The Operating Partner's Pressure-Test for Commercial Due Diligence

The financial due diligence on your portfolio company acquisition tells you what happened. It doesn't tell you whether the revenue is real, whether the pricing is defensible, or whether the customer base will grow after close. Commercial due diligence answers those questions. If you're relying on a financial model and a management presentation to answer them instead, you're pricing risk you haven't actually assessed.

The 100-Day Window

Your portfolio company has a 100-day window after close where you can set the commercial agenda without triggering organizational resistance. After 100 days, decisions start requiring political capital you haven't yet built. The CDD work you do before close determines whether you enter that 100-day window with a roadmap or with a set of questions you're still trying to answer.

The four commercial facts you must know before you sign: your portfolio company's realized average selling price as a percentage of list price, their net revenue retention (NRR) by customer cohort, their customer acquisition cost (CAC) payback by acquisition channel, and the percentage of revenue in accounts that have never received a price increase. These four numbers tell you more about the quality of the commercial model than any management presentation can.

If you don't have all four before close, you don't have commercial DD. You have commercial hope.

The Framework

A 30-day commercial due diligence sprint for a private equity (PE) acquisition covers three sequential workstreams.

Step 1: Build the pricing realization waterfall. Request a deal-level extract from the CRM for all contracts signed in the previous 24 months, including list price, all discounts applied, final contracted annual contract value (ACV), and any non-standard terms. Calculate the average discount by deal size, by rep, by customer segment, and by quarter. You're looking for three things: whether the discount rate has been trending up (a sign of market or competitive pressure), whether a small number of reps are driving disproportionate discounting (a governance problem), and whether the gap between list and pocket price has been widening with deal size (a sign that your enterprise pricing model is broken). A waterfall gap wider than 20% in a business that's been operating more than three years is a commercial architecture finding, not a sales execution finding.

Step 2: Run a cohort NRR analysis by acquisition vintage and customer segment. Pull revenue for every customer cohort going back four years. Calculate net revenue retention annually for each cohort. Look for divergence between early cohorts (who grew up with the product) and more recent ones (who may have been acquired into a different ideal customer profile (ICP)). If NRR is declining with more recent cohorts, your portfolio company has either expanded its ICP beyond its core competence or shifted its pricing model in a way that's reducing expansion. Both are fixable, but both require a different value creation plan.

Step 3: Assess the deal desk and discount governance architecture. Request documentation of the current discount approval process: what's documented, what requires approval, and what gets approved without documentation. Interview three to five reps and three to five deal desk approvers separately. Ask them to describe how a non-standard deal gets approved. If the answers are inconsistent, you don't have a governance process. You have an oral tradition. That tradition will not survive a leadership transition, which you may be planning.

The Failure Case

An operating partner completed a software acquisition without running structured commercial DD. The CIM showed $73M annual recurring revenue (ARR), 112% NRR, and a 90-day average deal cycle. These numbers were accurate.

Post-close, a commercial diagnostic revealed: a realized discount rate of 26% against a list price that had been artificially inflated to show a better-looking pocket price ratio, NRR of 112% driven almost entirely by two large customers that represented 31% of ARR, and deal desk approvals that were being processed informally through a single VP who was planning to leave.

Before close: $73M ARR, stated NRR 112%, deal cycle 90 days.

After close reality: Customer concentration in two accounts at 31% of ARR, VP of Sales exit confirmed at Day 45, realized discount 26%, no documented governance.

After 12-month intervention: Customer concentration reduced to 18%, new VP installed, governance documented, realized discount 16%.

The value creation plan was sound. The 100-day window was spent fixing commercial architecture surprises that a structured CDD would have surfaced before the price was set.

What to Do This Week

If you're in the CDD phase of an active deal, request the deal-level contract extract from the management team this week. Don't wait for the data room to be curated. The raw CRM export will tell you more than the packaged version.

If you're already post-close, run the same analysis. What you find will be your value creation plan.

For a structured way to scope your commercial diagnostic, start at Assess Your Commercial Health.

This connects to the value creation framework in The Hidden Costs of Bad Private Equity Value Creation and to the operating model work in The Operator's Guide to Commercial Operating Model.