Home Business Insights & Advice The difference between the work scope of Commercial Due Diligence (CDD) and the work scope of financial due diligence (FDD)

The difference between the work scope of Commercial Due Diligence (CDD) and the work scope of financial due diligence (FDD)

by Sarah Dunsby
14th Dec 22 4:15 pm

Businesses rely on due diligence to discover the necessary information needed to make sound decisions. Commercial Due Diligence (CDD) and Financial Due Diligence (FDD) are two methods used to research potential investments. Both of these due diligence methods provide valuable insight into a company’s operations. However, they have key differences that can help you determine which method is best for your needs. Let’s explore the differences between CDD and FDD in closer detail.

Understanding Commercial and Financial Due Diligence

To understand both terms, let’s first define each of the two;

What is commercial due diligence?

Commercial due diligence focuses on understanding the commercial aspects of a business or investment opportunity. This type of due diligence looks at things like competitive analysis, customer base analysis, product/service offering reviews, contract reviews, market risk reviews, and channel strategy assessment. The goal of commercial due diligence is to identify any potential risks associated with an investment opportunity so that businesses can make informed decisions about whether or not the opportunity is worth pursuing.

What is financial due diligence?

Financial due diligence involves gathering financial information about a business or investment opportunity to assess its potential for success. This type of due diligence typically involves examining financial statements, reviewing accounts receivable/accounts payable records, analysing cash flow statements, assessing tax liabilities and compliance issues, performing profitability analyses, etc. The goal of financial due diligence is to gain an accurate picture of the financial health of a business so that investors can make educated decisions when deciding whether or not they should invest money in it.

Key points of differences between CDD and FDD

While both CDD and FDD are useful tools for discovering important information about businesses and investment opportunities, there are some key differences between the two methods that need to be taken into consideration before making a final decision:

1. Focus

CDD focuses more on the commercial aspects of a business or investment opportunity whereas FDD is more focused on the financial aspects.

2. Data and information gathering

The data gathered for CDD is usually more qualitative, such as customer surveys and competitive analysis reports. FDD involves more quantitative data gathering such as financial statements and profitability analyses.

3. Assessment

CDD assesses potential risks associated with a business or investment opportunity. FDD assesses the financial health of a business or investment opportunity.

4. Outcome

The outcome of CDD is usually an understanding of the commercial potential of a business or investment opportunity. The outcome of FDD is usually an understanding of the financial viability and potential profitability of a business or investment opportunity.

Overall, CDD and FDD are both essential tools for businesses that want to gain insight into potential investments. By understanding the differences between CDD and FDD, businesses can make more informed decisions about investing in a particular opportunity.  Furthermore, they can also use this information to mitigate any potential risks associated with their investments.

Ultimately, businesses need to understand the differences between CDD and FDD to make more informed decisions about potential investments.

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