What is Due Diligence?
Due diligence is all about investigating a company, potential investment, product or staff to confirm all facts that have been provided by the counterpart. It is usually conducted before entering into an agreement with a third-party. The type, complexity and size of the transaction determine the content and thoroughness of the investigation.
Due diligence can either be conducted internally – when hiring new staff for example – or externally, when targeting another company. In this article, we will focus on externally conducted due diligence.
There can also be another distinction in due diligence, especially in the case of Merger and Acquisitions: the hard type and the soft type. Hard due diligence is driven by mathematics and focuses on quantifying organizational data. On the other hand, soft due diligence captures information on “human capital” such as corporate culture, employee motivations and relationships. Conducting both types of due diligence is crucial for achieving a successful M&A.
Why is it so important in China?
In general, due diligence enables you to exactly know who or what you are dealing with before closing an important deal. Therefore, it may protect your company from many risks.
More specifically, many companies are facing difficulties or unexpected problems when doing business in China. The United States Commercial Service particularly advises to conduct more due diligence in China than foreign companies would usually need in other markets. Foreign companies may also feel particularly targeted by audits and reviews, which reinforces the case for compliance.
Be aware: Even though the business environment improved in China, it is still difficult to get all the information you need. Laws and regulations are often unclear and change regularly. Additionally, as most of the documents are in Chinese and the Chinese counterpart does not necessarily speak English, you may face huge language barriers. Therefore, you should consider getting in touch with professionals who will be able to support you in this process.