Investment is a scientific and artistic industry, which requires investors to have keen insight, rigorous logic and creative thinking. In the process of investment decision-making, an important and essential link is investment due diligence.

Investment due diligence, also commonly referred toDD（Due due due due), the purpose is to let investors have a comprehensive understanding of the company. Generally, after reaching an initial cooperation intention with the target enterprise, investors will conduct a comprehensive and in-depth review of the historical data and documents of the enterprise, the background of managers, business model, market risk, management risk, technical risk and capital risk through consultation to determine whether the target company is worth investing in, whether there is risk after putting money into it, and whether it can be rewarded with the least risk.

So, how to do investment due diligence? This article will introduce the basic steps of investment due diligence from the following six aspects, and show how to use business analysis techniques for effective investment due diligence with the actual case of Champ Consulting.

Step 1: Develop a survey plan

Before you start investing in due diligence, you must first develop a detailed and reasonable investigation plan that clarifies the objectives, scope, methods, time and responsibility allocation of the investigation. The survey plan should be tailored to the target company's industry characteristics, stage of development, size and complexity to avoid one-size-fits-all or loopholes.

For example, when investing in a new energy vehicle manufacturer, Champ Consulting developed the following survey plan:

Survey objective: to assess the value, risk and viability of the target company

Scope of investigation: including business, financial, legal, technical and market aspects

Survey methods: including review of documents, reference to external information, interviews with relevant personnel, corporate field surveys and internal team communication.

Time of investigation: Expected to take two months

Investigation responsibility: A dedicated project team is formed by Champ Consulting, including industry experts, financial experts, legal experts and technical experts.

Step 2: Collect and verify information

Once the survey plan is in place, it's time to start collecting and validating information. This is the most important part of investment due diligence, and it is also the most time-consuming and laborious part. Investors need to collect information about the target company through various channels and verify its authenticity, accuracy and completeness in order to have an objective, comprehensive and in-depth understanding of the target company.

The main channels for collecting information are as follows:

Documents provided by the target company, including business registration, financial reports, business documents, legal contracts, etc.

External information, including information sources such as the Internet, industry magazines, industry insiders, etc., to understand the target company and its industry.

Interviews with relevant personnel, including adequate communication with all levels and functions within the target company, as well as with intermediaries.

Enterprise field survey, including the view of the target company's plant, land, equipment, products and inventory and other physical assets.

Group internal communication, including investigation team members from different backgrounds and professions, their mutual communication is also a way to achieve the purpose of the investigation

There are several ways to verify information:

Comparative analysis, including comparing the information provided by the target company from different sources, at different times, and with different content, to find differences and contradictions among them.

Cross-validation, including communication with customers, suppliers, competitors, etc. outside the target company to verify the information provided by the target company.

Sample validation, including sampling large amounts of data provided by the target company to test its reasonableness and consistency.

Expert verification, including asking experts in relevant fields to evaluate and comment on the technical, legal, etc. information provided by the target company

For example, when investing in a new energy vehicle manufacturer, Champ Consulting collected and verified the following information:

Documents provided by the target company, including business registration, financial reports, business documents, legal contracts, etc.

External information, including information sources such as the Internet, industry magazines, and industry insiders, to understand the development trend, market size, regulatory policies, and competitive landscape of the new energy vehicle industry.

Interviews with relevant personnel, including in-depth communication with the founder, senior management, technical personnel and sales personnel of the target company, to understand the vision, strategy, product characteristics and market positioning of the target company.

Enterprise field investigation, including visiting the target company's production base, R & D center, exhibition hall, etc., to observe the target company's production process, technical level, product quality, etc.

Internal communication of the team, including analysis and discussion by members of the Champ Consulting Project Team based on their respective expertise to form preliminary findings and recommendations.

Step 3: Analyze and evaluate the information

After the information has been collected and validated, it is time to begin analyzing and evaluating the information. This is the most core part of investment due diligence, and it is also the most challenging and creative part. Investors need to use business analysis techniques to conduct value discovery, risk discovery and investment feasibility analysis of the target company.

Value discovery refers to the evaluation of the target company's profitability, growth potential, competitive advantage, etc. through the analysis of the target company's finance, business, market, etc., to determine the intrinsic value and investment value of the target company.

Risk discovery refers to the assessment of the target company's compliance risk, technical risk, management risk, etc. through the analysis of the target company's law, technology, management and other aspects, to determine the target company's risk level and risk control measures.

Investment feasibility analysis refers to the analysis of the valuation, return and exit of the target company to assess whether the investor can obtain a reasonable return after investing the capital, and whether the investor can successfully achieve the recovery of the capital when the investor exits.

For example, in the investment due diligence of a new energy vehicle manufacturer, Champ Consulting analyzed and evaluated the following information:

Value discovery: through the financial analysis of the target company's financial statements, it is found that the target company has a high revenue growth rate, gross profit margin and net profit margin, indicating that the target company has a strong profitability; Through the business analysis of the target company's products and services, it is found that the target company has independent research and development of core technology, innovative business model and loyal customer groups, indicating that the target company has greater growth potential; through the market analysis of the target company's industry and market, it is found that the new energy automobile industry is in a rapid development stage, the market demand is strong, the policy support is strong, and the competition pattern has not yet formed, indicating that the target company has a strong competitive advantage. Based on the above analysis, it is determined that the target company has a high intrinsic value and investment value.

Risk discovery: through the legal analysis of the legal documents involved in the target company, it is found that the target company has some compliance risks, including not obtaining some necessary administrative licenses, not paying part of taxes and fees according to regulations, and having contract disputes with some suppliers, which may lead to consequences such as fines, lawsuits or losses. Through the technical analysis of the technology owned by the target company, it is found that the target company has some technical risks, including that some technologies have not been patented, some technologies depend on external partners or suppliers, and some technologies may face replacement or replacement, which may lead to technology leakage, intensified competition or lagging behind the market. Through the management analysis of the management team of the target company, it is found that there are some management risks in the target company, including the lack of stability and diversity of the management team, imperfect and irregular management systems, low management efficiency and opacity, etc., which may lead to brain drain, decision-making errors or lack of supervision. Based on the above analysis, it is determined that the target company has a certain degree of risk, and the corresponding risk control measures are proposed.

Investment feasibility analysis: through the valuation analysis of the target company, the price-earnings ratio method and the price-to-sales ratio method are used for relative valuation, and the data of listed companies in the same industry and recent mergers and acquisitions are compared and adjusted to obtain the reasonable valuation range of the target company; through the return analysis of the target company, the internal rate of return method and net present value method are used for absolute valuation, and according to the investor's capital cost and income requirements for comparison and adjustment, the target company's reasonable return range; through the target company exit analysis, considering the target company's listing potential, merger and acquisition possibility and the feasibility of other exit methods, and according to the market situation and the preference of investors to choose and plan, the target company's reasonable exit plan. Based on the above analysis, determine whether the investor can obtain a reasonable return after investing the capital, and whether the investor can successfully achieve the recovery of the capital when the investor exits.

Step 4: Write and review the report

After analyzing and evaluating the information, it is time to start writing and reviewing the report. This is the most formal and important part of investment due diligence. Based on the results of the analysis and evaluation, investors need to prepare a complete and professional investment due diligence report and conduct internal review for submission to the investment decision-making committee or other relevant parties.

The investment due diligence report consists of the following sections:

Summary of the report, including the basic situation of the target company, the purpose of the investigation, the scope of the investigation, the method of the investigation, the time of the investigation, the conclusions and recommendations of the investigation, etc.

The value discovery part, including the target company's financial analysis, business analysis, market analysis, etc., to assess the target company's profitability, growth potential, competitive advantage, etc., to determine the target company's intrinsic value and investment value.

The risk discovery part, including legal analysis, technical analysis, management analysis, etc. of the target company, evaluates the compliance risk, technical risk, management risk, etc. of the target company, and determines the risk level and risk control measures of the target company.

Investment feasibility analysis, including the target company's valuation analysis, return analysis, exit analysis, etc., to assess whether the investor can get a reasonable return after investing capital, and whether the investor can successfully achieve capital recovery when exiting.

The format of the investment due diligence report follows the following principles:

Concise and clear, avoid lengthy and complex

Clear logic to avoid clutter

Objective truth, avoid subjective assumptions

Professional norms to avoid mistakes

For example, after investing in a new energy vehicle manufacturer, Champ Consulting wrote an approximate100page of the investment due diligence report and an internal review was conducted. The report is summarized as follows:

Report Summary

This report was prepared by Shangpu Consulting for a private equity fund to invest in a new energy vehicle manufacturer (hereinafter referred to as the "Target Company"). The purpose of this report is to provide the Fund with a comprehensive and in-depth understanding of the value, risk and viability of the target company.

This report covers business, financial, legal, technical and market investigations, using methods such as review of documents, reference to external information, interviews with relevant personnel, corporate field investigations and internal communication within the team, which took two months and was carried out by a dedicated project team composed of Shangpu Consulting.

The main conclusions and recommendations of this report are as follows:

The target company is a high-tech enterprise focusing on the manufacturing of new energy vehicles, with independent research and development of core technology, innovative business model and loyal customer groups, in the stage of rapid development, strong market demand, strong policy support, the competition pattern has not yet formed, with high intrinsic value and investment value.

The target company has some compliance risks, technical risks and management risks, which need to include corresponding safeguard clauses in the investment agreement, as well as strengthen risk control and supervision in post-investment management.

The reasonable valuation range of the target company is10Billions15Billions of dollars, investors put in1Billions of dollars later available10%To15%of equity, with a projected internal rate of return25%To35%, the net present value is1.5Billions2.5$billion, with a return on investment multiple2.5Double3.5Times.

The target company is expected to be listed or M & A within the next three years as the main exit method for investors. Other possible exit methods include equity transfer or dividends.

To sum up, we recommend that the fund invest in the target company and enter into an investment agreement with the target company.

Step 5: Design and implementation of investment programmes

Once the report has been written and reviewed, the design and implementation of the investment programme will begin. This is the most practical and critical part of the investment due diligence. According to the conclusions and recommendations of the report, investors need to negotiate and negotiate with the target company to determine the investment amount, equity ratio, guarantee terms and other details, and sign the investment agreement to complete the investment transaction.

The process of designing and implementing an investment programme consists of the following steps:

Propose preliminary intentions, including expressing investment intentions to the target company and proposing general investment conditions

In-depth negotiations, including discussions and negotiations with the target company on the specific investment amount, equity ratio, guarantee terms, etc.

Sign a letter of intent or memorandum, including written confirmation by both parties on the agreed investment conditions and agree on subsequent work arrangements

Complete and submit due diligence reports for approval, including submission of due diligence reports to the Investment Decision Committee or other interested parties for approval, and modification and improvement based on feedback

Sign a formal agreement and make payments, including a formal investment agreement between the parties on the final terms of the investment and make payments in accordance with the agreement.

Complete industrial and commercial changes and obtain equity certificates, including completing industrial and commercial registration changes in accordance with the law and obtaining corresponding equity certificates

For example, after investing in a new energy vehicle manufacturer, Champ Consulting designed and implemented the following investment plan for a private equity fund:

Propose a preliminary intention: the fund expressed its intention to invest in the target company and proposed general investment conditions, I .e. investment.1Billions of dollars, get10%of equity, as well as some safeguards, such as priority dividends, anti-dilution, concerted action, etc.

In-depth negotiations: the fund and the target company on the specific investment conditions for a number of rounds of discussion and consultation, and finally reached an agreement, that is, input.1.2Billions of dollars, get12%of the equity ratio, as well as a number of safeguards, such as priority dividends, anti-dilution, concerted action, disclosure, exit arrangements, etc.

Sign a letter of intent or memorandum: the fund and the target company have made a written confirmation of the agreed investment conditions, and signed a letter of intent to complete the due diligence report and submit for approval within one month, and complete the signing of the formal agreement and the payment within two months.

Complete the due diligence report and submit it for approval: the fund submitted the due diligence report to the investment decision-making committee for approval, and made some modifications and improvements based on the feedback, and finally obtained the approval of the investment decision-making committee.

Sign a formal agreement and make a payment: the fund signed a formal equity investment agreement with the target company on the final investment terms and paid1.2Billions of dollars

Complete industrial and commercial changes and obtain equity certificates: The fund has completed the industrial and commercial registration changes in accordance with the law and obtained the corresponding equity certificates

Step 6: Post-investment management

After the investment transaction is completed, it is time to start post-investment management. This is the most lasting part of the investment due diligence, and it is also the most concerned part. Investors are required to provide ongoing supervision and guidance to the target company in accordance with the rights and obligations agreed upon in the investment agreement in order to protect and increase the value of their investments.

The main contents of post-investment management include the following aspects:

Supervise the operation of the target company, including regular access to the target company's financial reports, business reports, market reports, etc., and analyze and evaluate them.

Guide the target company's development strategy, including providing advice and support to the target company on product development, market expansion, brand building, etc. according to market changes and competitive trends.

Participate in major decisions of the target company, including decisions on financing, mergers and acquisitions, dividends, changes, etc., in accordance with the matters agreed in the investment agreement.

Facilitate the exit arrangements of the target company, including the way and time agreed in the investment agreement, to promote the target company to achieve exit methods such as listing or mergers and acquisitions, and to achieve their own capital recovery

For example, after investing in a new energy vehicle manufacturer, Champ Consulting conducted the following post-investment management for a private equity fund:

Supervise the operation of the target company: the fund regularly obtains the financial reports, business reports, market reports, etc. of the target company, analyzes and evaluates them, and finds that the target company has maintained a high growth rate and market share in the field of new energy vehicles, but it also faces challenges and pressures in terms of technology update, cost control, channel construction, etc.

Guide the development strategy of the target company: according to market changes and competitive situation, the fund provides suggestions and support for product development, market expansion and brand building of the target company, for example, it is suggested that the target company should increase R & D investment and develop new energy vehicles with higher performance and lower cost; it is suggested that the target company should expand overseas market and make use of policy advantages and brand influence to increase international market share; It is suggested that the target company should strengthen brand publicity, increase consumer awareness and loyalty, etc.

Participation in major decisions of the target company: the fund participates in the target company's decisions on financing, mergers and acquisitions, dividends, changes, etc., in accordance with the matters agreed upon in the investment agreement, such as participation in the target company'sBRound of financing, assisted the target company to introduce an internationally renowned strategic investor; participated in the target company's acquisition of a battery supplier, helped the target company reduce costs and risks; participated in the target company's dividend policy, enjoyed the target company's profit distribution; participated in the target company's equity structure changes, and maintained its own equity ratio and rights.

Promote the exit arrangement of the target company: According to the method and time agreed in the investment agreement, the fund has promoted the target company to achieve exit methods such as listing or mergers and acquisitions, and realized its own capital recovery, such as assisting the target company in preparing for listing., Including financial audit, legal due diligence, information disclosure, etc., and sold its own shares according to the lock-in period after listing; or find the right acquirer, negotiate and negotiate with it, and recover the money you have invested after the merger is completed, etc.

Summary

Investment due diligence is a comprehensive and in-depth review of the target company by the investor before investing to determine its value, risk and feasibility. This article introduces the six steps of investment due diligence, namely, developing a survey plan, collecting and verifying information, analyzing and evaluating information, writing and reviewing reports, designing and executing investment plans, conducting post-investment management, and showing how to use business analysis techniques to make effective investment due diligence, combined with the actual case of Shangpu Consulting. I hope this article can be helpful to friends who are interested in engaging in or upgrading their skills in the investment industry.