Executive Paper
Commercial Due Diligence Beyond Financial Ratios
How to assess revenue quality, dependency, cost to serve, channels and execution capacity.
Executive summary
Ratios describe part of a business, but do not by themselves establish that revenue is repeatable, contracts transferable, operating capacity sufficient or counterparties acceptable. Defensible commercial due diligence connects figures, contracts, customers, operations and compliance, then turns each material discrepancy into a decision condition.
Why financial statements are not enough
IFRS 15 shows that revenue recognition depends on the contract, performance obligations, transaction price and allocation. The accounting figure is necessary, but does not by itself reveal concentration, exceptional discounts, returns, owner dependence, contract renewal or cost to serve. Commercial review should reconcile revenue with contracts, orders, invoicing, cash collection and delivery.
Five verification planes
- Market and demand: accessible market, competitive dynamics and buying evidence rather than broad estimates alone.
- Customers and revenue: concentration, retention, terms, customer-level margin, recent losses and pipeline quality.
- Offer and operations: capacity, critical suppliers, lead times, quality, systems, key people and the actual cost of delivery.
- Contracts and transfer: rights, renewal, termination, change of control, exclusivity, claims and outstanding obligations.
- Counterparty and compliance: identity, ownership and control, business rationale, sanctions, reputation, performance history and payment terms.
Triangulation and discrepancies
Material assertions should be checked against more than one source where possible. OECD guidance treats due diligence as an ongoing, risk-based process across operations, supply chains and business relationships. The US Department of Justice includes, for third parties, business rationale, qualifications, associations, contracts, payment terms, work performed and monitoring. These frameworks do not replace applicable law, but support a review that goes beyond receiving documents.
How the work should change the decision
The output should not be a folder of findings but a traceable position: proceed, renegotiate, cap exposure, impose a condition precedent, investigate further or withdraw. Each material point should state the evidence, contradiction, potential impact, owner and deadline. In merger review, the UK competition authority likewise notes that evidence weight is case-specific and may include internal documents, customer behaviour, alternatives and capacity constraints.
Limits
Due diligence reduces uncertainty; it does not guarantee forecasts or eliminate fraud, market change or poor execution. Legal, tax, financial, technical and compliance work should be integrated where the risk requires it.
Sources and scope
- IFRS Foundation, IFRS 15 Revenue from Contracts with Customers. Primary source; publication or version: ; accessed: .
- OECD, Due Diligence Guidance for Responsible Business Conduct. Primary source; publication or version: ; accessed: .
- US Department of Justice, Evaluation of Corporate Compliance Programs. Primary source; publication or version: ; accessed: .
- UK Competition and Markets Authority, Merger Assessment Guidelines. Primary source; publication or version: ; accessed: .
These sources support the framework and its general claims. Applying it to a specific decision requires current data, transaction documents and specialist advice where appropriate.