Jilian Consultants Co., Ltd.
Jilian Consultants Co., Ltd.

Financial Due Diligence, Please Pay Attention to Two Questions

When it comes to financial due diligence, we must first pay attention to the purpose of financial due diligence. Different purposes may have different concerns. But the financial concern, in the big picture, is, is the performance real? If true, is there investment value? If it is to be regulated, will profits fall, and what is the potential of the company? If resources are imported, can it be quickly regulated to meet other requirements such as listing or mergers and acquisitions, and if it cannot meet the requirements of mergers and acquisitions or IPOs quickly, can it meet the requirements of the second round of financing. The authenticity of performance may be the most concerned issue for investors. How to pay attention to which financial due diligence points may be clear to many people, but how to obtain useful financial due diligence data is the key to finding problems.

Ⅰ. Financial statements for financial due diligence

1. Internal and external accounts and financial statements: Private enterprises set up more internal and external accounts due to taxation and other considerations. Internal accounts refer to the real financial status of the company, usually based on cash flow and cash flow, etc. However, tax payment and invoices are not compliant and need to be adjusted. Income, costs, employee wages, social security, expenses, etc. are not fully accounted for.

It is recommended to collect the income tax returns and internal financial statements of the company for the most recent two years. For the biennial income tax return, collect the finalized income tax return for 2015 and 2016 and the income tax return for 2017 (directly scan the tax return stamped by the tax bureau); If the company is unwilling to provide the internal financial statements for the biennial period due to confidentiality considerations, it can be handled by signing a non-disclosure agreement first.

Through the internal and external financial statements, the tax cost can be preliminarily estimated, but the so-called internal accounts provided by the company may also be false. Whether there is an inflated performance requires further analysis, which can be compared and analyzed from labor, electricity, freight and other indicators. Whether the company is the size described in the internal accounts, you can see whether the company really makes money from the treatment of employees. A profitable company may have double-layer toilet paper, and a company that does not make money may have a messy bathroom and no toilet paper. 

2. Consolidated financial statements and financial statements of the parent company: Sometimes subsidiaries, especially overseas subsidiaries, have hidden dangers. Therefore, due diligence should not only focus on the parent company, but also on subsidiaries, especially those in tax-preferential or overseas companies.

3. In addition to obtaining reports, further detailed financial data is required, such as: sales ledger, purchase account, production cost calculation table, freight, wages, electricity and other materials to learn more about the records in the company's operation process.

Ⅱ. Business situation of financial due diligence

1. Main products or services: In order to reflect the main products and services of the enterprise and understand the main business of the enterprise, it is recommended to count the income, cost and gross profit rate of different types of products or services of the enterprise in the last two years. This is usually based on the data at the level of the consolidated financial statements of the enterprise's internal accounts.

2. Enterprise customers: Understand the main market and customers of the company, count the sales ratio of the top five customers in the last two years, and understand whether there is major customer dependence and customer concentration.

3. Sales model: Understand the company's sales model, including agency sales, direct sales, etc., and count the proportion of revenue under different sales models.

4. Suppliers: Learn about the company's main materials and suppliers; count the procurement ratios of the top five suppliers in the last two years, and find out whether there is dependence on major suppliers and supplier concentration.

5. Competitors: Understand the market competition of the company's products and its main competitors, and pay special attention to the same type of listed companies and listed companies.

6. Core technology and patent information: understand the company's core technology and patent information, of which the patent information can be inquired on the patent website. For technology and patent situation, focus on understanding its advanced nature and competitive advantage.