Basic Information About Due Diligence In China

Valuations: Valuations of equipment and buildings can be notoriously inconsistent in China, not least because there might be a partnership among the valuer and the owner. It can be a tough negotiating position over which valuer to make use of. If you need to insist on an independent valuer who is not known to the Chinese partner, you will usually be thought to cover the costs. Nonetheless, this is usually rewarding. Professional valuers such as American Appraisal or the major Real Estate firms in China may have a valuations department, and will usually be truthful, fair and use internationally approved expectations in performing work. Using them is to your advantage.



Experience checks: Under some factors it would be sensible to find out who exactly your partners are. There may be political and lawful outcomes if you are not fully conscious of their track record. This can be hard to find out in China, since there is no public records office. Nevertheless some diligent, low key questioning may reveal details. Otherwise, or if you feel potential concerns, you will find low-key investigations agencies in China that could give a dossier on identities, backgrounds, and any legal issues pending or previous. It is important to seek out answers to vital questions in areas like management, legal problems, overall concept, market, capital requirements and financial statements.



Management. Who are the management team? Have they worked together before and are their thoughts appropriate? What encounter does each member bring to the table, and is it important? What is the focus of each member? Is the team complete? Lawful Problems. Is the financial investment in China lawful? Are there any constraints imposed on that specific industry within China? Is the company operating inside the scope of the business (i.e. is the company acting ultra vires?)? Has the Chinese partner's fixed assets, to be used as capital injection into the new company, in fact already been pledged to the bank? Have the land rights been given the acceptable land certificate? Are there any standards on the company's land-use rights?



Concept. What is the overall schedule for the project? Will the product have a tough edge in the Chinese market? Are there Intellectual Property or Patent and Trade Mark concerns? Which are the local company regulatory concerns, and does the plan allow sufficient time for these to be fixed? China is not a country where the Rule-of-Law predominates. Many regulations are contradictory and often rely on the goodwill of a bureaucrat who may have other interests at stake. Although corruption is widely considered to be endemic in China, it is usually sublime to outside observers and the Government is actively fighting to manage it from surfacing in the market community. Market. And what about those financial and generation projections? What data are they depending on? Which are the estimates of the need for the company's products or services? What consumer research has been done, and has it been examined? Which are the competitive advantages of the company's products/services in the China market? Which are the future marketing strategies? What's the pricing strategy? What about the competition?



Capital requirements. What amount of funding will be required now, and into the future, and how will the financing be organized? Will further funding be required and, if so, when, at what stage in the project and from who? Financial statements. It is important to have three to five year projections, and for established companies, historical records going back for the same period. It is also important to be aware of the financial position of the Chinese partner, including whether the statements are presented in a "true and fair" manner. Similarly, are they as per International Accounting Standards? This means that ... "are the books cooked?" Investigate. Last, but most famously, investigate your suggested partner, getting an investigator who can assess different channels. This is together with due diligence on the recommended joint venture partner and its owners.




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