Understanding commercial due diligence
Bone Prince Lekgotle | Friday August 29, 2025 12:24
In development finance, CDD has emerged as a foundational tool for making informed and responsible investment decisions. It is a systematic investigative and analytical process designed to assess the commercial viability of a proposed investment by critically evaluating the market environment, competitive dynamics, regulatory frameworks, and the financial assumptions that underpin a business model.
CDD is particularly vital for capital-intensive, high-risk, or highly regulated ventures, such as those in the pharmaceutical, biotechnology, or healthcare manufacturing sectors, where sustainability is contingent upon robust strategic planning and accurate demand forecasting.
These sectors often involve complex supply chains, stringent regulatory regimes, and significant public health implication factors that heighten the importance of precision in evaluating the investment proposition. In such contexts, CDD functions as a litmus test, quickly revealing whether a proposal is commercially sound or fundamentally flawed before substantial resources are committed.
Triggers for Commercial Due Diligence
CDD is typically initiated when a development finance institution (DFI), public-sector funder, or private investor is considering financial support for a project that demonstrates one or more of the following characteristics: • Significant capital outlay, often exceeding standard thresholds for funding consideration; • Operational and/or regulatory complexity, especially in industries governed by multi-jurisdictional compliance requirements; • Potential for economic transformation, including job creation, industrial diversification, or technology transfer; • Regional or international market exposure, particularly where foreign licenses, regulatory approvals, or cross-border logistics are involved; and • Reliance on sensitive or complex value chains, such as those in essential medicines, biologics, or sterile manufacturing.
In these contexts, CDD functions as a strategic filter eliminating underdeveloped or misaligned proposals while strengthening promising ones for further development and scalable execution.
Scope of a Commercial Due Diligence assignment
A comprehensive Commercial Due Diligence exercise typically spans five interrelated dimensions:
Market Environment and Demand Assessment
This includes a rigorous analysis of the regulatory regimes, licensing and statutory clearance procedures, and institutional oversight in the target markets. It involves assessing market size, segmentation, growth trends, consumer demographics, and demand behaviour, including the mechanics of sales channels, price regulation, and purchasing frameworks such as public procurement or private-sector distribution.
Industry and Competitive Landscape
An in-depth mapping of the industry’s structure is conducted, identifying key competitors, suppliers, and customers. Analytical frameworks such as Porter’s Five Forces are applied to evaluate competitive pressures, profitability margins, barriers to entry, and substitute threats. This section may also involve value chain analysis and industry benchmarking, providing a clearer view of where the proposed project fits within the broader ecosystem.
Legal and Regulatory Compliance
This component examines compliance with local, regional, and international regulatory requirements. It includes the review of manufacturing and trading licenses, intellectual property considerations, facility requirements, taxation, insurance, corporate governance, and statutory obligations. For pharmaceutical projects, this entails evaluating harmonised standards such as those of SADC and other transnational bodies.
Commercial Feasibility and Financial Model Analysis
CDD validates the assumptions embedded in the project’s financial model, including pricing strategies, unit margins, fixed and variable costs, and capital expenditure. It includes sensitivity testing, stress-testing, and alignment of sales forecasts with distribution strategies. Robust financial modelling is critical to ascertain both near-term liquidity and long-term sustainability.
Risk Identification and Strategic Partnerships
This segment focuses on identifying and mitigating market, regulatory, operational, and geopolitical risks. It also highlights potential strategic alliances whether in the form of local partners, distributors, or contract manufacturing organisations that can improve project viability. A thorough understanding of macroeconomic, political, and supply chain variables is essential for this analysis.
Why CDD is Critical in Development Finance
In many DFIs, the findings of a Commercial Due Diligence exercise are the primary determinant for whether an investment is approved. The process serves several core objectives: it ensures alignment with national or institutional development goals; it provides evidence for de-risking capital deployment; it strengthens the negotiation posture with co-investors and stakeholders; and it mitigates the risk of misallocating scarce public resources. In the case of highly technical or regulated sectors, CDD serves to validate assumptions, test the logic of the business model, and affirm the capacity of the project team to execute. Ultimately, a well-executed CDD not only enhances investor confidence but also supports the establishment of resilient, high-impact projects that are capable of achieving commercial success while advancing public interest. Eligibility criteria for conducting
Commercial Due Diligence
Due to the technical depth and strategic importance of CDD, particularly in regulated, capital-intensive sectors, only qualified and experienced service providers should undertake such assignments.
*Bone Prince Lekgotle is the lead consultant at Infinite Capabilities, specialising in business development, accounting, and taxation, with a proven track-record of guiding SMMEs and start-ups to growth and compliance.