Lee & Lee Associates is very experienced in working together with VCs and PEs. We are VC / PE’s reliable Partner by providing good-quality of financial due diligence service.
A financial due diligence on a potential target normally is one of key procedures for equity acquisition. The areas for due diligence may comprise financial, legal, tax environment and market situation, and its intellectual property ownership, etc.
1. Basic information of the firm
Due diligence investigation should at least cover the information of registration, ownership structure, subsidiaries and branches, key events of purchasing and selling assets, and business scope.
2. Industry Overview and Market Assessment
The industry overview mainly covers brief industry history, growth story and market size. Meanwhile, it is necessary to understand overall operation environment of the industry and how it impacts the target company; For market assessment, the investor shall avoid making assumptions based on home markets and the difference between the country in which the target company is located and the home country, including the government policies and market.
To know the competitors well, the investor shall conduct research to understand the competitors well, including the major players, the market share, and the history of development and then make comparison between the target and the nearest competitor, to analyze specific areas where the target has significant strengths and/or weaknesses as compared to its competitors.
4. Financial due diligence
In a financial due diligence, the investor ought to check whether the firm’s financial statements reveal any signs of insolvency, fraud, obvious signs of material misstatement or some other information that may negatively affect the decision to the transaction.
For example, a public listing foreign company was going to acquire a Chinese company. By analyzing the financial statements, the foreign company got a rough knowledge about the basic financial status and operating results of the target company. The revenue, in that year, was RMB 232.88 million and the main operating revenue was RMB 228.32 million while other revenue was RMB 4.56 million. At the balance sheet date, the debt ratio is 70.28%, which indicated a good quality. However, the current ratio and the quick ratio of the target were both less than 1, which means the short-term debt-paying ability of the target is limited. Based on review on the financial information and interview with the personnel from the target, the result of the due diligence review shows that the target may have some problems in financial management and internal control system. The value of the due diligence result is to give decision maker information from financial side for consideration of the transaction.