Due Diligence
Before committing capital, investigate. This page covers the three-phase diligence process and the four commercial lenses consultants use to decide whether a business is worth buying — a framework that applies to any "should we invest" question, not just private equity.
Due diligence is professional scepticism turned into a process. A banker pitches the deal; the diligence team's job is to find the reason not to do it. In a case, that mindset is the whole game — you are not asked to describe the target, you are asked to hunt for the deal-breaker hiding in the market, the moat, the numbers, or the customer base, and to translate what you find into the price you should pay.
TL;DR · Key Takeaways
Key Takeaways
- You will run diligence in three phases — frame the investment, investigate across the four lenses, then decide and plan — and recognise the framework applies to any "should we invest" case.
- You will pressure-test across market, competition, business, and customer, leading with whatever would most threaten the investment thesis rather than describing the business evenly.
- You will approach DD as professional scepticism — state a thesis and actively try to break it, rather than hunting for confirmation that the deal is good.
- You will probe for the classic deal-breakers — fake moats, unsustainable unit economics, and especially customer concentration — because one fatal flaw can sink an otherwise healthy business.
- You will translate every finding into value: a weak lens lowers the price you should pay or re-prices the deal, rather than simply "looking bad," and a red flag may mean re-price rather than walk.
Commercial due diligence is the part of a deal a consulting firm actually runs — assessing whether the business is sound, while bankers and lawyers handle the financial and legal pieces. Although it is the classic private-equity step, the framework generalises to any case where a client asks "should I invest in, acquire, or enter this?" If you can run commercial DD, you can structure a large share of investment cases.
The diligence process
Diligence runs in three phases: frame the investment, investigate it, then decide and plan. The middle phase is where the analysis lives; the bookends set it up and conclude it.
This is market entry with an exit
Notice the overlap: the diligence phase asks "is the market attractive and can this business win in it" — the same questions as a market-entry case. Due diligence adds the investor's lens on top: not just "is this a good business" but "can we buy it at a price that earns our return, and how do we eventually exit." If you know market entry, you are most of the way to commercial DD.
The four commercial lenses
The heart of diligence is four lenses applied to the target. Market and competition test whether it sits in a good position; business and customer test whether that position is durable enough to rely on the cash flows you are paying for.
Customer concentration is the classic killer
A business can look healthy on every other lens and still be a bad investment if one or two customers make up most of its revenue — lose them and the cash flows you valued vanish. Always probe concentration: by customer, by product, by geography, by channel. A "strong" business resting on one client is a fragile one, and spotting that is exactly what diligence is for.
Navigating it live
Run a diligence case as a thesis you actively try to break. State why this should be a good investment, pressure-test that claim across the four lenses, and convert what you find into a price and a recommendation.
Worked mini-case
A short example of the diligence mindset — note how the candidate states a thesis, then immediately hunts for what could break it, and converts a red flag into a re-pricing rather than a flat no.
Diligence on a D2C brand
A PE fund is considering buying a direct-to-consumer skincare brand growing 40% a year. They've asked us to run commercial diligence. How would you approach it?
I'd start with the investment thesis: the bull case is presumably "a fast-growing brand in a large, premiumising skincare market with loyal repeat customers, that a fund can scale further and exit in five years." My job is to pressure-test that, hunting for what could break it. I'd go across four lenses, but given a 40%-growth D2C brand, I'd front-load two suspicions: is the growth bought with unsustainable marketing spend, and is retention real or is it churning and re-acquiring?
Good instincts. Why those two first?
Because they are the classic D2C deal-breakers. On the business lens, many D2C brands grow fast by spending heavily on digital ads — if customer acquisition cost is rising and lifetime value is not, the growth is unprofitable and stops the moment you slow spend. On the customer lens, a brand can show big revenue growth while quietly churning customers, masking it with new acquisition. So I'd want the unit economics — CAC, LTV, payback period — and a cohort retention curve. On market and competition I'd check that the category is genuinely growing and that the brand has a real moat beyond marketing, because skincare has low barriers to entry.
Say diligence finds retention is strong, but CAC has doubled in two years as the brand scaled. What do you tell the fund?
That changes the price, not necessarily the answer. Strong retention means the customer base is real — that supports the thesis. But doubling CAC means future growth is more expensive than the historical 40% implies, so I'd lower my forward growth and margin assumptions, which lowers the valuation. My recommendation would be: the business is fundamentally sound and worth owning, but not at a price that extrapolates 40% growth cheaply — re-price the deal to reflect rising acquisition cost, and make a post-deal plan to diversify acquisition channels away from paid ads. So: invest, but at a lower price and with a clear value-creation plan.
The candidate stated the thesis, front-loaded the most likely deal-breakers for that business type, distinguished the red flag that kills a deal (fake retention) from the one that re-prices it (rising CAC), and converted the finding into a valuation adjustment plus a value-creation plan rather than a binary yes/no.
State a thesis, hunt the likely deal-breakers first, and turn findings into price, not just verdicts.