Definition of Commercial due diligence consulting

Commercial due diligence consulting (CommercialDueDiligence,CDD) refers to a comprehensive, in-depth and objective analysis of the internal and external environment and operation of the investment target, assessing its business prospects and risks, and providing professional support and advice for investment decisions. Commercial due diligence advice is a necessary step for investors before investing and is an important part of investment due diligence, complementing financial due diligence and legal due diligence. Business due diligence consulting can be targeted at companies of all types and sizes, including listed companies, unlisted companies, start-ups, and M & A targets. The main body of commercial due diligence consulting can be a variety of investors, including private equity, venture capital, strategic investment, mergers and acquisitions.

Purpose of commercial due diligence advice

The purpose of commercial due diligence consulting is to help investors understand the core competitiveness, market position, development potential, profitability, risk prevention and other aspects of the target company, so as to make a reasonable valuation and investment strategy. Specifically, commercial due diligence advice can help investors achieve the following objectives:

Validate the target company's business plan and assumptions, assess their feasibility and credibility;

Identify the strengths and weaknesses of the target company and analyze its competitiveness and degree of differentiation in the industry;

Understand the market size, growth rate, structure, trends, opportunities and threats of the target company, and judge its market attractiveness and potential space;

Evaluate the target company's customer base, demand, satisfaction, loyalty, conversion rate, retention rate, etc., and analyze its customer value and stability;

Analyze the target company's financial position, profit model, cost structure, cash flow, assets and liabilities, etc., and calculate its financial indicators and financial risks;

Check the target company's organizational structure, management team, human resources, corporate culture, incentive mechanism, etc., and evaluate its organizational efficiency and talent reserve;

Review the target company's legal documents, contracts, licenses, patents, litigation, etc. to identify its legal risks and compliance.

Commercial due diligence consulting process

The process of commercial due diligence consultation generally includes the following steps:

Determine the scope, objectives, timetable and resources of commercial due diligence consulting, and sign confidentiality agreements and service contracts with investors and target companies;

Collect and analyze the internal information provided by the target company, including business plan, financial statements, customer list, contract agreement, organizational structure, etc;

Collect and analyze external data, including industry reports, market data, competitor information, policies and regulations, etc;

conduct management interviews and conduct in-depth communication with senior management and key department heads of the target company to understand its strategy, operation, finance, manpower and other aspects;

Conduct customer interviews to select a sample of existing and potential customers of the target company to understand their demand, satisfaction and loyalty to the target company's products or services;

Conduct competitor interviews to identify the main competitors of the target company and understand the characteristics, strengths, weaknesses, market share, etc. of its products or services;

Interviews with other interested parties, including suppliers, distributors, partners, industry experts, government agencies, etc. of the target company, to understand their relationship with the target company, cooperation, industry views, etc;

Integrate and analyze all the collected information, verify and evaluate the business plan of the target company, and predict and evaluate its business prospects and risks;

Prepare and submit commercial due diligence advisory reports, the content and structure of which should be clear, complete, logical and convincing, and can reflect the true situation and value of the investment target;

Communicate and discuss with investors, answer questions and concerns of investors, and provide advice and opinions on commercial due diligence consulting.

Approaches to commercial due diligence consulting

The main methods of commercial due diligence consulting are as follows:

Market analysis, through the industry's macro environment, market size, market structure, market growth, market trends, market opportunities and threats and other aspects of the analysis, to assess the target company's market attractiveness and potential space;

Competitive analysis, which assesses the competitiveness and degree of differentiation of the target company by analyzing the number, type, size, product or service, strengths, weaknesses, market share, strategy, dynamics, etc. of the target company's competitors;

Customer analysis, through the target company's customer base, demand, satisfaction, loyalty, conversion rate, retention rate and other aspects of the analysis, to assess the target company's customer value and stability;

Financial analysis, through the analysis of the target company's financial position, profit model, cost structure, cash flow, assets and liabilities, etc., to calculate the target company's financial indicators and financial risks;

Organizational analysis, through the target company's organizational structure, management team, human resources, corporate culture, incentive mechanism and other aspects of the analysis, to assess the target company's organizational efficiency and talent pool;

Legal analysis, through the analysis of the target company's legal documents, contracts, licenses, patents, litigation, etc., to identify the target company's legal risks and compliance.

The case of commercial due diligence advice

In order to better illustrate the method and value of commercial due diligence consulting, this paper takes Shangpu Consulting as an example and introduces the case of commercial due diligence consulting services provided by a private equity investor. Shangpu Consulting is a professional business consulting company, providing a number of consulting services including business due diligence consulting. It has rich industry experience and professional knowledge, serving customers in many industries and fields, including Internet, medical care, Education, consumer goods, energy, etc.

Case background: a private equity investor plans to invest in an online education platform, which mainly provides online tutoring services for primary and secondary school students. It has millions of registered users and thousands of online teachers. In recent years, its performance has grown steadily and its market share has been increasing, but it is also facing fierce competition and policy uncertainty. Investors hope to understand the business prospects and risks of the platform through commercial due diligence consulting, and provide a basis for their investment decisions.

Case process: According to the needs of investors, Shangpu Consulting has formed a project team composed of industry experts, market analysts, financial analysts, organizational analysts and legal analysts to provide investors with a full range of business due diligence consulting services. The project team used the above-mentioned commercial due diligence consulting method to conduct an in-depth analysis of the target company's internal and external environment and operations, including the following aspects:

Market analysis: The project team assessed the development status and trends of the online education industry by collecting and analyzing industry reports, market data, policies and regulations, etc., and found that the industry has the following characteristics: the market scale is huge, and it is expected to reach 500 billion yuan by 2024; The market is growing rapidly and will grow by more than 50% in 2020 due to the impact of the epidemic. The market structure is scattered and there is no obvious leader, the total market share of the top ten platforms is less than 30%; the market competition is fierce, and platforms compete for users through price wars, marketing wars, content wars and other means; market opportunities are diverse, in addition to online tutoring for primary and secondary school students, there are adult education, Vocational training, hobbies and other subdivisions; market threats exist, mainly from policy uncertainty, user turnover rate, teacher stability, etc. The project team believes that the industry has high market attractiveness and potential space, but it also requires the target company to have strong competitiveness and risk prevention capabilities in order to stand out in the market.

Competitive analysis: The project team assessed the competitiveness and differentiation degree of the target company by collecting and analyzing the information of competitors, and found that the target company has the following advantages and disadvantages: the advantages include: having high brand awareness and reputation, and the user scale and growth rate are higher than the industry average; It has high-quality teaching content and services, and the courses cover various disciplines and grades. Teachers have undergone strict screening and training, the teaching effect is recognized by users; It has advanced technology and platform, supports online teaching of various terminals and scenarios, and provides intelligent learning analysis and personalized learning recommend. Disadvantages include: facing strong competition from similar platforms and emerging platforms, it needs to continuously invest resources for product innovation and market expansion; Facing the uncertainty from policies and the strengthening of supervision, it is necessary to adjust business strategies and compliance measures in time; facing the challenge of the loss rate of users and the stability of teachers, it is necessary to improve the loyalty of users and the satisfaction of teachers. The project team believes that the target company has a certain degree of competitiveness and differentiation in the industry, but also needs to pay attention to its disadvantages and risks, and how to deal with the dynamics and strategies of competitors.

Customer analysis: the project team evaluated the customer value and stability of the target company through customer interviews, and found that the customers of the target company have the following characteristics: the customer group is mainly primary and secondary school students and their parents, mainly distributed in the first and second tier cities, with high educational needs and consumption ability; the customer needs are mainly to improve academic performance and interest, and at the same time pay attention to learning efficiency and fun, there are high requirements for the quality of teaching content and service; Customer satisfaction is high, the target company's brand, products and services are recognized and trusted, willing to recommend to others; Customer loyalty is average, affected by price, marketing, content and other factors, easy to be attracted by other platforms, high turnover rate; Customer conversion rate is low, subject to the impact of lectures, coupons, cash back and other promotional means, the proportion of registered users and paid users is lower. The project team believes that the target company's customers have high value and potential, but they also need to improve customer loyalty and conversion rates, and increase customer stickiness and retention by providing better teaching content and services.

Financial analysis: The project team calculated the financial indicators and financial risks of the target company by analyzing the financial data of the target company, and found that the financial situation of the target company is as follows: the income of the target company mainly comes from the fees of online counseling services, and the income in the past three years is 0.3 billion yuan, 0.5 billion yuan and 0.8 billion yuan respectively, with an average annual growth rate of 50%; the cost of the target company mainly includes teachers' salary, platform operation and maintenance, marketing investment, etc. The cost in the past three years is 0.2 billion yuan, 0.35 billion yuan and 0.6 billion yuan respectively, with an average annual growth rate of 45%. The profit of the target company is mainly income minus cost. The profit in the past three years is 0.1 billion yuan, 0.15 billion yuan and 0.2 billion yuan respectively, with an average annual growth rate of 40%; the profit margin of the target company is mainly profit divided by income. The profit margin in the past three years is 33%, 30% and 25% respectively, with an average annual decline rate of 5%. The cash flow of the target company is mainly income minus costs and investment. The cash flow in the past three years is 0.08 billion yuan, 0.12 billion yuan and 0.16 billion yuan respectively, with an average annual growth rate of 35%. The assets of the target company mainly include cash, accounts receivable, fixed assets, etc, the assets in the past three years are 0.15 billion yuan, 0.25 billion yuan and 0.4 billion yuan respectively, with an average annual growth rate of 50%. The liabilities of the target company mainly include accounts payable, short-term loans, long-term loans, etc. The liabilities in the past three years are 0.05 billion yuan, 0.1 billion yuan and 0.2 billion yuan respectively, with an average annual growth rate of 75%. The net assets of the target company are mainly assets minus liabilities, the net assets in the past three years are 0.1 billion yuan, 0.15 billion yuan and 0.2 billion yuan respectively, with an average annual growth rate of 40%. The project team believes that the target company's financial position is generally good, with high revenue growth, profit margin and cash flow, but also needs to pay attention to its cost growth rate, profit margin decline rate and debt growth rate, and how to optimize its financial structure and management.

Organizational analysis: the project team evaluated the organizational efficiency and talent reserve of the target company through management interviews and analysis of the organizational data of the target company, and found that the organizational structure of the target company is platform-based, consisting of headquarters and various business departments, headquarters is responsible for strategic planning, financial management, technical support, etc., and business departments are responsible for product development, teaching services, marketing, etc; the management team of the target company is composed of founder and CEO, CTO, CFO, COO, CMO, etc. It has rich industry experience and professional knowledge, and its leadership style is open, innovative and collaborative. The human resources of the target company are composed of thousands of online teachers and hundreds of platform employees. Teachers mainly provide teaching services through part-time or outsourcing. The employees are mainly responsible for the operation and management of the platform; the corporate culture of the target company is user-centered, education-oriented, innovation-driven, collaboration-based, focusing on the growth and development of employees, and providing a variety of incentives and benefits. The project team believes that the target company has a high organizational efficiency and talent pool, a flexible organizational structure, an excellent management team, diverse human resources and a positive corporate culture, but also needs to pay attention to the stability and quality of its teachers, staff training and assessment, organizational communication and coordination.

Legal analysis: the project team identified the legal risks and compliance of the target company by reviewing the legal information of the target company, and found that the legal situation of the target company is as follows: the legal documents of the target company, including the articles of association, shareholders' agreement, board resolution, equity transfer agreement, etc., are valid legal documents, and no major omissions or defects are found; the contracts of the target company include contracts and agreements with customers, teachers, suppliers, distributors, partners, etc., which are all legal contracts, and no major breach of contract or disputes have been found; the licenses of the target company include education licenses, network licenses, copyright licenses, etc., which are all valid licenses, and no major expiration or invalidation has been found; the patents of the target company include platform technology patents, teaching content patents, etc, all are valid patents, and no significant infringements or disputes have been found; the target company's litigation, including litigation cases with customers, teachers, competitors, etc., are normal litigation, and no significant losses or damages have been found. The project team believes that the target company has low legal risk and compliance, has complete legal documents, contracts, licenses, patents, etc., and has not found major legal problems or hidden dangers, but it also needs to pay attention to policy changes and industry norms at any time, as well as timely handling of possible legal disputes and litigation.

Case results: After completing the analysis of commercial due diligence consulting, Champ Consulting has prepared a detailed commercial due diligence consulting report, the content and structure of which are as follows:

ReportAbstract: Outlines the background, purpose, methodology andConclusion, highlighting the business prospects and risks of the target company, as well as advice and opinions to investors;

Market analysis: the development status and trends of the online education industry are introduced in detail, and the market attractiveness and potential space of the target company are evaluated, as well as the opportunities and threats of the market;

Competitive analysis: details the situation of the target company's competitors, evaluates the competitiveness and differentiation of the target company, as well as the strengths and weaknesses of the competitors;

Customer analysis: detailed introduction of the target company's customer groups, needs, satisfaction, loyalty, etc., assessment of the target company's customer value and stability, as well as customer conversion rate and retention rate;

Financial analysis: the financial situation, profit model, cost structure, cash flow, assets and liabilities of the target company are introduced in detail, and the financial indicators and financial risks of the target company are calculated, as well as the valuation and return on investment of the target company;

Organizational analysis: a detailed description of the target company's organizational structure, management team, human resources, corporate culture, etc., to assess the target company's organizational efficiency and talent pool, as well as organizational communication and coordination.

Legal analysis: Details the target company's legal documents, contracts, licenses, patents, litigation, etc., identify the target company's legal risks and compliance, as well as legal changes and norms.

ReportConclusion: Summarizes the business prospects and risks of the target company, and gives suggestions and opinions to investors, including whether to invest, investment amount, investment conditions, investment income and so on.