Due Diligence in China

For foreign companies looking to do business in China, no matter the business model, prevention and preparation is key to success in the Chinese market. Due diligence is a prerequisite for any transaction with Chinese parties. You can put your business at risk by making assumptions about potential business partners and, even for vetted partners, due diligence can provide additional intelligence for your negotiations and strategy.

Due to the limited open channels to the public for accessing information in China, any foreign investor looking to set up business in China will require a professional service provider to conduct comprehensive due diligence on potential business partners, agents or suppliers, which should include:

Operational due diligence to confirm the identity and legitimacy of business partners – It is mandatory for Chinese companies to register with State Administration of Industry and Commerce (SAIC) or local SAICs. This data enables information provided by the local company, such as the registered capital, registered legal person, registered address, business scope and licence expiry date, to be verified.
Financial due diligence when considering joint ventures or mergers and acquisitions – A Chinese company’s financial accountability should always be assessed, especially before significant transactions.
Reference Check and Third-Party Evaluation – A well-established company should always be open and ready to provide references. The company’s suppliers, customers, even competitors, are all good references. A company with a single supplier or limited market may entail more risk.
On-site inspection – Due to geographical distance, it is often difficult to know your partner’s background, capability, credibility and performance. For sizable deals, on-site inspection or on-the-ground presence is important.

Due diligence is not a one-off procedure. It should be conducted throughout your time in the China market. Trusted partners today may be less reliable in the future and you need to be prepared. Ongoing due diligence should be maintained as an integral part of your business.

The old proverb, “Trust but verify”, could have been coined for those doing business in China or with Chinese companies. Sovereign China can assist you to better understand potential business partners, agents or suppliers, by conducting reputational and/or financial due diligence.

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