Investment due diligence is a comprehensive and in-depth review of the target company by the investor before investing to determine its value and risk. Investment due diligence involves the investigation and understanding of the business, finance, law and other aspects of the enterprise, which requires investors to have professional knowledge and experience, as well as some effective tools. This paper introduces the five tools of investment due diligence, namely, data room, field visits, data review, personnel interviews and financial models, and explains the use of these tools and considerations in the light of the case of Champ Consulting.

Data Room

The data room is a space for storing and sharing various files and data related to investment. It can be a physical space or a virtual space. The role of the data room is to ensure the security and integrity of information, so that investors can quickly obtain the information they need. The data room is usually provided by the target company or its consultant, and the corresponding access rights and rules are set.

The data room shall contain basic information, business information, financial information and legal information of the target company, such as business license, articles of association, shareholder composition, company introduction, company strategy, main business processes, important customers, important suppliers, financial statements in recent years, texts of important contract agreements, litigation and arbitration information, etc. The information in the data room should be kept updated in a timely manner, and the questions and opinions of investors should be fed back in a timely manner.

For example, when looking for strategic investors for a medical device company, Shangpu Consulting set up a virtual data room, uploaded all kinds of documents and data related to the company to the cloud, and set up passwords and permission controls. Through the data room, Champ Consulting can effectively demonstrate the company's business advantages and development potential to potential investors, and respond to their questions and concerns in a timely manner.

Field visits

Field visit refers to the investor personally to the target company's office or production base to inspect, in order to intuitively feel the company's operating conditions and management level. Field visits can help investors verify whether the information in the data room is true and reliable, find some details and problems that are difficult to obtain from the documents, and enhance their trust and confidence in the company.

During on-site visits, investors should pay attention to the following aspects: first, the work efficiency and morale of employees, second, the operation and maintenance of equipment, third, the accumulation of inventory, fourth, shipments and payments, and fifth, the company's culture and values. During on-site visits, investors should also communicate with the company's senior managers, core employees, important customers, and important suppliers to understand their views and evaluations of the company.

For example, when looking for an acquirer for an education and training company, Shangpu Consulting arranged several on-site visits to the company's headquarters, branch schools and cooperative institutions. Through field visits, Shangpu Consulting found that the company's curriculum quality and teacher level are high, but the market promotion and brand building are weak, resulting in a high customer turnover rate. Based on these findings, Shangpu Consulting has formulated corresponding improvement measures for the company and made reasonable valuation recommendations to potential acquirers.

Data Review

Data review refers to the detailed analysis and evaluation of the documents and data in the data room by investors to capture the key value points and risk points of the target company. Data review requires investors to have professional knowledge and experience, but also need to use some analytical tools and methods. When reviewing the information, investors should pay attention to the following aspects: first, the authenticity, completeness and consistency of the documents and data; second, the information and logic implied in the documents and data; third, the comparison of the documents and data with the industry, market and competitors; fourth, the problems and hidden dangers in the documents and data.

Example: When looking for venture capitalists for an e-commerce platform, Champ Consulting conducted an in-depth review of various documents and data provided by the company. Through the review, Champ Consulting found that the company's user size and activity is high, but the user stickiness is low, mainly rely on low-cost promotions to attract users. Shangpu Consulting believes that the company's profit model is not clear and stable enough, and put forward suggestions to the company to optimize user operations and enhance user value.

Personnel Interviews

Personnel interview refers to the communication between investors and relevant personnel inside and outside the target company to obtain more first-hand information and feedback. Personnel interviews can help investors verify that the conclusions drawn from the data review are correct, identify details and issues that are difficult to obtain from the documents, and enhance their trust and confidence in the company. When interviewing people, investors should pay attention to the following aspects: first, choose the right interviewee, second, design the interview questions reasonably, third, master the appropriate interview skills, and fourth, record and analyze the interview content.

For example, when looking for strategic partners for an auto parts company, Shangpu Consulting conducted several rounds of interviews with the company's founders, senior managers, core technical personnel, important customers, and important suppliers. Through the interview, Shangpu Consulting learned about the company's technical advantages and market position, and found that the company's management system, financial norms, legal risks and other aspects of the shortcomings. Based on these findings, Shangpu Consulting has formulated corresponding improvement measures for the company and proposed reasonable cooperation plans to potential partners.

Financial Model

Financial model refers to investors based on the target company's internal and external data, establish various assumptions, complete financial forecasts and valuation analysis, in order to assess the target company's future development potential and return on investment. Financial models require investors to have professional financial knowledge and skills, as well as some analytical tools and methods. When modeling financial models, investors should pay attention to the following aspects: first, selecting appropriate financial indicators and assumptions, second, constructing a reasonable financial structure and logic, third, applying appropriate valuation methods and techniques, and fourth, testing and optimizing the results of the model.

For example, when looking for private equity investors for an Internet financial company, Shangpu Consulting established a detailed financial model, including income forecast, cost forecast, cash flow forecast, profit forecast, balance sheet forecast, etc., and used a variety of valuation methods such as price-earnings ratio method, price-to-book ratio method and cash flow discount method to conduct a comprehensive valuation analysis of the company. Through the financial model, Champ Consulting found that the company's performance growth rate and profitability were high, but risk control and capital management were weak, resulting in tight cash flow and rising bad debt rates. Based on these findings, Shangpu Consulting has formulated corresponding improvement measures for the company and made reasonable investment suggestions to potential investors.

Summary

Investment due diligence is a comprehensive and in-depth review of the target company by the investor before investing to determine its value and risk. This paper introduces the five tools of investment due diligence, namely, data room, field visits, data review, personnel interviews and financial models, and explains the use of these tools and considerations in the light of the case of Champ Consulting. I hope this article can help investors and entrepreneurs to improve the efficiency and quality of investment due diligence.