What Is Hedge Fund Due Diligence?

Due diligence also translates as "prudential investigation". Refers to a series of surveys conducted by the acquirer on the assets and liabilities, operating and financial conditions, legal relationships, and opportunities and potential risks of the target company during the acquisition process. It is one of the most important links in the process of corporate acquisitions and mergers, and an important risk prevention tool in the process of acquisitions. In the investigation process, professional experience and expert resources in management, finance, and taxation are usually used to form an independent point of view to evaluate the advantages and disadvantages of mergers and acquisitions as management decision support. The investigation is not limited to reviewing the historical financial situation, but also focuses on assisting the acquirer in reasonably anticipating the future. It also occurs in the pre-stage work of venture capital and corporate public listing.

Due diligence

The purpose of due diligence is to enable buyers to discover as much as possible about the shares or assets they are buying. From a buyer's perspective, due diligence is risk management. To the buyer and their

For a large acquisition involving multiple potential buyers, due diligence usually goes through the following procedures:

1. The seller designates an investment bank to coordinate and negotiate the entire M & A process.

2. A potential buyer appoints a due diligence team of experts (typically including lawyers, accountants, and financial analysts).

3 A "non-disclosure agreement" is signed between the potential buyer and its expert consultants and the seller.

4 Collect all relevant information together and prepare the data index by the seller or by the target company under the guidance of the seller.

5. Prepare a due diligence checklist for potential buyers.

6. Specify a room (also known as a data room or due diligence room) where relevant information is placed.

7. Establish a procedure that gives potential buyers the opportunity to ask 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, financial analysts) hired by the potential buyer make a report and briefly introduce matters that are important in determining the value of the target company.

During the due diligence stage, the investor finally confirms the entrepreneur's business model, product, business plan, positioning, etc. in order to achieve perfection. Due diligence is for mutual understanding between the two parties, so as to facilitate better cooperation and development between the two in the future.

The following are some of the areas investors are focusing on in due diligence:

1. Whether the team is strong and healthy

If the startup team is small, angel investors may meet with each member. Angel investors will investigate the intelligence, loyalty, strengths, weaknesses, teamwork and management style of each team member. An imperfect team, or someone who has an old fondness at a key location, can affect financing success.

2. Preparation of products or services

Technical investigations usually start with engineering technicians and product marketers. Angel investors will evaluate the startup process of startups, as well as the products. All the entrepreneur's preparation goals are to make angel investors 100% satisfied with the functions and quality of the claimed product, and the entire team and R & D process must ensure that the product can be realized in the future. Finally, angel investors need to confirm intellectual property protection and status.

3 Confirmation of market demand and size

An excellent angel investor can help startups in many ways, but there is no guarantee that users will buy products from startups. Angel investors will find some potential customers from the market crowd reference table given by entrepreneurs, talk to them, and understand the market situation. Angel investors will also contact technical masters and industry insiders in their relationships. Without experiencing the pain of verification, there is no successful transaction.

4 Sustainable competitive advantage

If angel investors find a competition that was not anticipated before, but the entrepreneur forgets to mention it, then this is a death kiss. Angel investors need to use industry analysis to confirm that the differences owned by entrepreneurs are indeed unique, and there are no potential competitors in the future.

5. Company and financial situation

How are the startup financials and company-defined milestones completed? Angel investors will check the financing and equity of the startup before it, and make an accurate market investment table. The founder's poor credit, unresolved lawsuits, and insolvency all increase the risk of financing failure.

The contents of due diligence generally include the following aspects:

1. Background checks for managers

2. Market assessment

3 Completion of sales and purchase orders

4 Environmental Assessment

5. Production Operation System

6. Management Information System (Reporting System)

7. Method of financial forecast and accuracy of past forecast

8. Sales volume and financial assumptions

9. Verification of financial statements, sales and purchase notes

10 Current cash, receivables and debt status

11. Possibility of loan

12. Asset verification, inventory and equipment inventory verification

13. Wage benefits and retirement fund arrangements

14. Leasing, sales, purchasing, employment, etc.

15. Potential legal dispute

Hedge funds also need to conduct due diligence on listed companies before shorting or longing one stock. Such due diligence includes routine due diligence methods such as data access and field investigations. ^[1]

Due Diligence Company Profile

1. Company establishment background and situation introduction;

2. Company history

3 Changes in the shareholding structure and capital increase and asset restructuring since the company was established;

4 The main development stages since the establishment of the company, and the reasons for the changes and development at each stage;

5. Major changes in business development, production capacity, profitability, sales volume and product structure since the establishment of the company;

6. The company's foreign investment situation, including the investment amount, investment proportion, investment nature, investment income, etc., and the main investment unit introduction;

7. Company employee status, including age structure, education structure, job distribution structure and technical title distribution structure;

8. Resume of directors, supervisors and senior management personnel;

9. The company's dividend distribution and company's dividend distribution policy;

10 The company's implementation of the senior management and employee stock ownership plan.

Due diligence company organizational structure

1. Organizational management structure established by the company;

2. company policy;

3 The composition of the company's board of directors, and the concurrent employment of directors, senior management personnel and members of the supervisory board

4 The company's shareholder structure and introduction of major shareholders, including background information, shareholding ratio, main business, registered capital, asset status, profitability, business scope, and legal representative;

5. The company's business transactions with the above major shareholders (such as the supply of raw materials, cooperative research and development products, joint use of patented technology and intellectual property rights, sales agents, etc.), capital transactions, and whether there are related-party transaction contracts to regulate the above-mentioned business and capital transactions and transactions;

6. What support does the company's major shareholders have for the company's business development, including capital, market development, research and development, and technology investment?

7. Relevant information of the company's subsidiaries (factories), including name, business, asset status, financial status and income and profitability, and external business transactions;

8. Relevant information of the holding subsidiary, including name, business, asset status, financial status and income and profit status, external business transactions, internal capital river business transactions

9. How the company and the above-mentioned wholly-owned subsidiaries (factories) and holding subsidiaries are unified in administration, sales, material supply, and personnel management;

10 Brief introduction of major stock companies.

Due Diligence Supply

1. The types of raw materials and other auxiliary materials that the company needs in its business, including uses and the proportion of demand in raw materials;

2. For the major suppliers of the aforementioned raw materials, has the company signed long-term supply contracts with relevant suppliers, and if so, please explain the main terms of the contracts;

3 Please list the proportion of raw materials provided by each supplier in the company's total purchases;

4 List and basic information of the company's main subcontracting manufacturers, details of subcontracting components, details and distribution of subcontracting molds, prices and supply cycles of each subcontracting component, and qualification certification of subcontracting manufacturers

5. Does the company have imported raw materials? If so, the proportion of imported raw materials, and whether the state has any policy restrictions on importing the raw materials;

6. Settlement of transactions between the company and raw material suppliers, and whether there are credit transactions;

7. The company's consumption of main energy.

Due Diligence Business and Products

1. The company's main business and business description, the importance of each business in the overall business income;

2. Background information on the industry in which the main business is located;

3 Development prospects of the business;

4 The growth of major businesses, including sales volume, revenue, market share, sales price trends, and the respective proportions of various products in the company's sales revenue and profits;

5. Company product series, product component composition breakdown and details;

6. The company's product structure, which introduces the main products and sales of the company; product demand;

7. The product quality, technical content, functions and uses of the above products, the main technologies applied, technical performance indicators, product competitiveness, etc .; specific consumer groups targeted;

8. Whether the company has patented products, and if so, what protection measures the company has;

9. What trademarks are used for the company's products for sales, and whether the above trademarks are used exclusively by the company registration;

10 The main awards and honors obtained for the above products;

11. What measures will the company take to improve product quality, product grade, and product competitiveness?

12. The company's new product development.

Due Diligence Sales

1. Briefly describe the development of domestic and foreign sales markets for the company's products and the establishment of a sales network;

2. What are the company's main customers, and introduce the relevant situation of the main customers, the proportion of the main customers in the company's total sales; the geographical distribution of the company's main customers;

3 The company's major domestic sales regions, sales management and distribution network distribution;

4 The sales ratio of the company's products at home and abroad, and the distribution structure and proportion of major countries and regions for export;

5. Whether the company has a long-term fixed-price sales contract;

6. The company's main measures to expand sales and marketing methods;

7. The structure of sales staff, including the number of people, education, work experience, division of labor, etc .;

8. The company's main incentives for sales staff;

9. What is the company's advertising strategy, the major media of advertising and the proportion of advertising expenditures on each media, the total annual advertising expenditures and growth of the company, and the proportion of total advertising expenditures to the total corporate expenditures;

10 Please provide a list of the company's main competitors in the domestic and foreign markets and the main information of the main competitors, and the respective market shares of the company and the main competitors in the domestic and foreign markets;

11. What after-sales services the company provides to consumers and how to arrange them;

12. The credit sales period of the company is generally long, and the proportion of the credit sales to the total sales; whether there have been bad debts in history, and how much of the actual bad debts account for the accounts receivable each year;

13. Whether the company has the right to import and export. If not, the company mainly entrusts that foreign trade company as an agent.

Due Diligence Research and Development

1. Please provide detailed information about the company's research institute, including the time of establishment, research and development strength, research and development results that have been achieved, main research equipment, research and development methods, research and development procedures, and research and development organization management structure;

2. The structure of the company's technical developers, resumes of engineers and major technical developers;

3 List of major research and development institutions that cooperate with the company and the status of cooperative development; introduction of the main information of the cooperative units;

4 The company's main patented technology, independent intellectual property rights, patent status, including name, use, application, and awards;

5. The company's annual research and development expenses and its proportion of the company's operating income;

6. What are the new technologies and products that the company is currently researching and developing;

7. The company's new product development cycle,

8. New technologies and products planned for future research and development.

Due Diligence Fixed Assets

1. The composition of the company's main fixed assets, including the main equipment name, original value, net value, quantity, use and depreciation, and technological advancement;

2. Classified by production and operation use, auxiliary production and operation use, non-production and operation use, office use, transportation use and other uses; distribution of fixed assets;

3 Property and facilities owned by the company, including construction area, floor area, original value, net value, depreciation and method of acquisition;

4 The company's main projects under construction, including the name, investment plan, construction period, start date, completion date, progress, and whether it has obtained permission from government departments;

5. The nature, area, market price, acquisition method, and purchase price (leasing price) of the land owned by the company.

Due Diligence Company Finance

1. Company income, profit sources and composition;

2. The composition of the company's main business costs and the company's management expenses;

3 The composition of the company's selling expenses;

4 Proportion of main business income to total income;

5. The composition of the company's main expenditures;

6. Financial indicators such as the company's accounts receivable turnover rate, inventory turnover rate, current ratio, quick ratio, return on net assets, gross profit margin, and asset-liability ratio in the previous three years;

7. The company's balance sheet, profit and profit distribution for the previous three years;

8. What are the factors that will have a major impact on the company's future major income and expenditures;

9. Various tax rates implemented by the company.

Due diligence claims and debts

1. What are the main claims of the company and the reasons for the formation of such claims;

2. The company's main bank loans, the amount, interest rate, term, maturity date and whether there are overdue loans;

3 The company's borrowings with related parties (shareholders, employees, holding subsidiaries);

4 The company guarantees and mortgages the loans of major shareholders and other companies and enterprises.

Due Diligence Investment Project

1. The main introduction of the investment project raised by the raised funds, including project feasibility, project status, purpose, total investment, planned start date, project background information, investment recovery period, financial return rate, annual sales income and profitability after reaching production

2. The technical content of the investment project, the advanced level of technology, the future market development prospects and the impact on the development of the entire company;

3 What are the main investment projects that the company has completed and the main investment projects completed?

Due diligence other

1. The advanced level, maturity, characteristics, performance and advantages of the technology and production technology used by the company;

2. Compared with competitors in the same industry, the company's main operating advantages, management advantages, competitive advantages, market advantages and technological advantages;

3 The company, the company's major shareholders, and the company's directors and senior managers are involved in legal proceedings, and if so, how will it affect the company.

Due Diligence Industry Background Information

1. The development of the industry;

2. The state's relevant industrial policies, management measures, and possible policy changes in the future;

3 The degree of market competition in the industry, and introduce the situation of the main competitors in the same industry, including annual production capacity, annual actual output, annual sales volume, sales revenue, market share, and domestic market position;

4 The development of the industry abroad;

5. The impact of relevant national policies on the industry;

6. Introduction to the national market situation, including annual demand, annual supply, regional demand distribution, regional supply distribution, number of manufacturing companies, whether it is subject to competition from similar imported products.