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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.
Our Perspective: Verification is key to commercial due diligence
Determining a potential Target’s ability to win can be done with a surprisingly high degree of accuracy. This can only be done if the due diligence team has access to a detailed plan of the Target’s strategy and a financial forecast. Funds need to make sure these types of plans are produced before conducting a full due diligence. Not doing so will either result in delays or a less comprehensive due diligence, since the commercial due diligence team will have to spend time clarifying management’s strategic intentions, leaving less time for confirming the strategic suitability and feasibility of these intentions.
Since many potential targets do not have the ability or resources to present such a plan it often makes sense for the fund to have its investment professionals assist in this process.
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
Learn more about our methodology and approach to Private Equity Due Diligence and China Acquisition Due Diligence, to discuss how we can help you organization please contact us.