Due Diligence Questions sample

Due Diligence List
Company History and Background:
1. Describe in detail, the shareholding structure of the company including all significant
shareholders. Include details of any controlling shareholder(s), management or employee stock ownership, and/or undisclosed agreements / arrangements between shareholders.
2. Describe any significant corporate changes that have occurred in the last five years (for
example changes in the organizational structure or ownership of the company or any M&A activity etc.)
3. Describe any major strategic/operational partnerships, joint ventures or affiliations that
your company is party to.
The nature of the businesses conducted by the companies mentio ned and the specific nature of the strategic alliance between these companies and your company:
Busine ss & Strategy:
4. Provide any business plan and detailed forecasts that may exist for the company under
different capital raise assumptions
5.Describe future product expansion efforts detailing strategy and selection criteria,
including the target area, target consumer groups, marketing strategies and capital expenditure requirements, market response and testing etc. Any plans for expansion outside of China?
6. Describe the company's future long-term development strategy. Include forecasts for
growth over the next five years and note if it is above / below industry average. Include how the company compares with the industry average level of profitability.
7. Comment future partnership strategy on potential joint ventures / alliances.
8. Discuss in detail the potential use of proceeds from the new capital injection.
ment on the company’s dependence on raw material prices. What has been the
historical volatility in the key raw materials? Describe and comment on your raw materials procurement arrangements.
10.How are prices charged to customers determined? How long are contracts? (i.e. is 4-5
years typical?) What is the historical range and volatility of prices? Describe these contracts and comment on the commercial aspects which may vary and those which are fixed?
Industry and Competition:
11.What factors drive competition on the industry? Price? Quality?
12. Comment and quantify if possible on the seasonal changes in the company's business
and its impact on earnings.
13. Provide expected product market share going forward in your target markets.
Sales and Marketing, Distribution:
14. Provide details on the company's sales model and pricing scheme.
15. Provide details on the company's marketing strategy. Describe the advertising / promotion
type, pricing, expenditure trends (as a percentage of the total cost and sales). Comment on strategy vs. competitors, if relevant. Describe current, ongoing marketing activities as well as future planned marketing activities.
16. Describe the company's logistics system, such as: inventory conditions, delivery methods,
associated costs and risks.
Procurement & Manufacturing:
17.Describe your manufacturing facilities and equipment. Would you describe these as
state-of-the-art or industry leading? When do you foresee needing to replace such machinery to remain competitive? What is the required replacement capex? What maintenance capex is required?
18.Provide details on any significant machinery breakdown or system failure or customer
complaints in the last five years. Experienced any production stoppages? Power outages?
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19.Please comment on the current utilization levels for your various manufacturing
facilities. What are the historical and projected trends?
20. Comment on any quality control issues in the past 3 years, including complaints.
Comment the process in which the claims were handled and the impact on compensation and litigation costs. Was the company able to return the goods and how long were operations disrupted?
21.Provide details of manufacturing facilities. Include information on square footage size and
functionality, property rights, associated construction and purchasing costs, leasing costs / contract / terms / termination fees, building restrictions, expansion flexibility, current or future maintenance / repair needs, land ownership arrangements and restrictions.
22.Please provide most recent external valuations of any freehold properties.
Discuss land, plant and equipment needs and requirements over the next 5 years including annual cost projections.
23.Discuss past / present / future environmental issues due to land, water, electricity
consumption, and waste / wastewater treatment, exhaust emission.
Financials & Accounting:
Income Statement
24. Why did production costs, and consequently cost of sales, increase more than
proportionally to sales (by ~79% Y/Y) in the 4th quarter of 2008? Was this increase expected and do you expect this trend to continue going forward?
25. Provide breakdown of cost of sales and production costs, i.e. labor costs, depreciation
etc.?
26. Provide a detailed breakdown of selling and distribution expense.
27. Provide a detailed breakdown of general and administrative expense.
28. Do you expect further impact from the PRC Labor Contract Law that commenced in
January 2008? Do you foresee any similar type of legislation risk that could impact your cost of sales?
29. Comment on your company’s interest income including details on the sources of such
income and the sustainability of such income in the future.
Cash Flow Statement
30. Detail the purchase of $xx on plant and equipment. Include cost per machine and
depreciation schedule.
31. What are the remaining useful lives for the company’s plant and equipment?
32. What is the company’s exposure to FX volatility? Is this limited to FX translation for
reporting purposes? If not, please detail the company’s FX exposure? Do you expect your exposure to FX volatility to change?
Balance Sheet
33. What drove the xx% decrease in raw materials inventory in 2008?
34. Provide additional detail regarding the amount due from related parties.
35. Provide additional details regarding allowance for doubtful accounts in the amount of $xx
in 2007 deemed uncollectible.
36. Describe the company’s notes payable in further detail.
37. Describe accrued expenses and other payables.
Other
38. Provide details regarding your company’s working capital targets and projections, policy
and standard terms:
- Inventory procurement, holding and aging policy. E.g. How many inventory turns does your company target?
- Receivable collection targets and policy. E.g. What collection terms does your company have?
- Payable targets and policy. E.g. What are the company’s policies/targets with respect to payment of key vendors/suppliers?
39. Provide details of your company’s cash management policy/activities, if any.
40. Provide details on all charges, liens, mortgages, preemptive rights or other
encumbrances etc. over the company’s significant assets.
41. Have you ever paid out any stock dividends or carried out any stock repurchases?
42. Provide historical budgets vs. actual results for each plant facility.
43. Discuss details of the internal budgeting process.
Management, Corporate Governance, Human Resource s:
44.Provide corporate organization chart
45.Provide updated list and profiles of key executives and directors, including name, age,
background, affiliation, duties, etc.
46.Provide employee breakdown by geography, job function, unions, part-time / full-time /
contract.
Legal & Regulatory:
47.Provide all relevant documents, licenses and registrations for the company and its
subsidiaries and affiliates.
48.Provide details on the company’s tax situation. Include description of China's tax policy.
Include 5 year history by region of various taxes paid, such as income / wages / import / sales tax, any tax carry-forwards, the availability of tax penalties and preferential tax treatment.
49.Provide list of registered patents, both domestic and international and jurisdictions.
50.Provide detailed overview of patents / trademark. Include description of the patent laws
and regulations and discuss their impact on the business. Provide a detailed list / description of all company-owned patents and trademarks including in-process and extensions. Include information regarding owner, duration, involved in litigation or arbitration, copyright income / expenditure, etc.)
51.Provide details on litigation issues, including the actual / pending / threatened / concluded
cases. Include a list of all cases, 5 years of detailed proceeding details, court settlement costs.
52.Provide copies and explanations of various company agreements including: licensing /
royalty / distribution / supply / all other material agreements.
53.Give a detailed overview of the pertinent regulatory environment. Include list of relevant
government / regulatory bodies in China. Describe the current regulatory environment,
expected changes the potential impacts of the company and the industry. Note any favorable government-related business developments.
Additional Questions:
(A) Financial Forecast que stions
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