Due Diligence (Due Diligence) is an integral part of business investment, it is the investor in the target enterprise to reach an initial intention to cooperate with the target enterprise, the target enterprise of all matters related to the investment investigation, analysis and evaluation of a series of activities. The purpose of due diligence is to solve the problem of information asymmetry, discover the value and risk of the target enterprise, and provide the basis for investment decision-making. The scope of due diligence mainly includes business, financial and legal aspects, each of which has its focus and methods. This article will provide a comprehensive analysis of the concept, role, process, scope, methods and cases of due diligence from both theoretical and practical perspectives to help readers master the basic knowledge and skills of due diligence.

The concept and role of 1. due diligence

Due diligence (Due Diligence), also known as prudential investigation, refers to a series of activities in which investors investigate, analyze and evaluate all matters related to this investment by consensus after reaching an initial intention to cooperate with the target enterprise. Due diligence often occurs in mergers and acquisitions, public offerings and other investment and financing activities. Due diligence can be divided into business due diligence, financial due diligence and legal due diligence and other different types, depending on the specific circumstances of the project, but also related to the market, technology, environment, human resources and other aspects.

The main function of due diligence is to solve the problem of information asymmetry. In business investment, there is information asymmetry between the investor and the target enterprise, I .e. the target enterprise has more and more detailed information than the investor. This leads to uncertainty and risk when investors make investment decisions. In order to eliminate or reduce this information asymmetry, investors need to obtain true, accurate and complete information about the target enterprise through due diligence in order to make an objective and comprehensive assessment of the target enterprise.

Due diligence also has the following functions:

Value discovery. Through due diligence, investors can understand the core competitiveness, market position, profitability, growth potential and other aspects of the target enterprise, so as to determine the value and reasonable price of the target enterprise.

Risk discovery. Through due diligence, investors can find out the various risks that exist or may exist in the target enterprise, such as financial risk, legal risk, market risk, technical risk, etc., and put forward corresponding risk prevention and control measures.

Investment feasibility analysis. Through due diligence, investors can analyze whether the investment is in their own interests and expectations based on the value and risk of the target enterprise, as well as their own strategic objectives and resource conditions, and formulate appropriate transaction structures and terms.

2. the process and scope of due diligence

The due diligence process generally includes the development of an investigation plan-collecting and reviewing information-conducting on-site investigations and interviews-drafting due diligence reports-conducting internal reviews-issuing due diligence opinions and other stages. The scope of due diligence mainly includes business, financial and legal aspects, each of which has its focus and methods.

(I) Business Due Diligence

Business due diligence is the core of due diligence, which focuses on the business conditions, market conditions, competitive advantages, development strategies and other aspects of the target enterprise to assess the business value and sustainability of the target enterprise. The main contents of business due diligence include:

The basic situation of the enterprise. Including the history of the enterprise, organizational structure, management team, equity structure, association, etc.

Product/Service. Including product/service type, characteristics, quality, technical level, research and development capabilities, intellectual property protection, etc.

market situation. Including industry trends, market size, market demand, market share, market penetration, market competition pattern.

Marketing situation. Including sales channels, sales strategy, sales model, sales team, sales, gross margin, etc.

Procurement situation. Including supplier selection, supplier quality and reputation, purchase price and quantity, purchase contract and terms.

Production/Operations. Including production/operation process, production/operation capacity, production/operation cost, production/operation efficiency, production/operation risk, etc.

Financing situation. Including the target enterprise's financing history, financing needs, financing plans, financing purposes, etc.

Risk analysis. This includes the various risks that the target enterprise faces or may face, such as market risk, technology risk, policy risk, management risk, etc., and proposes corresponding risk response measures.

The main methods of business due diligence are:

Collect and review the relevant documents provided by the target enterprise, such as business plan, organization chart, equity structure chart, product introduction, market report, etc.

To conduct on-site investigation and interview, observe the actual operating conditions of the target enterprise, communicate with the senior management and key employees of the target enterprise, and understand the strategic objectives and core competitiveness of the target enterprise.

Use third-party data and information sources, such as industry associations, professional consulting agencies, online media, etc., to obtain relevant data and information on the industry and market in which the target company is located, and conduct comparative analysis and verification.

(II) Financial Due Diligence

Financial due diligence is an important part of due diligence, which focuses on the financial position and financial management level of the target enterprise to assess the financial risk and return on investment of the target enterprise. The main elements of financial due diligence include:

Financial Statement Analysis. This includes horizontal comparison and vertical analysis of the balance sheet, profit statement and cash flow statement of the target enterprise, calculation of various financial ratios, such as current ratio, quick ratio, asset-liability ratio, return on net assets, gross margin, net interest rate, etc., and assessment of the financial position and profitability of the target enterprise.

Analysis of financial forecasts. This includes forecasting and analyzing the revenue, cost, profit and cash flow of the target enterprise for the next few years, considering various possible scenarios and assumptions, and assessing the development potential and return on investment of the target enterprise.

Financial adjustment analysis. This includes making necessary adjustments to the financial statements of the target enterprise, such as eliminating non-recurring gains and losses, reflecting related transactions, reflecting goodwill impairment, etc., so that the financial statements more realistically reflect the operating conditions of the target enterprise.

Financial risk analysis. This includes the identification and assessment of various financial risks that exist or may exist in the target enterprise, such as asset-liability mismatch, cash flow shortage, bad accounts receivable, inventory backlog, tax disputes, etc., and the corresponding risk prevention and control measures.

The main methods of financial due diligence are:

Collect and review the relevant documents provided by the target enterprise, such as financial statements, audit reports, tax returns, bank statements, etc.

On-site investigation and interview, observe the actual financial management status of the target enterprise, communicate with the financial personnel and auditors of the target enterprise, and understand the financial policies and systems of the target enterprise.

Use third-party data and information sources, such as banks, tax authorities, credit agencies, etc., to obtain relevant data and information of the target enterprise for comparative analysis and verification.

(III) Legal Due Diligence

Legal due diligence is the basis of due diligence, which focuses on the legal status and legal compliance of the target enterprise to assess the legal risks and legal liabilities of the target enterprise. The main contents of legal due diligence include:

Company Legal Matters. This includes the registration of the company's establishment, the provisions of the articles of association, the shareholders' meeting, the meeting of directors, the transfer of shares, etc., to check whether the company exists and operates legally and effectively.

Contract Legal Matters. Including the company and customers, suppliers, banks, partners, etc. signed various types of contracts and their performance, to check whether the contract is legally and effectively signed and performed.

Intellectual Property Legal Matters. Including the various types of intellectual property rights owned or used by the company and their protection, and checking whether the company has infringed or been infringed on intellectual property rights.

Labor Law Matters. Including the labor contract signed by the company and its employees and their performance, as well as the social insurance and provident fund paid by the company for employees, to check whether the company has complied with the provisions of the labor law.

Environmental legal matters. Including whether the company meets the requirements of environmental protection in the process of production and operation, whether there are problems with pollutant discharge or disposal, whether it is punished or litigated by environmental regulatory authorities, and check whether the company has complied with the provisions of environmental laws.

Litigation arbitration matters. This includes whether the company is involved or may be involved in various litigation or arbitration cases, as well as the causes, progress, results and effects of the cases, and examines whether the company has or may have legal disputes.

The main methods of legal due diligence are:

Collect and review the relevant documents provided by the target enterprise, such as business license, articles of association, equity certificate, contract text, intellectual property certificate, litigation and arbitration materials, etc.

On-site investigation and interview, observe the actual legal management status of the target enterprise, communicate with the legal personnel and lawyers of the target enterprise, and understand the legal policies and systems of the target enterprise.

Use third-party data and information sources, such as industrial and commercial bureaus, intellectual property offices, courts, arbitration institutions, etc., to obtain relevant data and information of target enterprises for comparative analysis and verification.

Cases of 3. due diligence

In order to better understand the practical application of due diligence, this article will introduce some specific cases of Champ Consulting Services clients. Shangpu Consulting is a company specializing in business investment consulting services, with rich due diligence experience and professional team to provide customers with efficient, professional and comprehensive due diligence services.

(I) a food company to acquire a dairy company.

A food company is a listed company that mainly produces instant noodles, biscuits and other foods. In order to expand its product line and market share, it plans to acquire a dairy company. The dairy company is a private enterprise that mainly produces milk, yogurt and other dairy products. Champ Consulting was commissioned by a food company to conduct a comprehensive due diligence on a dairy company.

When conducting business due diligence, Shangpu Consulting found that a dairy company has strong R & D capabilities and brand influence, its product quality and taste are loved by consumers, and its market share and growth rate are higher than the industry average. At the same time, Shangpu Consulting also found that a dairy company has some problems, such as fewer product types and lack of differentiated competitive advantages; a single sales channel, mainly relying on supermarkets and convenience stores; high procurement costs, which are affected by fluctuations in raw material prices Larger wait.

When conducting financial due diligence, Shangpu Consulting found that a dairy company was in good financial condition, its revenue and profits had maintained steady growth, its cash flow was abundant, and its financial ratios were in line with industry levels. At the same time, Shangpu Consulting also found that a dairy company has some problems, such as low inventory turnover rate, leading to inventory backlog risk; low accounts receivable turnover rate, leading to bad debt risk; financial statements have some non-recurring profit and loss items, need to be adjusted accordingly.

During the legal due diligence investigation, Shangpu Consulting found that the legal status of a dairy company was in compliance, and there were no obvious problems in the registration of company establishment, equity structure, contract signing and performance, etc. At the same time, Shangpu Consulting also found that a dairy company has some problems, such as its intellectual property protection is not perfect, there is a risk of infringement; its labor contract is not standardized, there is a risk of labor arbitration; its environmental protection measures are not in place, there is a risk of being punished by the environmental protection department.

After completing the due diligence, Shangpu Consulting issued a due diligence report and opinion to a food company, conducted a detailed analysis and evaluation of the value and risk of a dairy company, and put forward corresponding suggestions and measures. Based on the report and opinions of Champ Consulting, a food company conducted further negotiations and consultations with a dairy company, and finally reached an acquisition agreement and successfully completed the acquisition transaction.

(II) an Internet Company Invests in an E-commerce Platform

An Internet company is a listed company that mainly provides search engines, social networks, online videos and other services. In order to expand its business scope and market share, it plans to invest in an e-commerce platform, which is a start-up company that mainly provides second-hand commodity trading. Champu Consulting was commissioned by an Internet company to conduct a comprehensive due diligence on an e-commerce platform.

When conducting business due diligence, Shangpu Consulting found that an e-commerce platform has strong innovation capabilities and user stickiness, and its platform model, functional design, user experience and other aspects have high advantages, and its user scale and transaction volume have both Maintained rapid growth. At the same time, Shangpu Consulting also found that there are some problems in an e-commerce platform, such as insufficient security of the platform and the risk of being attacked by hackers or leaking user information. The supervision of the platform is not strong enough, and there is a risk of being cheated or selling fake goods by sellers. The profit model of the platform is not clear, and there is a risk that it is difficult to make profits or continue to lose money.

When conducting financial due diligence, Shangpu Consulting found that the financial situation of an e-commerce platform is average, and its revenue mainly comes from advertising fees and commission fees, and its costs mainly include technology development fees, operation and maintenance fees, promotion fees, etc. As the platform is in a rapid expansion phase, its costs greatly exceed revenue, resulting in negative profits and a shortfall in its cash flow. At the same time, Shangpu Consulting also found that there are some problems in an e-commerce platform, such as unaudited financial statements, some accounting errors or irrationality; financial forecasts are too optimistic, ignoring uncertain factors such as market competition and policy changes; The level of financial management is low, and there is a lack of effective internal control and risk management mechanisms.

When conducting legal due diligence, Shangpu Consulting found that the legal status of an e-commerce platform was poor, and there were some problems in the registration of company establishment, equity structure, contract signing and performance, etc. At the same time, Shangpu consulting also found that there are some problems in an e-commerce platform, such as the legal provisions related to personal information collection, commodity quality assurance, consumer rights and interests protection, but its platform agreement and terms do not fully comply with these legal provisions, and there is a risk of being complained or sued by users; its platform also involves legal provisions on intellectual property rights, taxation, anti-monopoly, etc, however, the management and operation of its platform do not fully comply with these laws and regulations, and there is a risk of being claimed by the right holder or punished by the regulatory authorities.

After completing the due diligence, Shangpu Consulting issued a due diligence report and opinions to an Internet company, conducted a detailed analysis and evaluation of the value and risks of an e-commerce platform, and put forward corresponding suggestions and measures. According to the report and opinions of Shangpu Consulting, an Internet company conducted further negotiations and consultations with an e-commerce platform, and finally reached an investment agreement and successfully completed the investment transaction.

4. epilogue

Due diligence is an indispensable part of business investment, which can help investors obtain true, accurate and complete information about the target enterprise, discover the value and risk of the target enterprise, and provide a basis for investment decision-making. The scope of due diligence mainly includes business, financial and legal aspects, each of which has its focus and methods. The due diligence process generally includes several stages, such as developing an investigation plan, collecting and reviewing information, conducting on-site investigations and interviews, drafting due diligence reports, conducting internal reviews, and issuing due diligence opinions. The case of due diligence can help us better understand the practical application and value of due diligence.