Commercial Due Diligence

As private equity has exploded over the last 40 years, so has commercial due diligence. Commercial due diligence (CDD) has been a growing area of strategy consulting for some time, although the level of focus on this type of work varies heavily by the firm. Bain & Co for example has a much larger presence when it comes to working with the largest private equity firms compared to rival BCG. One of the best-known firms in CDD is L.E.K which was started by three Bain & Co partners and is a significant employer at both graduate and post-MBA levels.

Other firms such as OC&C, EY Parthenon, Strategy& deals, and CIL Management Consultants also specialize in transactional work in the form of either buy-side or sell-side due diligence.

Here are the basics to understanding the main differences between other types of strategy consulting and the transactional work associated with M&A, carried out by the firms listed above.

1. Client Base

The client base for transactional work, typically due diligence, will be private equity (PE) firms. The private equity industry is heavily concentrated in financial centers, specifically London and New York, although the industry has grown to such a size that particularly across the US, PE firms are increasingly springing up in cities such as Boston and Chicago, hence L.E.K and CIL Management Consultants having offices in the respective locations.

PE firms of all sizes will complete commercial due diligence, although the scope of the work varies largely depending on its purpose. More minimal work will be used to test the market and the viability of an asset in order to secure bank debt (this typically makes up a significant amount of the capital used in a private equity deal), whereas more extensive work is used to identify new opportunities, growth areas or markets for the target company. In many cases, PE clients will ask the consultants to identify other smaller targets that would make suitable acquisition targets in adjacent markets (otherwise known as bolt-ons).

2. The Work

Commercial Due Diligence (CDD)

A PE firm or a PE-backed company will hire consultants to perform commercial due diligence on an asset (company) they intend to purchase. This is designed to test the fundamentals of the market in which the target operates, the positioning of the target relative to competitors is used to identify any further growth opportunities. This work is also used by PE firms in conjunction with legal DD and financial DD to secure debt (leverage) for a particular deal.

Buy-side due diligence may also look to answer specific questions that potential investors want to address before completing the acquisition process.

Vendor Commissioned Due-Diligence (VCDD)

VCDD, as the name suggests, is paid for by the company being brought to market. However, the components of the report are largely the same as those seen in CDD. It is not the same as the information memorandum (IM) produced by corporate finance, as it is not considered a sales document and although the language is likely to be softer than that seen in buy-side work, the work should still be independent.

A typical due diligence piece of work will consist of:

• A review of the current business model

• Market drivers

• Competitive environment mapping

• Competitive performance analysis

• Customer feedback

• Identification of adjacent opportunities

Other Work

Strategy consultants gain a strong understanding of specific industries and markets when carrying out due diligence work. This is why a lot of work within consulting is won on credentials. It is very likely that if company A carried out buy-side due diligence, for example, the same firm would then be used to carry out sell-side due diligence when the asset next comes up for sale (typically 4-7 years later depending on the PE fund).

However, a lot of other work can typically come off the back of due diligence work. Examples of such work include:

• Market entry work: If company A already operates in the UK but wants to expand into continental Europe, which countries are most addressable?

• Target identification work: A company is looking to expand to new markets through acquisition. Which are the most suitable targets?

• Broader strategy work: This encompasses a broad range of work but includes work that could include identifying new sites for a restaurant chain, developing a go-to-market strategy, or supporting management through a significant time of change.

3. Interview Process

The interview process for the strategy consultants that specialize in transactional work will be similar to those that are more generalist. However, there will undoubtedly be a market sizing question. A big question for PE clients is typical “how big is the market” and “what is the headroom within this market?” As a result, almost every interview from these firms will include a market sizing exercise of some sort.

The interview process can typically be split into 3 parts:

1. Fit and competency questions

2. Market sizing questions

3. Case studies

Some companies will also include brain-teasers, although these are becoming less common.

Fit and Competency Questions

Typical of most jobs, particularly at the graduate level, a fit and competency interview are there to learn more about an applicant’s motives, experience, and understanding of the particular job and/or firm they have applied to.

Personal fit questions can be well-practiced, and such examples include “what would you consider your greatest strength?” Competency questions require an applicant to provide a real-life example where they demonstrated a particular skill. “Tell me about a time when you demonstrated leadership?” Such questions can be easily prepared for and become significantly easier with practice.

Market sizing questions

Market sizing questions (sometimes known as guesstimates) are often used in interviews because they require a mix of logic, math, and common sense. They can be asked as a standalone question or as part of a larger case interview. Candidates that are competent with market sizing questions can find them extremely easy to execute and if included in an unstructured interview it can result in the candidate having an extra 20% time to answer other questions.

All the top-tier consulting firms are likely to test their candidates with a market sizing question at some stage in the process, as it is considered a “back-of-the-envelope” calculation. For instance, you may be sat talking to a UK clothing retailer about their growth strategy and someone may put forward the idea of opening an e-commerce store inviting the question “how much revenue could we expect to generate from an e-commerce store?” and on the back of an envelope (or more likely a piece of paper), you could estimate the size of the UK’s online clothing market and apply a market capture percentage for the client to give them a rough figure. Being quick with these calculations keeps the conversation flowing with the client and maintains a good impression.

Case Studies

Every graduate that has applied to consulting jobs and been successful has passed at least one case interview. It is the most relevant part of the process for consulting jobs, and they are usually based on projects that the hiring firm has delivered for a client. It is an exercise that requires a logical approach to finding the problem and appropriate solution.​ A case interview is a business case that involves a strategic problem such as market entry or increasing profitability and as the interviewee, you are asked to recommend an appropriate strategy.

Read our full guide to case interviews.

Brain Teasers

Brainteasers have the potential to stump even the best candidates. That is because it often involves a certain perspective to find the right answer, without it, you can easily draw a blank. There are different types of brainteasers including riddles, lateral thinking, root cause analysis, practical questions, and more. They became popular as interview questions due to the requirement of both creative thinking and a logical approach.

The good news is that the use of brainteasers as interview questions is in decline and even a previous lawyer, Google, has dropped them from their question bank. The bad news is that they are still in use for many graduate employers and still have the potential to catch you out.

Although incredibly frustrating in a lot of ways, there is only a finite amount in circulation. Sometimes the names or numbers change, but fundamentally they are the same. This means that if you put in the time to practice, it is unlikely you'll be caught out in an interview.

4. Candidates, Lifestyle and Remuneration

Candidates

These firms aren’t lying when they say they look to recruit from a broad range of backgrounds. Due to the nature of the very high-level work, it is helpful to have staff from a variety of backgrounds, both in terms of education and previous work experience. Of course, strong math, commercial awareness, and the ability to solve complex problems are all critical skills, but these firms genuinely do look for variety in the people they recruit.

Competition for jobs remains fierce and a strong academic record from a top university is required.

Lifestyle

Whether you are a lawyer, investment banker, or consultant carrying out transactional work, the hours on a deal can be tough. Deadlines are firm and 60+ hour weeks are not uncommon. However, projects are short. This means you will be exposed to a large number of companies in a short period of time, and the learning curve is steep. Some firms have implemented initiatives to help improve work-life balance. For example, CIL Management Consultants rewards employees with additional days off following particularly testing projects. Despite this, if you are looking for a consistent work schedule, transactional work may not be for you.

Remuneration

Consulting is a well-paid profession for the most part. Transactional work is no different and all the firms are well aware that the lifestyle is testing, and therefore the pay should reflect that. Including bonuses, all the firms listed above will pay in excess of £40,000 for first-year London-based hires, and should you be lucky enough to do a stint across the Atlantic you can expect a lot more.

5. Differences Between Firms

The work many of these companies carry out will be broadly similar, however, many have an industry focus, and they also vary significantly by size and growth rate. It is worth attending an insight day or interview at many of these firms in order to gauge whether the fit is right for you.

6. Exit Opportunities

Whilst the exit opportunities for those who specialize in transactional work are likely to be approached by the same recruiters that approach more general strategy consultants, a larger portion of any given cohort is likely to make the move into private equity and venture capital, although many private equity companies will be looking for candidates to demonstrate experience financial modeling also. There are also a significant number of roles working on in-house growth strategy, identifying new markets or potential targets for large corporates.

Typical transactional strategy consultants will notice that recruiters become much more aggressive in terms of approaching prospective candidates for other roles once they pass the 1-year mark.