Business investment is a complex and important decision involving many factors and interests. Before making a business investment, investors need to conduct a comprehensive and in-depth investigation and analysis of the target enterprise to ensure the safety and profitability of the investment. This process is to tune.

The term due Diligence (Due) is derived from U.S. securities law and originally refers to the necessary investigation and verification of the authenticity, legality and validity of securities by the issuer or broker of securities before the issuance or sale of securities. Later, the concept of due diligence was gradually extended to various business transactions, especially in the fields of mergers and acquisitions, equity investment, debt financing, etc., and became an indispensable part of business investment.

Purpose of due diligence

The main purpose of due diligence is to help investors understand the real situation of the target enterprise, assess its value and potential, and identify and avoid possible risks and pitfalls. Through due diligence, investors can:

Verify the legality, compliance and effectiveness of the target enterprise, and eliminate possible legal disputes, administrative penalties, intellectual property infringement and other issues;

Understand the target enterprise's financial situation, business situation, market situation, competition situation, technical situation, human resources situation and other aspects of information, judge its profitability, growth, stability and competitive advantage;

Assess the value and future earnings expectations of the target enterprise and determine a reasonable investment price and rate of return;

Discover the potential risks and hidden dangers that may exist in the target enterprise, such as financial fraud, abnormal operation, market changes, backward technology, brain drain, etc., and formulate corresponding risk avoidance measures or exit mechanisms;

Optimize investment plans and transaction structures, formulate appropriate transaction terms and agreements, and protect their own interests and rights.

Content of due diligence

The content of due diligence varies according to the type of investment and the characteristics of the target enterprise, but usually includes the following aspects:

Legal due diligence: mainly to review the legal status, legal documents, legal relationships, legal responsibilities, etc. of the target enterprise, including the articles of association, shareholder register, shareholding structure, shareholder agreements, major contracts, litigation and arbitration, intellectual property rights, licenses, taxation, etc;

Financial due diligence: mainly the analysis of the target enterprise's financial statements, financial indicators, financial policies, financial management, etc., including balance sheet, profit statement, cash flow statement, audit report, accounting standards, internal control, cost structure, capital structure, asset evaluation and other aspects;

Business due diligence: mainly to evaluate the business strategy, business model, business efficiency, business risk, etc. of the target enterprise, including market positioning, product service, customer relationship, supply chain management, marketing channels, competitors, industry trends, etc;

Technical due diligence: mainly to test the technical capability, technological innovation and technological protection of the target enterprise, including core technology, patent application, R & D investment, R & D team, technical cooperation and other aspects;

Human resources due diligence: mainly inspects the scale, structure, quality and incentive of human resources of the target enterprise, including the number of employees, employee distribution, employee ability, employee welfare, employee turnover rate, employee training and other aspects.

Methods of due diligence

There are mainly the following methods:

Document review: access to relevant information and data, such as legal documents, financial statements, business reports, etc., by consulting various documents and materials provided by the target enterprise;

On-the-spot investigation: that is, by visiting the office and production sites of the target enterprise in person, to observe its actual situation and operation status, such as equipment and facilities, production process, management system, etc;

Interviews and exchanges: through communication and exchanges with the management and key personnel of the target enterprise, to understand their views and ideas, such as strategic planning, development goals, risk identification, etc;

Third-party consulting: that is, by hiring professional third-party institutions or individuals to provide professional opinions and suggestions in related fields, such as legal advisers, financial advisers, industry experts, etc.

Process of due diligence

The process of due diligence generally includes the following steps:

Sign a confidentiality agreement: before the formal start of due diligence, both parties need to sign a confidentiality agreement, stipulating the scope and duration of confidentiality of the information and data involved in the due diligence process, as well as the liability and compensation for breach of confidentiality obligations;

Develop a due diligence plan: investors need to develop a detailed and reasonable due diligence plan based on their own investment objectives and strategies, as well as the characteristics and circumstances of the target enterprise, specifying the scope and depth of due diligence, assigning due diligence tasks and responsibilities, and determining due diligence schedules and budgets;

Collect and analyze information: investors need to collect information and data on the relevant aspects of the target enterprise through various methods in accordance with the due diligence plan, and conduct systematic and in-depth analysis to assess its value and potential, and identify and avoid possible risks and pitfalls;

Preparation and submission of due diligence reports: investors need to prepare a due diligence report that comprehensively and objectively reflects the true situation of the target enterprise based on the information and data collected and analyzed, and submit it to the counterparty or decision-making level;

Adjusting investment decisions based on due diligence results: investors need to make necessary adjustments and optimizations to their own investment decisions based on the contents and conclusions of the due diligence report, such as modifying investment prices, increasing or decreasing investment ratios, adding or deleting trading conditions, etc;

Complete the transaction and follow-up: After completing the transaction, the investor needs to conduct continuous supervision and management of the target enterprise to ensure that the investment is implemented and executed to achieve the expected benefits and objectives.

Case study of due diligence

In order to better illustrate the importance and practicality of due diligence, the following is an analysis of some common problems and coping strategies that may be encountered in the process of due diligence, taking into account the specific cases of clients of Shangpu Consulting Services.

Case 1: A food company acquires a dairy company.

A food company (hereinafter referred to as A company) is a professional engaged in food production and sales of enterprises, with a number of well-known brands and products. In order to expand its market share and product line, Company A decided to acquire a company that mainly produces dairy products (hereinafter referred to as Company B). Company A entrusts Champ Consulting to provide M & A due diligence services.

In conducting legal due diligence, Champ Consulting found that Company B had the following problems:

Company B has been complained by consumers because of product quality problems and has been punished by relevant departments;

There are unfulfilled or incomplete contractual obligations between Company B and some suppliers and customers, which may lead to the risk of breach of contract or claim;

Part of the intellectual property rights of Company B are unknown or not registered in time, which may lead to the risk of loss or infringement of rights.

In response to these issues, Champ Consulting recommends that Company A take the following measures:

Require Company B to provide relevant quality inspection reports, consumer feedback, administrative penalties and other documents to assess the impact of its product quality issues on the M & A transaction;

Require Company B to negotiate with relevant suppliers and customers to resolve unfulfilled or incomplete contractual obligations, or provide corresponding guarantees or compensation measures;

Company B is required to clarify or complete the ownership and registration of its intellectual property rights as soon as possible, or to provide a corresponding license or transfer agreement.

During the financial due diligence process, Champ Consulting found that Company B had the following problems:

Company B's financial statements in recent years show a downward trend in its operating income and net profit, which is lower than the industry average;

Company B has high inventory and accounts receivable, resulting in a low capital turnover rate, and some inventory and accounts receivable are at risk of sluggishness or bad debts;

Company B has a high debt burden, and the debt structure is unreasonable, resulting in its weak solvency, and some of the debt is overdue or default risk.

In response to these issues, Champ Consulting recommends that Company A take the following measures:

Company B is required to provide business reports, market analysis, competitive strategies and other documents in recent years to analyze the reasons for the decline in revenue and profits and the possibility of improvement;

Require Company B to provide a schedule of inventory and accounts receivable, aging analysis, bad debt provision and other documents to assess the true value and recovery of its inventory and accounts receivable;

Company B is required to provide documents such as a schedule of debts, creditor information, repayment plans, and guarantees to assess the reasonableness and riskiness of its debts.

In conducting due diligence, Champ Consulting found that Company B had the following problems:

B company's market positioning is not clear, a wide range of products but lack of characteristics and advantages, resulting in its market share and brand awareness is low;

Company B's customer structure is unreasonable, relying too much on a few large customers, resulting in unstable customer relationships and vulnerability to market fluctuations;

Company B's supply chain management is not standardized, procurement channels are single, inventory management confusion, logistics and distribution efficiency is low, resulting in its high cost, and vulnerable to supply disruption.

In response to these issues, Champ Consulting recommends that Company A take the following measures:

Company B is required to provide its market positioning, product strategy, brand strategy and other documents to analyze its market competitiveness and development potential;

Company B is required to provide its customer list, customer distribution, customer satisfaction and other documents to analyze its customer stability and loyalty;

Company B is required to provide its supplier list, purchase contract, inventory list, logistics contract and other documents to analyze its supply chain efficiency and risk.

During the technical due diligence process, Champ Consulting found that Company B had the following problems:

The technical level of company B is low, the product quality and safety are not high, and it is difficult to meet the growing needs and preferences of consumers;

B company's technological innovation ability is weak, product upgrading is slow, and the lack of core technology and patent protection, resulting in its technical competitiveness is not strong;

Company B's R & D investment is small, the R & D team is small, and the R & D management system is not perfect, resulting in unsatisfactory R & D results.

In response to these issues, Champ Consulting recommends that Company A take the following measures:

Company B is required to provide its technical standards, quality testing, safety certification and other documents to assess the quality and safety of its products;

Company B is required to provide its technological innovation plan, product development progress, patent application and other documents to evaluate its technological innovation capability and technological protection;

Company B is required to provide its R & D investment budget, R & D team list, R & D management system and other documents to evaluate its R & D investment efficiency and R & D team quality.

During the due diligence of human resources, Champ Consulting found that Company B had the following problems:

Company B's human resources are small in scale, the personnel structure is unreasonable, and it lacks senior management and core technical personnel, resulting in insufficient management and technical capabilities;

B company's human resources quality is low, personnel ability and performance is uneven, and the lack of effective training and assessment mechanism, resulting in its personnel level is difficult to improve;

Company B has poor human resource incentives, low staff benefits and treatment, and lacks effective incentive and retention mechanisms, resulting in a high turnover rate and difficulty in attracting and retaining talented people.

In response to these issues, Champ Consulting recommends that Company A take the following measures:

Company B is required to provide its human resources scale, structure, distribution and other documents to assess its human resources allocation and matching;

Company B is required to provide its human resources quality, ability, performance and other documents to assess its human resources level and contribution;

Company B is required to provide its human resources incentives, benefits, treatment and other documents to assess the stability and loyalty of its human resources.

Through the above due diligence work, Shangpu Consulting has provided Company A with a detailed and professional due diligence report, helping Company A to have a comprehensive and in-depth understanding of the real situation of Company B, finding and avoiding possible risks and traps, and providing strong support and guidance for Company A to formulate a reasonable and effective merger plan and transaction structure.

Case 2: An Internet company's equity investment in an education technology company.

An Internet company (hereinafter referred to as C company) is a company specializing in Internet services and products, with a number of well-known platforms and applications. In order to expand into new business areas and increase revenue streams, Company C decided to make an equity investment in a company primarily engaged in educational technology services (hereinafter referred to as Company D). Company C commissioned Shangpu Consulting to provide equity investment due diligence services.

In conducting legal due diligence, Champ Consulting found that Company D had the following problems:

Company D has a complex shareholding structure, with multiple shareholder relationships and multiple shareholding transfer records, resulting in low clarity of its shareholding and disputes or disputes over some of its shareholding;

D Company's legal documents are incomplete, and some important documents are missing or irregular, such as shareholders' agreements, resolutions of the board of directors, industrial and commercial registration and other documents;

The legal relationship of Company D is not clear, and some important contracts have not been signed or performed, such as contracts with partners, suppliers, customers, etc.

In response to these problems, Champ Consulting recommends that Company C take the following measures:

Require Company D to provide its equity structure chart, equity transfer records, equity disputes or disputes and other documents to assess the authenticity and legality of its equity;

Require Company D to complete or improve its legal documents and provide relevant certificates or explanations, such as shareholders' agreements, resolutions of the board of directors, industrial and commercial registration and other documents;

Company D is required to clarify or standardize its legal relationship and provide relevant certificates or explanations, such as contracts signed or performed with partners, suppliers, customers, etc.

In conducting financial due diligence, Champ Consulting found that Company D had the following problems:

D Company's financial statements in recent years show an upward trend in its operating income and net profit, but low compared to the industry average;

Company D has high research and development investment and marketing expenses, resulting in lower gross and net profit margins, and some of the research and development investment and marketing expenses are ineffective or wasteful;

Company D has high accounts payable and prepayments, resulting in unstable cash flows, and some accounts payable and prepayments are at risk of overdue or refunds.

In response to these problems, Champ Consulting recommends that Company C take the following measures:

Require D company to provide business reports, market analysis, competitive strategy and other documents in recent years to analyze the reasons and sustainability of its revenue and profit growth;

Company D is required to provide its R & D investment budget, R & D results, marketing plan, marketing effect and other documents to evaluate the rationality and efficiency of its R & D investment and marketing expenses;

Company D is required to provide a breakdown of its accounts payable and prepayments, an ageing analysis, and a provision for bad debts to assess the authenticity and recovery of its accounts payable and prepayments.

In conducting business due diligence, Champ Consulting found that Company D had the following problems:

D company's market positioning is not clear, products and services are not prominent, it is difficult to form differentiation and advantage, resulting in its market share and brand awareness is low;

D company's customer structure is unbalanced, too concentrated in individual users and low-end users, resulting in its customer value and income stability is low;

D company's business model is not mature, product service quality and effect is inconsistent, and the lack of effective quality control and user feedback mechanism, resulting in its low user satisfaction and loyalty.

In response to these problems, Champ Consulting recommends that Company C take the following measures:

Require D company to provide its market positioning, product strategy, brand strategy and other documents, analysis of its market competitiveness and development potential;

Require D company to provide its customer list, customer distribution, customer value and other documents, analysis of its customer stability and loyalty;

D company is required to provide its business model, product service quality, user feedback and other documents, analysis of its business results and user satisfaction.

During the technical due diligence process, Champ Consulting found that Company D had the following problems:

D company has a high level of technology, good product service quality and effect, and can meet the growing needs and preferences of consumers;

Company D has strong technological innovation ability, rapid product upgrading, and has a number of core technologies and patent protection, resulting in its strong technological competitiveness;

D Company's R & D investment is more, the R & D team is larger, and the R & D management system is perfect, resulting in better R & D results.

In response to these problems, Champu Consulting believes that Company D has no obvious problems or risks in terms of technology, but is its biggest advantage and bright spot. Therefore, Champ Consulting recommends that Company C take the following measures:

Affirm and support D company's advantages and achievements in technology, and put forward reasonable suggestions or opinions, such as how to maintain the leading technology, how to improve the technology conversion rate, etc;

Establish a good technical cooperation relationship with Company D, and seek opportunities for technical exchange and sharing, such as jointly developing new products and sharing patent resources;

Respect and protect D Company's technology autonomy and intellectual property rights, and avoid the risk of technology leakage or infringement.

During the due diligence of human resources, Shangpu Consulting found that Company D had the following problems:

Company D has a large scale of human resources, a reasonable personnel structure, and senior management and core technical personnel, resulting in strong management and technical capabilities;

D company has high quality of human resources, consistent personnel ability and performance, and effective training and assessment mechanism, resulting in the continuous improvement of its personnel level;

D company's human resources incentives are better, staff benefits and treatment are higher, and there is an effective incentive and retention mechanism, resulting in a lower turnover rate, and can attract and retain talent.

In response to these problems, Champ Consulting believes that Company D has no obvious problems or risks in terms of human resources, but rather its important capital and resources. Therefore, Champ Consulting recommends that Company C take the following measures:

Affirm and support D company's advantages and achievements in human resources, and put forward reasonable suggestions or opinions, such as how to improve personnel efficiency, how to cultivate talent echelon, etc;

Establish a good human resources cooperation relationship with D company, and seek opportunities for talent exchange and training, such as co-organizing training activities, sharing talent pool, etc;

Respect and protect the human resource autonomy and rights of D company, and avoid the risk of brain drain or poaching.

Through the above due diligence work, Shangpu Consulting provided Company C with a detailed and professional due diligence report, which helped Company C to have a comprehensive and in-depth understanding of the real situation of Company D, found and avoided possible risks and traps, and provided strong support and guidance for Company C to formulate a reasonable and effective equity investment plan and transaction structure.

Summary

As an indispensable part of business investment, it can help investors understand the real situation of the target enterprise, assess its value and potential, and identify and avoid possible risks and pitfalls. The due diligence requires systematic and in-depth investigation and analysis from many aspects, including legal, financial, operational, technical, human resources and so on. A variety of methods are required for the effective and professional collection and processing of information, including document review, site visits, interviewing and communication, and third-party consultation. A due diligence process needs to be organized and implemented in a standardized and orderly manner, including the signing of confidentiality agreements, the development of due diligence plans, the collection and analysis of information, the preparation and submission of due diligence reports, the adjustment of investment decisions based on due diligence results, the completion of transactions and follow-up tracking steps. As much as possible requires practical and interesting learning and application of specific cases, including analysis of case background, discovery of case problems, and proposal of case measures.