Chapter 2

Due Diligence in China

Due diligence is the assessment of the benefits and liabilities of a proposed investment by evaluating all imaginable aspects of the past, present, and future of the business. It requires an understanding of the business and the environment and to use that information to come to an accurate valuation and to build reliable and predictable financial models. It includes an investigative analysis of the financial, legal, and operating activities of an entity in connection with a proposed transaction that would result in a significant change in the ownership or the capital structure of the entity. The aim of due diligence is to identify problems within the business, particularly any issues that may give rise to unexpected liabilities in the future (as shown in Figure 2.1).

FIGURE 2.1 Do Your Due Diligence Properly before Taking the Plunge

Source: Illustration by Kenny Ng.

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A good due diligence must be unbiased and carried out by independent professionals. It should be conducted with a positive attitude and with the cooperation of the management. Management may pose road blocks to the due diligence team if there is no trust or rapport built with the due diligence team.

There are many different types of due diligence processes, and the ones that are used depend on the intent of the due diligence, costs, the amount of time allowed for due diligence, the ...

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