Investment due diligence consulting refers to a comprehensive, in-depth and objective investigation and evaluation of the target enterprise or project before investment decision-making, in order to reveal its true value, risk and potential, and provide investors with effective decision-making basis and suggestions. Investment due diligence consulting is an important part of the investment field and one of the core businesses of Shangpu Consulting Group. However, in practice, there are many misunderstandings and pitfalls in investment due diligence consulting, which, if not avoided, may lead to losses or missed opportunities for investors. The purpose of this paper is to analyze the misunderstandings and pitfalls of investment due diligence consulting, and put forward corresponding solutions and suggestions to help investors make more informed investment decisions.

Myth 1: The purpose of due diligence is to assess the feasibility of the project.

Many investors believe that the purpose of due diligence is to assess the feasibility of the project, that is, to determine whether the project is worth investing in and whether it will bring the expected return. This understanding is problematic because it confuses the purpose of the due diligence officer with the purpose of the decision maker. The purpose of due diligence personnel is to achieve information symmetry, that is, to obtain true, complete and accurate information about the target enterprise or project as much as possible to provide a basis for decision makers. The purpose of the decision maker is to assess the feasibility of the project, I .e. to make investment decisions based on a comprehensive analysis of the value, risks and potential of the project based on due diligence reports and other factors. Therefore, due diligence personnel should not replace the functions of decision makers, nor should they carry a heavy burden on themselves, but should focus on the collection, collation and presentation of information.

Misunderstanding 2: The more comprehensive the better.

Many investors believe that due diligence is as comprehensive as possible, I .e., gathering as much information as possible about the target business or project without missing any details. This understanding is unrealistic and unnecessary because of the limitations of objective conditions and the importance of the principle. The limitation of objective conditions means that for targets with large scale, wide geographical area, many cross-industries and complex affiliated enterprises, it will take a very long time and high cost to thoroughly investigate, which may affect the timeliness and efficiency of investment. The principle of materiality means that not all information is equally important to investors, but rather that there are trade-offs based on the characteristics and needs of the project to capture the focus and meet the needs of decision-making.

Myth 3: The due diligence report is objective.

Many investors believe that the due diligence report is objective, that is, the due diligence report can reflect the real situation of the target enterprise or project, and is not subject to the subjective influence of the staff. This understanding is too idealistic and inaccurate because of human weaknesses and performance appraisal. Human weakness refers to the fact that, in preparing due diligence reports, due diligence personnel may intentionally or unintentionally selectively disclose information, emphasizing positive information and ignoring negative information, or vice versa, in order to achieve their own goals. Performance appraisal means that the performance of due diligence personnel is related to the objectives of the department or organization to which they belong, such as the performance of business managers is linked to business volume or operating income, and the performance of risk managers is linked to risk control, so their due diligence reports may be biased in their own interests.

Myth 4: Do your best to discover all risks.

Many investors believe that due diligence can identify all risks, that is, due diligence can effectively identify and prevent all potential risks of the target enterprise or project, and ensure the safety of the investment. This understanding is overly optimistic and incomplete because of the diversity and uncertainty of risk. The diversity of risks means that the risks faced by the target enterprise or project may come from many aspects, such as policy, economy, industry, market, management, law, etc., and these risks can not all be found through due diligence, especially some hidden, potential and future risks. Uncertainty of risk means that the risks of the target enterprise or project may change over time and in the environment, and these changes are difficult to predict and control, so that due diligence can only identify a portion of the known, existing, historical risks and cannot guarantee that future risks do not exist or will not occur.

Trap 1: Discount to recover claims

Discounted recovery of claims means that after a problem with an investment project, the investor accepts a discount on the investment claim in order to exit as soon as possible, I .e., the claim is transferred to a third party at a price lower than the principal, thereby reducing losses. This is a common investment trap because it can lead to greater losses or missed opportunities for investors. On the one hand, the discount recovery of creditor's rights may be used by some bad project parties or intermediaries to induce investors to accept unreasonable discount conditions through false information or threats, so as to obtain huge profits. On the other hand, discounted claims may deprive investors of subsequent recourse or rights, and if the project improves later or other rescue measures are available, investors may miss the opportunity to recover their principal or obtain higher returns.

Trap 2: Follow Big Cafe

Follow-up investment refers to relying on the judgment of some famous or influential investors or institutions when investing in projects, not doing their own independent thinking and due diligence, and directly following their investment behavior. This is a common investment trap as it can lead to blindness or risk taking by investors. On the one hand, big investors may ignore their investment objectives and risk preferences and blindly chase hot or high-return projects without considering whether their abilities and conditions are suitable, resulting in investment failure or loss or excessive risk. On the other hand, big investors may ignore their own independent judgment and due diligence, blindly believe in their authority or experience, and do not know their investment logic or motivation, which may lead to investment mistakes or fraud.

Trap three: trust verbal commitment

Confidence in verbal commitment is when investing in a project, placing too much faith in the verbal commitment of the target enterprise or project party, not requiring a written contract or agreement, or not carefully reviewing the content and terms of the contract or agreement. This is a common investment trap because it can result in the investor's rights being compromised or unprotected. On the one hand, the verbal commitment of trust may be used by some dishonest target enterprises or project parties to induce investors to invest money through false promises or guarantees, and then refuse to fulfill or change the commitment, thus occupying the interests of investors. On the other hand, trusting verbal promises may deprive investors of legal protection or relief, and in the event of a dispute or controversy, investors may find it difficult to prove their rights or claims, or find that there are content or terms in the contract or agreement that are not conducive to them, thus unable to defend their rights and interests.

Trap four: ignore the follow-up management

Ignoring follow-up management refers to not paying attention to or participating in the follow-up operation and management of the target enterprise or project after the investment project, not obtaining or analyzing relevant information and data in a timely manner, and not proposing or implementing corresponding improvement or optimization measures. This is a common investment trap because it can lead to lower returns or increased risk for investors. On the one hand, ignoring follow-up management may cause investors to miss out on some opportunities for value-added or profit, and if there are some new developments or changes in the target enterprise or project, investors may not be able to identify or grasp them in time, thus failing to improve their investment efficiency or returns. On the other hand, ignoring follow-up management may expose investors to some losses or crises, and if there are some problems or risks in the target enterprise or project, investors may not be able to detect or respond to them in time, thus failing to reduce their investment losses or risks.

Conclusion

Investment due diligence consulting is an important part of the investment field and one of the core businesses of Shangpu Consulting Group. However, in practice, there are many misunderstandings and pitfalls in investment due diligence consulting, which, if not avoided, may lead to losses or missed opportunities for investors. This paper analyzes the four misunderstandings and four traps of investment due diligence consulting, namely: the purpose of due diligence is to assess the feasibility of the project, the more comprehensive the better, the due diligence report is objective, the due diligence can find all risks, discount recovery of creditor's rights, follow-up big coffee, trust verbal commitment, ignore follow-up management. This paper also puts forward corresponding solutions and suggestions to help investors make more informed investment decisions.