DD Done Right

Due diligence is rarely anyone’s idea of fun and games. Nor should it be. And yet, several days into the process now I’m struck just how positive the process can be, when it’s done right, done well, done in an atmosphere of shared goals and shared respect. At its best, DD sets the tone for a long period of successful partnership and value-creation between a company and an investor. 

This week, DD kicked off between one of our China First Capital clients and the Private Equity firm intending to invest in the company’s first round of equity finance. The PE firm is among the best, and it operates with the precision of a Geneva watchmaker. The DD checklists sent in advance were exhaustive, prepared both in Chinese and English, encompassing legal, financial and managerial topics. 

Our client – after recovering from the initial shock on seeing the sheer volume of information to be collected and presented – dug in and worked until late each night over the weekend to get the material ready.  The laoban struck exactly the right note from the beginning, explaining to his sometimes-beleaguered staff, that the volume of DD material was conclusive proof that this PE firm would make a professional, highly-competent and valuable partner if the deal closes. 

In other words, it’s a step in a process of increased transparency, meticulousness and accuracy. This will benefit the company immediately, in its operations and planning, and ultimately put it in a far stronger position as it moves toward a successful public listing down the road.   

We insist to our clients that they embrace this approach:  “even as a private company, you should adopt the standards of a public one.” This makes the transition to a publicly-traded company, accountable to both to regulators and shareholders, infinitely smoother.  It’s also just good business. 

On Monday, the PE firm’s DD team arrived at our client’s office, and set right to work. The highest standards clearly pervade all aspects of the PE firm’s operation, from the team — led by a woman of uncommon intelligence, poise and grace –  to the lawyers and Big Four accountants chosen to assist. 

They set the right mood from the outset: one of professional collaboration and partnership, rather than of abrasive investigation. In two days of highly-focused scrutiny, with lawyers, accountants and the PE firm’s team working on parallel tracks, the investor got an enormous amount of its preliminary due diligence completed. On Day Three, they headed out to visit the client’s factory in a neighboring province. 

It’s an old truism of PE and VC investing that the one certainty of the DD process is that there will be surprises, generally of an unwelcome variety. The real question is how large are the surprises and how well they are addressed, by both PE firm and the target company. 

I have confidence that in this case, the DD process will continue in a spirit of shared purpose and reciprocal transparency. As a result, I foresee a great outcome for both our client and this PE investor.