What Private-Equity Due-Diligence Cases Actually Test

Most case prompts are written from the point of view of a company with a problem: margins are falling, a competitor is entering, a launch is stalling. A due-diligence prompt flips that. The client is an investor thinking about buying a company, and the problem is whether to pay the asking price. The question is not how to fix the business. It is whether the story the seller is telling is true enough to put money behind.

That reframing is why this case type trips up candidates who reach for a standard profitability tree. It also explains why it appears in interviews at firms with large private-equity practices. Which cases you see varies by firm, office and year, so treat this as preparation for a case type you might get, not one you will.

What commercial due diligence is

Before a private-equity fund buys a company, it typically commissions several independent checks. Accountants or specialist advisors look at whether the reported earnings are real. Lawyers look at contracts and liabilities. Operational advisors look at systems and facilities. Commercial due diligence is the check on the outside-in story: how big and how fast-growing the market really is, where the company stands against its competitors, what its customers think, and whether the growth plan in the seller's documents is believable.

These projects are commonly compressed into a few weeks because the sale process has its own deadline. The output is one input the investor uses in deciding whether to bid, at what price, with what risks, and with what plan for the first years of ownership. Several firms run large practices doing this work, and some specialist firms build their business around it.

How the case differs from a normal case

1. It is built around a decision and a clock

You are expected to end with a verdict (pursue, pursue at a lower price, or pass) and the two or three things that would change it. An answer that ends with a list of interesting observations is an incomplete answer here.

2. It is hypothesis-first

Diligence teams typically do not survey the whole world. They form an investment thesis on day one (this is a good buy because the market is growing, the company is winning share and margins can rise) and spend the project trying to break it. In an interview, say your thesis early and say which part you will test first.

3. It runs on "what must be true"

The price implies a return the investor needs. The return implies growth and margin the business must deliver. Those imply things about the market and the competition. Working backwards from price to required assumptions, then asking which assumption is weakest, is the core move.

4. The buyer is financial, not strategic

In the M&A four-lever framework, a strategic buyer can justify a price through synergies with its own business. A financial buyer usually has no such operating overlap, apart from planned add-on acquisitions. Returns come mainly from three places: earnings growth, the multiple of earnings at which the business is eventually sold, and cash used to pay down debt. Commercial diligence mostly speaks to the first, which is why the case spends so much time on growth and margin.

A five-block structure that holds up

Here is a structure you can adapt. The blocks are generic. What makes it a diligence structure is how you use it.

1. Market. How big is it, how fast is it growing, and what drives that growth: more units, higher prices, a new use? How cyclical is it, and what could change the rules?
2. Company. What does it sell, to whom, and why do customers stay? Look at retention, customer concentration, unit economics and pricing power, and ask whether past growth was organic or bought.
3. Competition. Who else serves these customers, on what basis do they compete, and is the company gaining or losing share? Who could enter, and what could replace it?
4. Forecast and risks. Is the seller's plan consistent with the market, the share trend and the margin story? What does the downside case look like, and what breaks first?
5. Value-creation levers. What could a new owner do that the current one has not: pricing and mix, new products or geographies, cost, add-on acquisitions?

You will not cover all five in 25 minutes, and you should not try. Pick the block that carries the biggest assumption, go there first, and say why.

A worked mini-case

The numbers below are fictional and round on purpose. They are not market data.

Step 1: Set up the arithmetic

You confirm two simplifications with the interviewer: no debt, the business is sold at the same 10x multiple in year five, and you ignore the cash it generates along the way. The purchase price is 10 × $20M = $200M. To double its money, the fund must sell for $400M, and at 10x that means year-five EBITDA of $400M ÷ 10 = $40M. So the question becomes: can Meridian double its EBITDA in five years?

Out loud, you say that doubling in five years needs roughly 15% a year. The rule of 72 gives 72 ÷ 5 = 14.4, and a quick check of 1.15 multiplied out five times gives about 2.0 (1.15 squared is 1.32, to the fourth is 1.75, to the fifth is 2.01).

Step 2: Turn it into two routes

EBITDA is revenue times margin, so there are two ways to reach $40M:

Step 3: Translate growth into market and share

Say your market work suggests the clinic-software market is about $1,250M today and growing about 5% a year. That is a hypothesis to test, not a fact. Meridian's share today is $100M ÷ $1,250M = 8%. In five years the market is roughly $1,250M × 1.276 = $1,595M (1.05 to the fifth is about 1.276). For Route B, Meridian needs $160M of revenue, which is $160M ÷ $1,595M = about 10% share.

So the investment case needs three things to hold together: the market grows near 5%, Meridian gains about two points of share, and margin rises five points. Now stress it. If the market grows only 2% a year, it reaches about $1,250M × 1.104 = $1,380M, and Route B requires $160M ÷ $1,380M = about 11.6% share. That is a gain of roughly 3.6 points instead of 2, against the same competitors.

Step 4: Pick what to test and give a verdict

Share gain is the least certain and the most powerful assumption, so test it first: win-and-loss records, customer calls, pricing against competitors, and retention. Retention matters because it sets how much growth is spent standing still. If Meridian keeps 90% of last year's revenue from existing customers, it must replace 10% of its $100M, or about $10M in the first year and more as the base grows, before it grows at all.

A strong close sounds like this: "On these numbers the deal works only if the market grows near 5%, we gain about two points of share and margin expands five points. I would proceed to detailed diligence, focused first on why customers choose Meridian and how many leave. At $200M there is little room if the market is closer to 2% growth, so I would want either a lower price or a plan that does not depend on a margin gain."

What the interviewer is scoring

• Comfort with compounding. Converting "double in five years" into an annual rate without a calculator.
• Turning a goal into assumptions. Price, to return, to EBITDA, to revenue and margin, to market and share.
• Prioritization. Choosing the one assumption that matters most and explaining why.
• Commercial judgement. Knowing that share gain in a slowly growing market is a hard claim and needs evidence.
• A clear verdict. Saying what you would do and what would change your mind.

How to prepare

Learn a short list of terms so nothing slows you down: EBITDA, the earnings multiple, CAGR, gross retention, churn, add-on acquisition. Practice converting target multiples into annual growth rates; the rule of 72 in the mental math shortcuts post covers the doubling case. Build quick fluency in two or three sectors that private-equity funds often look at, using the three-hour industry method. Then run a handful of cases where you must end with pursue, price or pass, and where you say the thesis before the structure.

Finally, keep the case type in proportion. For most candidates the fundamentals still carry the interview: structure, math, communication and a recommendation. Due-diligence cases reward the same skills with a different client and a sharper question.