This is the fourth article in a series of five were we present our take on how the most effective PE firms approach due diligence in China.
1. Secure and stress-test management’s goals and assumptions about the future
Require the Target to produce a financial forecast based on detailed assumptions ahead of the due diligence. Stress test the forecast, assumption by assumption, during the due diligence. Targets are rarely prepared for such a detailed review. This will result in a revised forecast based on realistic assumptions, insight into management’s industry knowledge, and an understanding of their integrity and intellectual honesty.
2. Determine if the Target has what it takes to execute its strategy
The best way to determine if a Target is able to meet aggressive strategic and financial goals is to determine if they have 1) the operational plans in place to meet key deadlines, and 2) the resources and capabilities needed to achieve them. Companies whose roll-out plans do not match claims made in financial forecasts are either presenting goals they do not expect to reach, or goals they are simply not capable of reaching.
Read the other posts in our series on how the most effective private equity firms approach due diligence in China:
- China PE Due Diligence ‘Best Practice’: Due Diligence The Big Picture
- China PE Due Diligence ‘Best Practice’: Due Diligence Strategy
- China PE Due Diligence ‘Best Practice’: Strategic Due Diligence
- China PE Due Diligence ‘Best Practice’: The Human Factor