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due diligence
Time of publication：2021-07-22
●Due diligence- refers to a series of investigations conducted by the acquirer on the target company’s assets and liabilities, business and financial conditions, legal relationships, and the opportunities and potential risks faced by the target company during the acquisition process. It is one of the most important links in the process of corporate mergers and acquisitions, and it is also an important risk prevention tool in the process of mergers and acquisitions. In the process of investigation, professional experience and expert resources in management, finance, and taxation are usually used to form independent opinions to evaluate the merits of mergers and acquisitions and serve as management decision support. The investigation is not limited to reviewing historical financial status, but also focuses on assisting the merger and acquisition party to reasonably anticipate the future. It also occurs in the preliminary work of venture capital and corporate public listing.
●The purpose of due diligence- is to enable the buyer to discover as much as possible about all the information about the shares or assets they want to buy. From the buyer's point of view, due diligence is also risk management. For buyers and their financiers, the merger itself has various risks, such as the accuracy of the target company’s past financial accounts; whether the target company’s main employees, suppliers and customers will continue to stay after the merger; Whether there are any obligations that may cause the target company’s operations or financial operations to fall apart. Therefore, it is necessary for the buyer to implement due diligence to remedy the imbalance in the information obtained by the buyer and seller. Once the due diligence has clarified the risks and legal issues, the buyer and seller can negotiate on which party should bear the related risks and obligations, and the buyer can decide under what conditions to continue the acquisition.
● survey flow process - for a large number of M & A activity involving potential buyer, it usually takes due diligence through the following procedures:
1. The seller appoints an investment bank to be responsible for the coordination and negotiation of the entire merger process.
2. The potential buyer appoints a due diligence team composed of experts (usually including lawyers, accountants and financial analysts).
3. The potential buyer and the expert consultant hired by him sign a "confidentiality agreement" with the seller.
4. The seller or the target company collects all relevant information and prepares the data index under the guidance of the seller.
5. A due diligence checklist is prepared by the potential buyer.
6. Designate a room (also known as "data room" or "due diligence room") where relevant information is placed.
7. Establish a set of procedures to allow potential buyers the opportunity to raise other questions about the target company and obtain copies of documents that can be disclosed in the data room.
8. The consultants (including lawyers, accountants, and financial analysts) hired by the potential buyers make a report, briefly introducing matters that are of great significance for determining the value of the target company. The due diligence report should reflect the substantive legal matters found in the due diligence investigation, and usually include recommendations on the transaction framework based on the information obtained in the investigation and analysis of various factors affecting the purchase price.
9. The buyer provides a draft of the M&A contract for negotiation and modification.
●Due diligence work flow:
1. Review the creditor's rights files- 1. Review the loan information: the reason for the loan, use, operating status, invested projects, the reason for the formation of bad, the process of being collected, the repayment measures and willingness, repayment records, fixed asset investment, receivables Creditor's rights, foreign investment, accounts, etc., affiliated enterprises (persons) or branches. 2. Review subject information: subject qualifications, business nature, operating status, business scope, shareholder composition, shareholding ratio, superior units, actual controllers, historical name changes, official seal style evolution, etc. 3. Review financial data: (1) The method, amount and time of shareholder’s capital contribution, whether the capital contribution is completed; (2) Capital verification account; (3) Financial data (inventory, fixed assets, foreign investment, long-term investment, accounts receivable, Long-term and short-term liabilities, accounts payable, owners’ equity, operating income). 4. Review other information: (1) Whether there is any malicious disposition, derogation, or influence on property and mortgages and their value; (2) Whether the various materials previously provided are materially false; (3) Whether the debtor is split, merged, or After the restructuring and reorganization, the old and new enterprises will not recognize the original loan debts; (4) Whether there is evasion or refusal to sign the collection materials of the creditor; (5) Whether the profit assets are withdrawn or transferred through abnormal connected transactions; (6) Shareholders, The legal representative has changed abnormally.
2. Check the industrial and commercial files——
1. Review the establishment materials: (1) Basic information on the debtor’s subject qualifications, equity composition, legal representative and senior management; (2) Information on the debtor’s capital contribution amount, method, and whether the capital contribution is in place; (3) The debtor’s use The ownership of the registered venue and the nature of use; (4) Other information such as the source of funds certificate, bank account, and details of capital contributions in kind; (5) Whether there is venue (property) lease in the business scope, etc.
2. Review the annual inspection data: (1) Financial statements; (2) Names and changes of financial personnel; (3) Branches; (4) Related debtors; (5) Property clues such as debts receivable, foreign investment projects, bank accounts, etc.
3. Review the closure information: (1) The time and reason for the closure or revocation of business license; (2) Whether there is a subject to bear the creditor's rights and debts; (3) Whether the cancellation procedures are complete and legal, and whether there is a liability statement; (4) Yes Whether the debtor’s property is received or allocated free of charge; (5) Whether the debtor has any malicious behavior after its dissolution.
4. Review the entire file and combine other evidence to determine whether the debtor exists: (1) Suspected of personality confusion; (2) Whether shareholders or bosses are suspected of abusing their rights to damage the interests of creditors.
3. Investigate affiliated companies (persons) -Shenzhou Jintai International Business Investigation serves the discovery of corporate risks. Based on multiple types of information such as investment relationships, judicial litigation relationships, shareholder relationships, and administrative penalties, it analyzes the target company’s related information and discovers the subject matter. Potential corporate risks; by monitoring the target company’s industrial and commercial changes, judgment documents, related company dynamics, untrustworthy information and other abnormal situations, enhance the comprehensive risk management system’s coverage of innovative businesses, improve full business, full process, full caliber risk management, and enhance credit The full asset management capabilities of the category and non-credit category, improve the full coverage of risk management, strengthen the construction of a risk management system based on big data and the Internet, and transform the new risk management method with big data analysis, intelligent judgment, and precise management and control, real-time Master the risk information of the target enterprise.
4. Detection site- 1: The debtor is not operating at the original location 2: The debtor is still operating at the original location 3: Conditions permit, the debtor can continue to check the following conditions in a flexible manner: 1. Operating conditions: (1) Whether the debtor is operating normally; if so, operate What kind of business; operating conditions and profitability in recent years; (2) Whether the debtor’s equipment or part of the property is leased to a third party for operation; if so, understand the lease term, rent standard, who collects the rent and how it is collected; (3) The debtor has Whether it is contracted to a third party for operation; if so, understand the term, contract gold standard, who receives the contract fee and the method of collection; (4) Whether the debtor has reorganized or restructured; (5) What is the debtor's plan for future development. 2. Staff situation: (1) The number of debtor's employees, the number of employees, the number of retired and retired employees ; (2) Whether the employees have been arranged; if not, whether there is a resettlement plan; (3) Whether there is a payment owed to the employees; (4) 1) Whether there is arrears of employees' social security expenses; (5) Whether there is a default of employees' wages and economic compensation. 3. Assets and liabilities: (1) General liabilities; (2) General assets; (3) General litigation (debt collection). 4. Repayment willingness: the attitude and willingness of the debtor and its superiors to repay the debt.
5. Investigation and litigation situation- Shenzhou Jintai International Business Investigation has an independent database, a large number of people's courts at all levels of judgment documents, enterprise/personal case information, court enforcement information, tax information, administrative law enforcement information, arrears information, etc., which are updated daily. The information is complete, the content is true, and the query is simple. Real-time query of business changes, business abnormalities, court announcements, judgment documents, untrustworthy information, online loan overdue information, environmental protection law enforcement information, equity pledge, movable property mortgage, equity freeze and other information, help Users keep abreast of the abnormal situation of the target enterprise in time.
1. Find out the debtor's debts: (1) The name and amount of the creditor; (2) Whether there are mortgages or seizures; (3) The progress of litigation or enforcement, etc. 2. Identify the nature of the debtor's debts: (1) Your own debt; (2) Guaranteed debt; (3) Private loans.
6. Investigate clearly 3 models- (1) Business model: refers to what products or services the company provides (what to do), how to work (how to do it), and whether the company's own talents, technology, capital, and other resources can support it. (2) Profit model: Refers to how the company makes money, what means or links are used to make money, and why can it make money? (3) Marketing model: how companies sell their products or services, channels, incentive mechanisms, etc. For a good company, these three models should promote each other without conflict.
7. Investigate 4 indicators- operating income, operating profit, gross profit margin, growth rate. Private equity investment institutions value the profitability and growth of the invested company. They often hope that the invested company can be restructured and listed as soon as possible. The financial data of investment enterprises in the past three years is more important. The gross profit margin of the main business reflects the profitability and anti-risk ability of an enterprise, and the growth rate can reflect the growth of the enterprise, which facilitates better storytelling in the capital market.
8. Investigate 5 structures- equity structure, executive structure, business structure, customer structure, supplier structure. The operation of any enterprise is very complicated. Therefore, the due diligence report should allow investors to know the details of the invested company. A very clear understanding of the structure is convenient for judging the quality of the enterprise. This is a basic requirement of our Shenzhou Jintai International Business Investigation.
(1) Ownership structure: the primary and secondary are clear, the primary and secondary are reasonable, the founder’s shares should not be too few, and there must be a core;
(2) Senior management structure: reasonable structure, professional background and work experience must have their own advantages, be complementary, have team spirit, and coordinate and efficient operation;
(3) Business structure: The main business should be prominent, the product structure should be reasonable, star industries and cash cow products should be available, and appropriate investment in technology and product innovation should be made;
(4) Customer structure: There must be large customers, but they must not be too focused, the structure must be reasonable, the customers have credibility and strength, and the problem of payment arrears is not serious;
(5) Supplier structure: There must be a certain number of high-quality suppliers who can guarantee the reliability of supply, the quality of raw materials, and the price.
9. Investigate 6 levels-the purpose is to have an in-depth understanding of the investment companies. If there are serious problems at any level, the company's restructuring and listing may be stranded. If it is a small flaw, it can be corrected.
(1) Historical compliance: The development history of the company is relatively clear, there are not too many original sins, and there are no major flaws in the establishment of capital verification, equity changes, etc.;
(2) Financial norms: relatively sound financial system, fair auditing, and accounting according to law;
(3) Pay taxes cleanly: there is no tax evasion, and pay taxes in accordance with the law;
(4) Clear property rights: The property rights of various properties are clear, the ownership transfer procedures are complete (including patents, trademarks, real estate, etc.), and there are no disputes that may lead to litigation or arbitration;
(5) Labor compliance: strictly enforce labor laws and sign labor contracts with employees;
(6) Safety and environmental protection: safe production, environmental protection compliance, no hidden dangers such as being ordered to relocate and punished.
10. The focus of the investigation is to pay more attention to the target enterprises of the investigation, focusing on the relatively small links of the enterprises. If there are some problems, they can be corrected in time. This is an important basis for China Jintai International Business Investigation to determine the management level of the target company.
(1) Specification compilation: Viewing the compilation of corporate management specifications, we can intuitively understand the level of institutionalization of corporate management. Many companies have not established a systematic corporate management specification;
(2) Regular meeting system: Ask the company whether to hold regular meetings (weekly general manager meetings, regular board meetings, regular shareholder meetings), to understand whether the company’s operations are standardized and normal, and to see whether the relationship between shareholders and corporate management is normal. Normal, respect and coordinate with each other;
(3) Corporate culture: Does the company form the cohesion and centripetal force of the company through its own cultural construction, and promote the long-term development of the company;
(4) Strategic planning: to understand the strategic planning of the company, you can know whether the company has goals for its development, and check whether its goals are in line with the actual direction of the industry's economic development;
(5) Human resources: understand the company's employee training, incentive plans, and use methods, you can understand whether the company can fully mobilize the enthusiasm and initiative of all employees to develop business, and examine the company's comprehensive competitiveness;
(6) Public relations: understand the company’s public relations strategy and status, you can know whether the company has a sense of social citizenship, whether it pays attention to corporate image and brand, and whether it has a sense of social responsibility; (7) Incentive mechanism: an excellent modern enterprise should have A mechanism or plan to motivate employees and improve the team, otherwise, it will be difficult for the company to continue to grow stronger and bigger.
11. In-depth analysis of 8 data-when analyzing the financial statements of the company to be invested, Shenzhou Jintai International Business Investigation and analysis of these 8 financial indicators, in-depth judgment of the company's financial status.
(1) Asset turnover rate: How many assets generate sales revenue, which reflects the turnover speed of total assets. The faster the turnover, the stronger the sales ability. Small profits but quick turnover can be used to accelerate asset turnover and increase profits. It can be seen whether this company is asset-light or asset-heavy. Turnover rate of total assets = sales revenue ÷ average total assets
(2) Asset-liability ratio: The asset-liability ratio is the percentage of total liabilities divided by total assets. It reflects how much of the total assets are raised through borrowing, and reflects whether the capital structure of an enterprise is reasonable. It is also possible to know the degree of protection of the creditor’s interests during the bankruptcy of the enterprise. Asset-liability ratio = (total liabilities÷total assets)×100%
(3) Current ratio: The current ratio is the ratio of current assets divided by current liabilities, reflecting the company's short-term solvency. Current assets are the most easily realized assets. The more current assets and the fewer current liabilities, the stronger the short-term solvency. Current ratio = current assets ÷ current liabilities
(4) Accounts receivable turnover days (accounts receivable turnover rate): reflects the turnover speed of accounts receivable, that is, the average number of times that accounts receivable are converted to cash in each fiscal year, also called average cash collection Generally speaking, the higher the account receivable turnover rate and the shorter the average collection period, it means that the accounts receivable can be recovered quickly, otherwise the working capital of the company will be dragged down by the accounts receivable too much, which will affect the normal funds turnover. Accounts receivable turnover rate = sales revenue ÷ average accounts receivable; accounts receivable turnover days = 360 ÷ accounts receivable turnover rate
(5) Gross profit margin of sales: gross profit margin of sales, which means how much money can be used to pay the expenses of each period after deducting the cost of the products sold, which is the initial basis of the net profit margin of the company’s sales, and it can also be seen The competitiveness of enterprises. Gross profit margin = (sales revenue-sales cost) ÷ sales revenue × 100%
(6) Net value return rate: The net value return rate is the percentage of net profit to owner’s equity, reflecting the level of return on shareholders’ equity. Net value return rate = (net profit ÷ average shareholders’ equity) × 100%
(7) Net cash flow from operating activities: it is the difference between the cash inflow and cash outflow generated by the company’s operating activities in a fiscal year, indicating the ability of operating activities to generate cash. The funds to be raised by the company should be based on actual production and operation needs through cash flow Table to determine. The better the financial status of an enterprise, the more net cash flow, the less capital needed, and vice versa. If the net operating cash flow is negative, it means that the company needs to raise more funds to meet the needs of production and operation.
(8) Market share is the market share of a company’s products. When a company gains a 25% market share, it is generally considered to control the market. This indicator is the most intuitive embodiment of a company's market position. It comprehensively reflects the company's technical level, marketing capabilities and brand image.
12. Investigation method——
(1) Collecting data: Collect various data of the enterprise in various ways and in various aspects;
(2) Interviews with executives: it is a very important link. It is often possible to quickly get an impression of the development prospects of the target company and the quality of team members. The first impression is often important and reliable.
(3) Enterprise inspection: It is necessary to inspect the enterprise's R&D, production, daily management, etc., and conduct random or inadvertent interviews with ordinary employees of the enterprise.
(4) Competition investigation: to understand the strength of various competitors in the market and their advantages and disadvantages. The more you grasp the information of your competitors, the more accurate your investment judgment will be. At the same time, you can also get information about the companies that are being invested in from your opponents.
(5) Visiting suppliers: Visiting the upstream suppliers of raw materials and auxiliary materials to understand the purchase situation, quantity, price, and supply credit, which can help us judge the reputation and real output of the company to be invested, and also understand the industry from the side. The competitive landscape.
(6) Visiting customers: Knowing the quality and popularity of the company's products, clarifying the true sales of the company, and also understanding the status of its competitors; at the same time, the level of the interviewed customers can also be used to determine the companies to be invested Market position, market demand and degree of sustainable development.
(7) Visit the association: to know the status and prestige of the company in the industry, as well as the development trend of the entire industry. (8) Visit the government: know the status of the company in politics and law, and the degree of government support for the company;
(9) Consultation with brokers: understand the feasibility of listing and expected time to market, and judge the development prospects of the company and the industry
13. The content of the report-to make a "due diligence report" is the basic skill of investment experience, not only a summary of the previous work, but also as the basis for the final decision-making of venture capital institutions. The "Due Diligence Report" provided by Shenzhou Jintai International Business Investigation includes the following 10 aspects:
(1) The historical evolution of the company: the background of its establishment, changes in shareholders during the period, major historical events that occurred, etc.;
(2) Enterprise products and technologies: company product status, technology sources, R&D and innovation capabilities;
(3) Industry analysis: industry overview, industry development prospects, and competitors;
(4) Strengths and weaknesses: what are the advantages of the company, what is its core competitiveness, what are the deficiencies or defects, and whether there are solutions or improvements;
(5) Development plan: the short-term, medium-term and long-term development plan, strategy and feasibility of the enterprise;
(6) Ownership structure: shareholder composition and rationality
(7) Senior management structure: analysis of the professional and work background of senior management and technical personnel;
(8) Financial analysis: analysis of various financial data in recent years
(9) Financing plan: whether the financing plan and financing conditions match the development plan of the enterprise;
(10) Investment opinions: the overall opinions of the investment manager on the project.
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