Commercial Due Diligence for Life Science Tools and Diagnostics Companies

Commercial due diligence is the part of a transaction review that tests whether a company's revenue plan is believable. It looks at the market, the customers and the commercial organization, and asks whether the growth in the plan is likely to happen.

It's different from financial due diligence, although the two are often run together. Financial due diligence confirms that the historical numbers are accurate. Commercial due diligence asks whether those numbers will repeat and grow after the deal closes.

Most commercial due diligence concentrates on the market: its size, growth, competitors and the company's share. That work matters, but it often spends less time on the commercial engine itself, meaning how the company forecasts, builds pipeline, sells, and keeps its customers. In tools and diagnostics, that is usually where the risk sits.

Enterprise value is a multiple times a metric. The metric is last year's revenue or EBITDA, and the multiple reflects how confident the buyer is that it will repeat and grow. Commercial due diligence is where that confidence is tested.

Strong commercial execution rarely earns a premium multiple on its own. However, weak execution reliably produces a discount, and that discount is usually visible about 18 months before an exit. Buyers start from a market reference multiple and subtract turns for risks they can document.

The five discounts that commercial due diligence most often uncovers are:

• Comparable set: revenue mix and consumable pull-through place the company with lower-multiple peers.
• Underwriting: past forecasts have not matched actuals, so the buyer underwrites a lower number than management's plan.
• Repeatability: growth depends on a few people or a few accounts.
• Transition: revenue is at risk if a key leader leaves after the deal.
• Structure: the buyer moves part of the price into earn-outs and holdbacks to cover what it cannot verify.

Most tools and diagnostics companies sell on a razor and razorblade model. A $50,000 instrument can generate more than $200,000 in lifetime consumables, so a placement is only the start of the revenue, and the value of the business depends on what happens after it.

That's why a buyer should look at three separate measures rather than one revenue forecast:

• Instrument (capital) forecast: deal-driven and tied to customer budget cycles, so it is naturally uneven.
• Consumable (recurring) forecast: driven by utilization and pull-through per placed instrument.
• Customer retention: net revenue retention, attach rate and the share of the installed base that has gone dormant.

When these are combined into one number, a strong capital quarter can hide a falling consumable run rate. A buyer who separates them will find it, so it's better for management to find it first.

The Commercial Readiness Assessment (CRA) is a 42-statement diagnostic completed independently by up to five leaders, typically the CEO and the heads of sales, marketing, customer success and finance or commercial operations. Each statement is rated 1 to 5 against written descriptions of each level.

The statements cover the nine pillars of the Commercial Operating System©, and the results are weighted into the Commercial Readiness Index (CRI©), a score from 0 to 100. The report also shows a pillar heatmap, a ranked list of gaps, the places where leaders disagree, and a 90-day plan.

Because the CRA produces a number rather than a narrative, it can be compared before and after a deal, or across companies in a portfolio.