Due Diligence in China: Beyond the Checklists

Authors: Kwek Ping Yong

Publisher: John Wiley

Year: 2013 December

ISBN: 978-1-118-46906-4

Content

Due diligence is crucial to any business deal, and, thankfully, due diligence research has come a long way over the years. What used to be a cumbersome, time-consuming process has been standardized and systemized with generally accepted auditing frameworks and tools, such as the all-important auditing “checklists.” But when it comes to doing due diligence in China, with its opaque regulatory system and byzantine accounting standards, all bets are off. In this book an acknowledged expert in the field takes you beyond the checklists to arm you with China-specific due diligence strategies, tools and techniques that go beyond what is typically part of the process.

• Gives a detailed account of why conventional frameworks used in the west simply don’t work in China
• Provides first-hand accounts based on the author’s years of experience as a private equity professional doing deals in China
• Reviews, in-depth, the unique differences between corporations and businesses in China and those in the West and their implications for the due diligence process
• Uses numerous case studies to guide the reader through an entire due diligence process for a firm in China

Table of Contents

Preface xi

Acknowledgments xv

Chapter 1: The Business Landscape in China 1

Macro and Structural Domains 2

Corruption in China 6

Conducting Due Diligence in China versus Western Countries 26

Conclusion 30

Notes 31

Chapter 2: Due Diligence in China 33

Due Diligence for Different Types of Deals 36

Levels of Due Diligence 48

Key Considerations 56

Organization of Due Diligence Process 59

The Due Diligence Team 63

Independence of Vendor Due Diligence 64

Reasons for Poor Due Diligence 68

Reverse Takeovers 73

Dispute between SEC and CSRC 75

Conclusion 77

Notes 78

Chapter 3: Financial Due Diligence 81

Financial Due Diligence Checklist 82

Conclusion 139

Notes 140

Chapter 4: Operational, Commercial, Legal, and Other Due Diligence 143

Operational Due Diligence 144

Commercial Due Diligence 167

Legal Due Diligence 169

Balanced Scorecard (BSC) 178

How to Predict Bankruptcy—Altman Z Scores and Gearing 185

Optional Checklists 186

Conclusion 193

Notes 194

Chapter 5: Beyond the Checklists: Founder and Management 195

Founder Management Root 198

The Founder Background Check 200

Guanxi (Relationship) 216

Due Diligence on More Than One Founder 223

Summary of Background Check: SWOPEST and Tri-Background 224

Conclusion 228

Notes 229

Chapter 6: Beyond the Checklists: Hard Facts 231

Face-to-Face Meetings 231

Proportion Check 242

Site Visits 247

Due Diligence Goes One Step Deeper: The Four Deadly A’s 256

Conclusion 290

Notes 292

Chapter 7: Implementing a Due Diligence Workflow 293

Getting the Mind-Set Right 294

Formulating the Due Diligence Strategy 295

Forming a Team 300

Starting the Due Diligence Process 304

Conclusion 312

Notes 313

Chapter 8: Post Due Diligence and Case Studies 315

Preparing the Due Diligence Report 316

Due Diligence Outcome Review 316

Deal Structuring, Negotiation, and Deal Making 318

Post-Acquisition Due Diligence 318

Summary Models 319

Final Case Studies 327

Conclusion 347

Notes 348

About the Website 351

About the Author 353

Index 355