on revenue durability. A seller may commission it ahead of a process, in which case a buyer should read it as an argument as well as a finding.

How is diligence on an artificial intelligence business different?

The commercial questions are unchanged. What differs is that the claimed advantage sits in an asset the buyer cannot inspect by reading a contract. Ownership, dependence on external providers and the cost of producing each output all become commercial matters.

What if the target has only a handful of customers?

Then the concentration is itself a finding. Where a small number of relationships carry the case, each is examined individually, including the tenure and disposition of the people who hold them.

How much does commercial due diligence cost?

It is priced by scope rather than by deal size: market coverage, the number of customer interviews, and the number of geographies. Published ranges are unreliable because scope varies so widely. A fixed fee against a written scope is the usual arrangement, and the scope is the part worth negotiating.

What is a red flag due diligence report?

A short report, commissioned early or during a competitive process, setting out only material issues rather than a full assessment. It is used to decide whether to continue. Where a bid proceeds the full workstream follows, and the red flag report should not be relied on in its place.

Notes · III Independent review

Commercial due diligence when the advantage is a model

In short

Commercial due diligence is an independent examination of whether a target’s revenues will persist. It asks who buys, why they buy, what those buyers would do if the target disappeared, and how the market is likely to move. Where the claimed advantage rests on a model, a dataset or an automated process, the same test applies to that asset. The buyer needs to establish whether the advantage is owned, whether it is durable, and whether customers would choose it again.

AdapData · 7 September 2026

Note

What is commercial due diligence?

Commercial due diligence is the buyer’s independent view of a target’s market position. It sits alongside financial due diligence, which examines the quality of reported earnings, and legal due diligence, which examines title and obligation. The commercial workstream examines demand. It establishes the size and shape of the market served, the position the target holds within it, the reasons customers renew, and the conditions under which they would not.

The output is a judgement rather than a description. A report that restates the management case in different words has not done its work. The buyer is paying for the parts of the case that do not hold.

What changes when the advantage is a model or a dataset?

Sellers increasingly describe their advantage in technical terms. The claim is that a model, a proprietary dataset or an automated workflow produces an outcome that competitors cannot match. That claim is commercial before it is technical, and it should be tested commercially.

Three questions settle most of it. Is the asset owned, or assembled from components any competitor could also assemble? Does the advantage compound with use, or merely persist? And does the customer pay for the asset, or for the service wrapped around it? Many targets hold a real capability that no customer has agreed to pay a premium for. That is a business, but not always the business the memorandum describes.

What should be settled before the data room opens?

Most commercial diligence is compressed into a few weeks. The work improves when the questions are fixed in advance rather than discovered during the process.

We frame the problem before the process begins, by writing down the two or three propositions on which the investment case rests in terms precise enough to be wrong. A proposition such as “the product is differentiated” cannot be tested. A proposition such as “customers renew because leaving would require them to rebuild eighteen months of labelled records” can be tested, and it can fail. Fixed in advance, these propositions determine which customers to approach, which documents to request, and what would count as a negative finding.

How is the demand side examined?

Demand is examined through the people who create it. Reference customers supplied by the seller are informative mainly about the seller’s view of its own best relationships. The more useful conversations are with former customers, with buyers who evaluated the target and chose otherwise, and with the staff who use the product rather than the executives who signed for it.

Three matters are worth pursuing in each conversation. What was in place before, and what it cost. What would happen next week if the product stopped working. And who inside the organisation would object to removing it. The third question locates the real switching cost, which is more often a person’s established habit than a technical dependency.

What does a defensible finding look like?

A defensible finding states what was tested, what evidence supports it, and how much confidence the reader should place in it. It separates what is known from what is inferred, and says plainly where the work could not reach, which in a compressed process is always somewhere.

It also survives contact with the seller. We prefer conclusions that the seller would recognise as fair and would still find inconvenient.

Questions

What is commercial due diligence?: It is an independent examination of a target’s market position, conducted for a buyer or a lender. It establishes who the customers are, why they buy, how durable that demand is, and how the market is likely to develop. It is separate from financial and legal due diligence.
What are the three types of due diligence?: The three ordinarily commissioned in a transaction are commercial, financial and legal. Operational and technical workstreams are added where the business depends on process or on systems, and tax, environmental and insurance reviews follow the nature of the asset.
What is the difference between financial and commercial due diligence?: Financial due diligence, or FDD, examines the quality of reported earnings, working capital and cash. Commercial due diligence, or CDD, examines the demand that produced them: who buys, why, and whether they will continue. FDD looks backwards; CDD looks forward.
How does financial due diligence differ from an audit?: An audit gives an opinion, under a defined standard, on whether statements are properly prepared, and it is performed for shareholders. Financial due diligence is commissioned by a buyer, follows no set standard, and asks which earnings are sustainable and what the buyer would inherit.
How long does commercial due diligence take?: Three to six weeks is usual. The determining factor is not the length of the window but how precisely the questions were framed before it opened. Work that begins from a fixed set of testable propositions reaches a conclusion sooner.
Who commissions commercial due diligence?: Usually the acquirer. Lenders commission it where the debt quantum depends on revenue durability. A seller may commission it ahead of a process, in which case a buyer should read it as an argument as well as a finding.
How is diligence on an artificial intelligence business different?: The commercial questions are unchanged. What differs is that the claimed advantage sits in an asset the buyer cannot inspect by reading a contract. Ownership, dependence on external providers and the cost of producing each output all become commercial matters.
What if the target has only a handful of customers?: Then the concentration is itself a finding. Where a small number of relationships carry the case, each is examined individually, including the tenure and disposition of the people who hold them.
How much does commercial due diligence cost?: It is priced by scope rather than by deal size: market coverage, the number of customer interviews, and the number of geographies. Published ranges are unreliable because scope varies so widely. A fixed fee against a written scope is the usual arrangement, and the scope is the part worth negotiating.
What is a red flag due diligence report?: A short report, commissioned early or during a competitive process, setting out only material issues rather than a full assessment. It is used to decide whether to continue. Where a bid proceeds the full workstream follows, and the red flag report should not be relied on in its place.

Engagement

We are usually engaged by an investor, a lender or an owner who wants a disinterested reading of a commercial case rather than support for a decision already taken. Work is senior-led and conducted in confidence. We reply personally to every enquiry; write to [email protected].