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

Purpose and Key Points of Financial Due Diligence

Ⅰ. The concept of financial due diligence

1. Concept

Due diligence, also known as prudence investigation, refers to a series of activities in which the investor conducts on-site investigation and data analysis on all matters related to the investment in the target company after reaching a preliminary cooperation intention with the target company and through consensus.

Financial due diligence refers to professional investigations such as review, analysis, and verification of the financial status of the target company and investment by financial professionals.

2. Type

There are four types of due diligence: legal due diligence, financial due diligence, business due diligence, and other due diligence.

Ⅱ. The purpose of financial due diligence

Due diligence is all about figuring out:

1. Who is he? That is, the details and management team of the actual controller of the counterparty;

2. What he is doing, that is, the category and market competitiveness of the product or service;

3. How well he has done, that is, the collection of operating data and financial data, especially the financial status, operating results, cash flow and vertical and horizontal (peer industry) comparisons reflected in the financial statements;

4. How others see it, including the attitude of peers and competitors;

5. How do we do it? On the basis of understanding customers, we conduct customer value analysis, use experience and obtained information to design credit granting plans and control measures, and turn exchanges into feasible transactions.

In short, do a good job of surveying shareholders' background and control structures, industries and products, operating and financial data, and peer attitudes, and provide our practices.

Ⅲ. The main points of financial due diligence

1. Business

(1) The business model and profit model of the industry/enterprise;

(2) The competitive advantage of the target enterprise;

(3) Synergies, as well as potential future integration costs and integration risks.

Tips: (1) When doing corporate due diligence, you can use the valuation model as a clue to investigate; (2) Don't ignore the target company's board of directors meeting minutes and legal documents such as decision-making, which will contain information about the company's business, especially the company's strategy .

2. Finance

(1) The authenticity and reliability of historical data;

(2) Is the forecast financial data conservative? Optimistic? What is the basis for the forecast?

(3) Are there any off-balance sheet liabilities?

(4) The soundness of the internal control system (auditor's internal control audit report);

(5) Tax issues (in addition to the company's own tax situation, it is also necessary to pay attention to the tax issues involved in the acquisition plan).

Tips: When conducting financial due diligence, it is necessary to fully communicate with auditors and be closely connected with business due diligence.

3. Law

(1) The legal situation of the company itself: major lawsuits and legal disputes, ownership of real estate and land, etc.;

(2) Legal issues involved in the transaction: shareholding structure (class equity arrangement, preferred shareholders, options, etc.), industry regulatory provisions, other regulatory rules involved in the transaction, etc.

Tips: Legal due diligence can be divided into two parts, one part is the legal situation of the company itself, which needs to rely on lawyers to conduct due diligence, and investment banks need to pay attention to future risks; the other part is the legal issues involved in the transaction, which investment banks must fully organize And actively participate in the discussion, the specific work can be dominated by lawyers.

4. Human resources

(1) Management recruitment and retention issues;

(2) Trade union issues;

(3) The burden of retirees, internal retirees and pensions.

Tips: Personnel issues are very important to the successful integration after acquisition and cannot be ignored; investment banks need to play a leading role, and the specific work is undertaken by appropriate intermediaries.

5. Others

(1) Are there any problems left over from history? For example, one factory with multiple systems, etc.;

(2) Whether there are problems such as capital occupation by major shareholders and major horizontal competition.

Tips: According to relevant regulatory rules and actual cases, the "checklist" should be formulated and continuously improved, and confirmed item by item.