Due diligence refers to a series of investigations conducted by the purchaser on the assets and liabilities, operation and financial situation, legal relationship, opportunities and potential risks faced by the target company in the acquisition process. It is one of the most important links in the process of merger and acquisition, and also an important risk prevention tool in the process of merger and acquisition.
Due diligence is also translated as “prudent investigation”. It refers to a series of investigations conducted by the purchaser on the assets and liabilities, operation and financial situation, legal relationship, opportunities and potential risks faced by the target company in the process of acquisition. It is one of the most important links in the process of merger and acquisition, and also an important risk prevention tool in the process of merger and acquisition. In the process of investigation, professional experience and expert resources in management, finance and taxation are usually used to form independent views, which are used to evaluate the advantages and disadvantages of M & A as decision support of management. The investigation is not only limited to reviewing the historical financial situation, but also focuses on assisting the acquirer to reasonably anticipate the future. It also takes place in the pre work of venture capital and public listing.
The purpose of due diligence is to enable buyers to find out as much as possible about all the information about the shares or assets they want to buy. From the buyer’s point of view, due diligence is also risk management. For buyers and their financiers, M & A itself has various risks, such as the accuracy of the target company’s past financial books; Whether the main employees, suppliers and customers of the target company will continue to stay after the merger and acquisition; Whether there are any obligations that may cause the target company’s operation or financial operation to fall apart. Therefore, it is necessary for the buyer to implement due diligence to remedy the imbalance of information acquisition between the buyer and the seller. Once the risks and legal issues are identified through due diligence, the buyer and the seller can negotiate on which party should bear the relevant risks and obligations, and the buyer can decide under what conditions to continue the acquisition activities.
In the due diligence stage, investors confirm the entrepreneur’s business model, products, business plan, positioning and so on, so as to achieve perfection. Due diligence is for the mutual understanding of both parties, so as to facilitate better cooperation and development between them in the future.
The following are the aspects that investors pay attention to in due diligence:
1. Is the team strong and healthy
If the entrepreneurial team is small, angel investors may meet each member. Angel investors will investigate the intelligence, loyalty, strengths, weaknesses, teamwork and management style of each team member. A dysfunctional team, or a person who always likes to disagree in a key position, will affect the success of financing.
2. Preparation of products or services
Technical investigation usually starts from engineering and technical personnel and product marketing personnel. Angel investors will evaluate the process of the start-up company and the products. All the preparation goals of entrepreneurs are to make the angel investors 100% satisfied with the function and quality of the declared products, and the whole team and R & D process should ensure that the products can be realized in the future. Finally, angel investors need to confirm the protection and status of intellectual property rights.
3. Confirmation of market demand and size
An excellent angel investor can help start-ups in many ways, but it can’t guarantee that users will buy their products. Angel investors will find some potential customers from the market crowd reference table given by entrepreneurs, talk with them and understand the market situation. Angel investors will also contact their technical experts and industry insiders in their interpersonal relationship. Without the pain of verification, there is no successful transaction.
4. Sustainable competitive advantage
If angel investors find out the unexpected competition, but entrepreneurs forget to mention it, then it is a kiss of death. Angel investors need to confirm through industry analysis that the differences owned by entrepreneurs are indeed unique, and there are no potential competitors in the future.
5. Company and financial status
How are the start-up company’s financial and company determined milestones completed? Angel investors will check the existing financing and equity of the start-up company, and make an accurate market investment table. The founder’s poor credit, unsettled lawsuits and solvency will increase the risk of financing failure.