Definition and purpose of 1. commercial due diligence

Commercial due diligence (Business Due Diligence, shortBDD) refers to the comprehensive, in-depth and objective investigation and evaluation of the trading object or investment project before making a commercial transaction or investment decision, so as to obtain true, accurate and complete information, reduce risks and protect interests. Business due diligence involves the market status, competitive advantage, financial status, legal compliance, management team, strategic planning and other aspects of the transaction object or investment project. It requires the use of professional knowledge, skills and methods, as well as adequate communication and collaboration.

The main purposes of commercial due diligence are as follows:

（1) Verify the authenticity and legality of the transaction object or investment project, and eliminate false or illegal situations.

（2) Assess the value and potential of the transaction object or investment project and determine a reasonable transaction price or return on investment.

（3) Identify the risks and problems of the trading object or investment project, and formulate corresponding countermeasures or exit mechanisms.

（44) Understand the advantages and disadvantages of the trading object or investment project, and formulate corresponding development strategies or improvement plans.

（5) Establish trust and good relationship with the transaction object or investment project, and lay the foundation for subsequent cooperation.

2. the content and methods of commercial due diligence

The content of commercial due diligence varies according to the type of transaction or investment objective, but can generally be divided into the following areas:

（1) Market due diligence: mainly to analyze the industry environment, market size, market structure, market demand, market trends, etc. of the trading object or investment project in order to assess its market position and market prospects.

（2) Competitiveness due diligence: It mainly analyzes the products or services, technical level, innovation ability, brand influence, channel network, customer resources, etc. of the trading object or investment project to evaluate its competitive advantage and competitive barriers.

（3) Financial due diligence: mainly analyzes the financial statements, financial indicators, financial policies, financial risks, etc. of the trading object or investment project to assess its financial position and financial soundness.

（4) Legal due diligence: mainly analyzes the legal qualifications, legal documents, legal disputes, legal risks, etc. of the transaction object or investment project to assess its legal compliance and legal protection.

（5) Management due diligence: mainly analyzes the organizational structure, management team, human resources, corporate culture, internal control, etc. of the transaction object or investment project to evaluate its management level and management efficiency.

（6) Strategic due diligence: It mainly analyzes the development goals, development strategies, development plans, and development difficulties of the transaction object or investment project to assess its development potential and development feasibility.

The main methods of commercial due diligence are as follows:

（1) Data analysis: To obtain objective information and evidence by collecting, collating and analyzing all kinds of data and materials provided by trading objects or investment projects, such as financial statements, market reports, contractual agreements, etc.

（2) On-site investigation: through on-site investigation of the production and operation places, equipment and facilities, product quality, employee status, etc. of the trading object or investment project, in order to obtain intuitive feelings and impressions.

（3) Interview communication: through communication and communication with the management, core employees, important customers, major suppliers, etc. of the transaction object or investment project, in order to obtain in-depth understanding and feedback.

（4) Expert consultation: by consulting professionals or institutions in related fields, such as industry associations, industry media, industry analysts, etc., to obtain professional opinions and suggestions.

Processes and steps for 3. commercial due diligence

The business due diligence process can generally be divided into the following steps:

（1) Determine the objectives and scope of due diligence: according to the type of transaction or investment objectives, clarify the main purpose and focus of due diligence, determine the content and aspects of due diligence, and formulate due diligence plans and arrangements.

（2) Collection and collation of information: according to the content and aspects of due diligence, obtain relevant data and information from the trading object or investment project, such as financial statements, market reports, contractual agreements, etc., and make necessary collation and classification.

（3) Analysis and evaluation: according to the content and aspects of due diligence, the use of professional knowledge, skills and methods to analyze and evaluate the collected data and information, such as market analysis, financial analysis, legal analysis, etc., and identify the risks and problems.

（4) Write a due diligence report: according to the results of analysis and evaluation, write a due diligence report, summarize the main findings and conclusions of due diligence, put forward due diligence suggestions and opinions, and attach relevant data and information as support.

（5) Communication and feedback: submit the due diligence report to the counterparty or investor, communicate and feedback with them, explain the key points and difficulties in the due diligence report, answer relevant questions and queries, and make amendments or supplements as needed.

4. the values of due diligence in business

Commercial due diligence is not only a technical means, but also a value, which reflects the responsibility and respect of both parties or investors to themselves and others. In the process of commercial due diligence, the following principles should be followed:

（1) Principle of authenticity: commercial due diligence should be based on true, accurate and complete information, avoiding false, misleading and concealed information, otherwise it will cause misjudgment and loss.

（2) Principle of objectivity: commercial due diligence should be analyzed and evaluated from an objective, impartial and neutral perspective to avoid being affected by subjectivity, prejudice and interests, otherwise it will cause bias and dishonesty.

（3) Principle of comprehensiveness: Commercial due diligence should cover all aspects and levels of the transaction object or investment project, avoiding ignoring or neglecting important information and details, otherwise it will cause omissions and risks.

（4) In-depth principle: commercial due diligence should dig deeper into the intrinsic value and potential problems of the transaction object or investment project, and avoid staying on the surface or form, otherwise it will be superficial and misleading.

（5) Respect principle: commercial due diligence should respect the privacy and trade secrets of the transaction object or investment project, and avoid disclosure or abuse of relevant information and materials, otherwise it will cause infringement and disputes.

5. the balance of commercial due diligence

Commercial due diligence is an interest-related activity that involves various interests and responsibilities of both parties or investors to a transaction. In the process of commercial due diligence, the following aspects should be balanced:

（1) Balance the acquisition and protection of information: commercial due diligence needs to obtain various information and materials of the trading object or investment project for analysis and evaluation, but at the same time, it is also necessary to protect such information and materials from disclosure or abuse in order to safeguard the legitimate rights and interests of the trading object or investment project. Therefore, before commercial due diligence, a confidentiality agreement should be signed, and after commercial due diligence, relevant information and materials should be destroyed or returned as agreed.

（2) Balance the efficiency and adequacy of time: commercial due diligence needs to be completed within a limited time in order to make timely trading or investment decisions, but at the same time to ensure the adequacy of time for comprehensive and in-depth analysis and evaluation. Therefore, a reasonable time plan should be developed before commercial due diligence, and time resources should be allocated according to importance and urgency in commercial due diligence.

（3) Balance cost savings and inputs: Commercial due diligence requires a certain amount of human, material, financial and other resources to conduct professional and high-quality analysis and evaluation, but also to ensure cost savings in order to improve profitability and competitiveness. Therefore, a reasonable budget should be established before commercial due diligence, and cost resources should be allocated according to necessity and effectiveness in commercial due diligence.

（4) Balancing the benefits and risks of the outcome: Commercial due diligence requires conclusions and recommendations that are conducive to trading or investment decisions in order to maximize benefits, but also to consider possible risks and issues in order to minimize risk. Therefore, after commercial due diligence, corresponding countermeasures or exit mechanisms should be formulated, and risks should be continuously monitored and managed during the transaction or investment process.

6. epilogue

Commercial due diligence is an important business activity that involves not only technical analysis and evaluation, but also value-based responsibility and respect. In the process of commercial due diligence, we should follow the principles of authenticity, objectivity, comprehensiveness, depth and respect, and balance the acquisition and protection of information, the efficiency and adequacy of time, the saving and investment of costs, the benefits and risks of results, so as to achieve the goal of win-win. As one of the most leading and authoritative independent third-party research and investment and financing consulting institutions in China, Shangpu Consulting has rich practical experience and professional team in business due diligence, providing customers with efficient, professional and high-quality business due diligence services to help customers achieve business success.