Purpose and content of 1. investment due diligence

Investment due diligence refers to the comprehensive, in-depth and objective investigation and evaluation of the target enterprise or project before the acquisition of equity or assets, merger and acquisition, cooperation, listing and other major investment activities, in order to determine its true value, risk and potential, and provide a basis for investment decision-making. The main purposes of investment due diligence are as follows:

Verify the legality, compliance and feasibility of the target enterprise or project, and eliminate potential legal risks and disputes;

Understand the core information of the target enterprise or project, such as financial status, operating status, market status, technical status, etc., and evaluate its profitability, competitive advantage, development prospects, etc;

Discover the problems and hidden dangers of the target enterprise or project, such as debt, litigation, loss, management defects, etc., and propose improvement measures or risk prevention plans;

Determine the reasonable valuation of the target enterprise or project and provide the basis for the negotiation of the transaction price and terms;

Provide support for subsequent transaction execution and integration, such as signing agreements, completing deliveries, and developing strategic plans.

According to different investment objectives and needs, the content of investment due diligence will vary, but it can generally be divided into the following aspects:

Financial due diligence: mainly to audit and analyze the financial statements, accounting policies, internal controls, tax status, etc. of the target enterprise or project to verify its financial authenticity and integrity and assess its financial position and profitability;

Legal due diligence: mainly to review and verify the legal documents, contractual agreements, intellectual property rights, litigation and arbitration of the target enterprise or project to confirm its legal legality and compliance, and to eliminate or reduce legal risks and disputes;

Market due diligence: mainly to investigate and analyze the industry, market, customers, competitors, etc. of the target enterprise or project in order to understand its market situation and development trend, and to evaluate its market demand and competitive advantage;

Technical due diligence: mainly to evaluate and verify the technical assets, research and development capabilities, innovation capabilities, technical risks, etc. of the target enterprise or project to determine its technical level and value and protect its technical rights and interests;

Management due diligence: mainly to inspect and evaluate the organizational structure, human resources, corporate culture, strategic planning, etc. of the target enterprise or project, so as to understand its management status and efficiency, and put forward suggestions for improvement or integration plan.

Methods and processes for 2. investment due diligence

There are several main ways to invest in due diligence:

Desktop research: that is, by consulting public materials and information, such as official websites, media reports, industry reports, policies and regulations, etc., to obtain the basic situation and background information of the target enterprise or project;

On-the-spot investigation: that is, by personally visiting the office space, production base and sales outlets of the target enterprise or project, observing its actual operation status and environmental conditions, and communicating with relevant personnel;

Data analysis: that is, through the collection and collation of various types of data and documents provided by the target enterprise or project, such as financial statements, contract agreements, patent certificates, etc., the use of professional analysis tools and methods, quantitative and qualitative analysis and evaluation;

Expert consultation: that is, by inviting experts or consultants in related fields, such as accountants, lawyers, industry experts, etc., to provide professional opinions and suggestions to solve the difficulties and doubts encountered in the process of investment due diligence.

The investment due diligence process generally includes the following steps:

Sign a confidentiality agreement: before the formal start of investment due diligence, both parties shall sign a confidentiality agreement to stipulate the scope and responsibility of confidentiality of information and data involved in the process of investment due diligence, so as to protect the interests of both parties;

Formulate a due diligence plan: according to the investment objectives and needs, formulate a detailed due diligence plan, including due diligence content, methods, time, personnel, budget, etc., and communicate and negotiate with the target enterprise or project to determine the due diligence arrangement;

Implementation of due diligence work: in accordance with the due diligence plan, using the above-mentioned methods to conduct a comprehensive, in-depth and objective investigation and evaluation of the target enterprise or project, and timely communication and feedback with the target enterprise or project to solve problems;

Issue a due diligence report: after completing the due diligence work, issue a detailed due diligence report based on the results of the due diligence, including the basic situation of the target enterprise or project, value assessment, risk analysis, improvement recommendations, etc., and provide relevant evidence and basis;

Conduct transaction negotiations: Negotiate transaction prices and terms with target companies or projects based on due diligence reports, and sign transaction agreements to complete transaction execution and integration.

The cost composition and influencing factors of 3. investment due diligence.

The cost of investment due diligence consists of the following components:

Labor cost: that is, the salary, bonus, welfare and other expenses of the personnel invested in the investment due diligence, which is usually the main part of the investment due diligence cost, and is related to the scale, difficulty, time and other factors of the investment due diligence;

Material cost: that is, the cost of equipment, materials, transportation, accommodation, etc., which is usually a secondary part of the cost of investment due diligence, related to the location, mode, scope and other factors of investment due diligence;

Outsourcing costs: that is, the cost of entrusting external professional institutions or individuals to provide investment due diligence related services, such as hiring accounting firms, law firms, market research companies, etc., related to the complexity, professionalism, quality and other factors of investment due diligence;

Other costs: that is, other costs that may be incurred in the investment due diligence process, such as the cost of providing information to the target enterprise or project, the cost of transaction negotiation, the cost of risk compensation, etc., related to factors such as the circumstances and results of the investment due diligence.

There are many factors that affect the cost of investment due diligence, including the following:

Investment objectives and needs: different investment objectives and needs determine the content and scope of different investment due diligence, such as the acquisition of a listed company and the acquisition of a private enterprise required investment due diligence workload and difficulty is different, and therefore will also affect the cost of investment due diligence;

Investment scale and risk: generally speaking, the larger the investment scale, the higher the investment risk, the need for more comprehensive and in-depth investment due diligence, in order to avoid or reduce potential losses, so will also increase the cost of investment due diligence;

The situation of the target enterprise or project: the situation of the target enterprise or project will also affect the cost of investment due diligence, such as the industry, market, region, etc. in which the target enterprise or project is located, as well as its financial situation, legal situation, technical situation, etc., will have an impact on the workload and difficulty of investment due diligence;

Investors' own capabilities and resources: Investors' own capabilities and resources will also affect the cost of investment due diligence, such as whether investors have a professional team and experience, whether they have sufficient time and budget, whether they have reliable partners and channels, etc., will have an impact on the efficiency and quality of investment due diligence.

Assessment of the benefits and value of 4. investment due diligence.

Assessing the benefits and value of investment due diligence is not simply a comparison of its outputs and costs, but rather a comprehensive analysis from multiple perspectives and levels, including the following:

Investment decision support: investment due diligence provides investors with important information and data on the true value, risk and potential of the target enterprise or project, helps investors make reasonable investment judgments, avoids blind or wrong decisions, and improves the success rate of investment;

Optimization of transaction prices and terms: investment due diligence provides investors with the basis and reference for a reasonable valuation of the target enterprise or project, helps investors to strive for greater benefits in the negotiation of transaction prices and terms, and reduces investment costs;

Risk prevention and control: investment due diligence provides investors with warnings and suggestions on the problems and hidden dangers of the target enterprise or project, helps investors to formulate risk prevention and control plans, and reduces investment risks;

Transaction execution and integration promotion: Investment due diligence provides investors with detailed information and background information about the target enterprise or project, helps investors to communicate and coordinate effectively in the process of transaction execution and integration, and improves transaction efficiency and integration effect.

In summary, the benefits and value of investment due diligence are reflected not only in the output of investment due diligence itself, but also in the impact of investment due diligence on the overall investment process and results. Therefore, assessing the benefits and value of investment due diligence needs to be considered from a global and long-term perspective, rather than only from a local and short-term perspective.

5. practical advice and case studies

In order to improve the cost-effectiveness of investment due diligence, that is, to reduce the cost of investment due diligence and improve the efficiency of investment due diligence under the premise of ensuring the quality of investment due diligence, the following are some practical suggestions:

Clarify investment objectives and needs, formulate reasonable due diligence plans, determine due diligence content, methods, time, personnel, budget, etc., and avoid duplication or ineffective work;

Select appropriate due diligence methods, according to the situation and characteristics of the target enterprise or project, flexible use of desktop research, field visits, data analysis, expert consultation and other methods, make full use of existing information and resources;

Establish a professional team and process, assign appropriate personnel and responsibilities according to different due diligence aspects, establish effective communication and coordination mechanisms, and ensure the smooth progress of due diligence work;

Entrust external professional institutions or individuals to provide some or all of the due diligence services, and if necessary or conditions permit, you can hire accounting firms, law firms, market research companies, etc. to provide professional opinions and suggestions to save time and cost;

Maintain a good relationship with the target company or project, communicate and negotiate with the target company or project in a timely manner, obtain the required information and data, resolve possible problems and doubts, and promote transaction negotiation and execution.

The following are some specific examples of cost-benefit analysis of investment due diligence:

Case 1: A well-known domestic Internet company plans to acquire an overseas game company. When making investment due diligence, the industry, market, legal and other environments in which the target company is located are quite different from those in China, so more in-depth and detailed investigation and evaluation are needed. In order to reduce the cost of investment due diligence, the company has taken the following measures:

Develop a detailed due diligence plan, and communicate and negotiate with the target company to determine the content, method, time, personnel, etc. of the due diligence;

Use publicly available information and data to conduct desktop research, and entrust local professional institutions to conduct field visits and data analysis;

Hired local well-known accounting firms, law firms, industry experts to provide legal, financial, market and other aspects of professional advice and advice;

Maintain good communication and cooperation with the target company, obtain the required information and data in a timely manner, solve possible problems and doubts, and promote transaction negotiation and execution.

Through the above measures, the company successfully completed the investment due diligence and acquired the target company at a reasonable price and terms, achieved the investment objectives and needs, and improved the cost-effectiveness of the investment due diligence.

Case 2: A well-known domestic pharmaceutical company plans to acquire a domestic small and medium-sized biotechnology company. When making investment due diligence, due to the high professionalism and complexity of the target company's technical assets, research and development capabilities, and innovation capabilities, more professional and rigorous evaluation and verification are needed. In order to improve the quality and efficiency of investment due diligence, the company has taken the following measures:

Clarify the investment objectives and needs, and formulate a reasonable due diligence plan, determine the due diligence content, methods, time, personnel, etc;

Professional teams and processes have been established, appropriate personnel and responsibilities have been assigned, and effective communication and coordination mechanisms have been established to ensure the smooth progress of due diligence work;

Use a variety of methods for technical due diligence, such as consulting technical documents, patent certificates, research and development reports, data analysis, experimental verification, expert review, etc;

Maintain a good relationship with the target company, communicate and negotiate with the target company in a timely manner, obtain the required information and data, resolve possible problems and doubts, and promote transaction negotiation and execution.

Through the above measures, the company successfully completed the investment due diligence, and acquired the target company at a reasonable price and terms, achieved the investment objectives and needs, and improved the quality and efficiency of the investment due diligence.

6. epilogue

Investment due diligence is a comprehensive, in-depth and objective investigation and evaluation of a target enterprise or project by an investor before making an investment decision, with the aim of revealing its true value, risk and potential in order to make a reasonable investment judgment. The process of investment due diligence involves many aspects, such as finance, law, market, technology, management, etc., which requires a lot of time, human and financial resources, and therefore will also incur corresponding costs. How to measure the cost-effectiveness of investment due diligence, that is, the ratio of input to output, is a matter of concern to investors. This paper analyzes the purpose, content, method and process of investment due diligence, discusses the cost composition and influencing factors of investment due diligence, and how to evaluate the benefits and value of investment due diligence, and puts forward some practical suggestions and cases, hoping to help investors.