Chapter 3

Financial Due Diligence

The following two chapters provide the readers with a comprehensive overview of the most crucial stage in any acquisition or merger process in China. The due diligence checklist, although commonly described as monotonous and time consuming, forms an important foundation for the buyer to understand the intricacies of the seller’s business as well as to raise any red flags that require further digging beyond the conventions.

For the largest of companies that routinely conduct due diligence on numerous potential acquisitions annually or for the largest of private equity funds that meticulously flip every stone in hundreds and thousands of companies, this process can be daunting; no two deals are ever exactly the same. It is important that readers think critically about customizing and shaping each due diligence exercise that is better suited for a particular industry, company, and purpose.

The due diligence checklist consists of two parts, namely the compulsory and optional checklists. Compulsory checklists include the types of due diligence that one cannot miss in the evaluation of every transaction. Optional checklists are not to be taken lightly either; depending on the uniqueness of the industry of the target company, optional checklists are aimed at uncovering the blind spots of a transaction.

This chapter focuses on one of the most crucial components of compulsory checklists: financial due diligence. Readers would find that it is impossible ...

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