Business investment due diligence refers to the process of comprehensive, in-depth and objective evaluation and analysis of the target enterprise or project before making investment decisions, in order to obtain its true, accurate and complete information, judge its value, risk and potential, and provide investors with decision-making basis and advice. Business investment due diligence is the most critical part of investment and financing due diligence, and it is also the most challenging part, because it involves data collection, analysis and verification in many aspects, as well as the market, competition, customers, channels, products, In-depth understanding of technology and other aspects. From a practical point of view, this paper summarizes the five common difficulties in business investment due diligence, namely, information asymmetry, market prediction, competition analysis, business model evaluation and risk identification, and puts forward corresponding countermeasures and solutions to help investors improve the efficiency and quality of business investment due diligence, so as to make more informed investment decisions.

1. information asymmetry

Information asymmetry means that in the process of business investment due diligence, the target enterprise or project party has more and more detailed information than the investor, and the investor can only obtain some information through limited channels, resulting in differences in the amount and quality of information between the two sides. Information asymmetry can create the following difficulties for investors:

Unable to fully and accurately understand the real situation of the target enterprise or project, there may be false exaggeration or concealment;

The authenticity and legality of the data and documents provided by the target enterprise or project party cannot be effectively verified, and there may be fraud or tampering;

The lack of timely access to the latest developments and changes in the target enterprise or project may be lagging or outdated.

In order to solve the problem of information asymmetry, investors can take the following measures:

Develop a detailed due diligence plan and checklist, identifying the type, source, method and time of information to be obtained;

Collect information from multiple channels and multiple angles. In addition to asking for relevant data and documents from the target company or project party, third-party information must be obtained through the Internet, industry reports, expert interviews, customer research, and on-site inspections;

Cross-validation and analysis of the collected information, comparing the consistency and reasonableness of information from different sources and perspectives, and identifying and explaining the differences and contradictions;

Keep communication and update with the target enterprise or project party, keep abreast of its latest progress and changes, and adjust the due diligence plan and content as needed.

2. market forecast

Market forecasting refers to the prediction and evaluation of the future development trend of the industry and market in which the target enterprise or project is located in the process of business investment due diligence. Market forecasting is one of the most important and difficult parts of business investment due diligence, as it involves the impact of multiple uncertainties, such as policy changes, technological innovation, and consumer demand. Market forecasts can create the following difficulties for investors:

Unable to accurately judge the future development direction and speed of the industry and market, there may be high or low situation;

Inability to effectively assess the competitive advantage and potential of the target enterprise or project in the market, and may be overly optimistic or pessimistic;

The valuation and return on investment of the target enterprise or project cannot be reasonably determined, and there may be overvaluation or undervaluation.

In order to solve the problem of market prediction, investors can take the following measures:

Establish a scientific market forecasting model, according to the characteristics and laws of the industry and market, select the appropriate forecasting methods and indicators, such as historical trend method, causality method, expert judgment method, etc;

Collect sufficient market data and information, obtain historical data and future forecast data of the industry and market through the National Bureau of Statistics, industry associations, market research institutions and other channels, and analyze and integrate them;

Consider a variety of possible market scenarios, construct different market scenarios based on different assumptions and parameters, and calculate the performance and value of the target enterprise or project under different scenarios;

Communicate and negotiate with the target company or project party to understand its views and basis for market forecasts, and adjust the market forecast model and results based on the consensus and differences between the two parties.

3. competition analysis

Competitive analysis refers to the analysis and evaluation of the competitors faced by the target enterprise or project in the process of business investment due diligence. Competitive analysis is one of the most critical and complex parts of business investment due diligence, as it involves multiple dimensions and levels of comparison and judgment, such as product, price, channel, brand, technology, etc. Competitive analysis can create the following difficulties for investors:

The main competitors of the target enterprise or project cannot be fully and accurately identified, and there may be omissions or confusion;

Inability to effectively obtain detailed data and information of competitors, which may be incomplete or untrue;

It is not possible to reasonably compare the strengths and weaknesses of the target enterprise or project with competitors, and there may be subjective or one-sided situations.

In order to solve the problem of competition analysis, investors can take the following measures:

Determine the appropriate scope and dimension of competition, and select the appropriate scope (e. g., region, customer group, product category, etc.) and dimension (e. g., product, price, channel, brand, technology, etc.) according to the characteristics of the industry and market in which the target enterprise or project is located;

Collect sufficient competition data and information, obtain the basic situation, strategic direction, operation status and other data and information of competitors through the network, industry reports, expert interviews, customer research, on-site visits, etc., and analyze and integrate them;

Establish a scientific competitive evaluation system, determine evaluation indicators according to the competitive dimension, and give reasonable weights to the target enterprise or project and competitors for quantitative or qualitative evaluation, and draw conclusions of advantages and disadvantages;

Communicate and negotiate with the target enterprise or project party to understand its views and basis for competition analysis, and adjust the competition evaluation system and results according to the consensus and differences between the two parties.

4. Business Model Assessment

Business model assessment refers to the analysis and evaluation of the business model of the target enterprise or project in the process of business investment due diligence. Business model refers to the logic and mechanism of how an enterprise or project creates, transmits and acquires value, including value proposition, customer relationship, revenue source, cost structure and other elements. Business model assessment is one of the core and most difficult parts of business investment due diligence, because it involves innovation and change in many aspects, such as products, services, technologies, processes, organizations, etc. Business model assessment can pose the following difficulties for investors:

The business model of the target enterprise or project cannot be fully and accurately understood, and there may be ambiguity or error;

The feasibility and sustainability of the business model of the target enterprise or project cannot be effectively evaluated, and there may be too ideal or realistic;

It is not possible to reasonably compare the strengths and weaknesses of the business model of the target enterprise or project with that of other enterprises or projects, and there may be subjective or one-sided situations.

In order to solve the problem of business model evaluation, investors can take the following measures:

Use scientific business model analysis tools, such as business model canvas, value proposition canvas, etc., to decompose the business model of the target company or project into different elements, and perform visual and systematic description and analysis;

Collect sufficient business model data and information, obtain basic business model data and information through financial statements, business plans, market research reports and other documents provided by the target enterprise or project party, and analyze and integrate them;

Establish a scientific business model evaluation system, determine evaluation indicators according to different evaluation dimensions (such as innovation, competitiveness, profitability, etc.), and give reasonable weights to quantify or qualitatively evaluate the business model of the target enterprise or project, and draw conclusions of advantages and disadvantages;

Communicate and negotiate with the target enterprise or project party to understand its views and basis for business model evaluation, and adjust the business model evaluation system and results according to the consensus and differences between the two parties.

5. risk identification

Risk identification refers to the identification and analysis of various risks that the target enterprise or project may face in the process of business investment due diligence. Risk is the uncertainty that may cause the target enterprise or project to fail to achieve the desired objectives or cause losses. Risk identification is one of the most sensitive and important parts of business investment due diligence, because it directly affects investors' risk appetite and risk tolerance for the target enterprise or project. Risk identification can create the following difficulties for investors:

It is not possible to fully and accurately identify all the risks that the target enterprise or project may encounter, and there may be cases of neglect or underestimation;

Unable to effectively analyze the probability and impact of various risks in the target enterprise or project, which may be high or low;

The measures and strategies of the target enterprise or project to deal with various risks cannot be reasonably formulated, and there may be situations that are too conservative or aggressive.

To address the issue of risk identification, investors can take the following measures:

Use scientific risk identification tools, such as risk matrix, risk list, risk map, etc., to divide the risks that the target enterprise or project may face into different types and levels, and carry out visual and systematic description and analysis;

Collect sufficient risk data and information, obtain basic risk data and information through legal documents, contract documents, audit reports and other documents provided by the target enterprise or project party, and analyze and integrate them;

Establish a scientific risk evaluation system, and determine evaluation indicators according to different evaluation dimensions (such as probability of occurrence, degree of impact, difficulty of response, etc.).

Business model evaluation refers to the analysis and evaluation of the business logic and profitability of the target enterprise or project in the process of business investment due diligence. Business model assessment is one of the most core and difficult parts of business investment due diligence, because it involves innovation and change in many aspects, such as value proposition, revenue source, cost structure, partners, etc. Business model assessment can pose the following difficulties for investors:

The business logic and value creation of the target enterprise or project cannot be fully and accurately understood, and there may be ambiguity or error;

The profitability and sustainability of the target enterprise or project cannot be effectively measured, and there may be too high or too low;

It is not possible to reasonably judge the innovation and competitiveness of the target enterprise or project, and there may be cases of neglect or exaggeration.

In order to solve the problem of business model evaluation, investors can take the following measures:

Use scientific business model analysis tools, such as business model canvas, value proposition canvas, etc., to systematically, visually, and dynamically analyze and describe the business model of the target company or project;

Collect sufficient financial data and information, calculate and analyze the profitability and sustainability indicators, such as revenue growth rate, gross margin, net margin, cash flow, etc., through the financial statements, budget plans, revenue structure and other data and information provided by the target enterprise or project party;

Communicate and negotiate with the target enterprise or project party to understand its views and basis for business model assessment, and adjust business model analysis tools and results according to the consensus and differences between the two parties.

5. risk identification

Risk identification refers to the identification and assessment of various risks that the target enterprise or project may face in the process of commercial investment due diligence. Risk identification is one of the most sensitive and important parts of business investment due diligence, because it directly affects investors' risk appetite and risk tolerance for the target enterprise or project. Risk identification can create the following difficulties for investors:

It is not possible to fully cover all types of risks that the target enterprise or project may face, and there may be omissions or omissions;

The probability and impact of various risks in the target enterprise or project cannot be accurately assessed, and there may be underestimation or overestimation;

Inability to effectively develop the target enterprise or project risk response and control measures, there may be a lack or excessive situation.

To address the issue of risk identification, investors can take the following measures:

Determine the appropriate risk classification system, according to the characteristics of the target enterprise or project industry and market, select the appropriate risk classification system, such as policy risk, market risk, technology risk, operational risk, financial risk, etc;

Collect sufficient risk data and information, obtain data and information on various risk events faced by the target enterprise or project and their probability and degree of impact through the network, industry reports, expert interviews, customer research, on-site visits, etc., and analyze and integrate them;

Establish a scientific risk evaluation system, determine evaluation indicators according to the risk classification system, and give reasonable weights, quantify or qualitatively evaluate the various risks of the target enterprise or project, and draw risk levels and priorities;

Communicate and negotiate with the target enterprise or project party to understand its views and basis for risk identification, and adjust the risk evaluation system and results according to the consensus and differences between the two parties.

6. epilogue

Business investment due diligence is an important basis for investment decisions and a key factor in investment success. There are many difficulties and challenges in business investment due diligence, which require investors to have sufficient professional knowledge, experience and skills, as well as sufficient data support and communication and collaboration. From a practical point of view, this paper summarizes the five common difficulties in business investment due diligence, namely, information asymmetry, market forecasting, competition analysis, business model assessment and risk identification, and puts forward the corresponding response and solution, hoping to provide some reference and help for investors.