Talking of Investment Risk Control via a Case 

In recent years, with the development of market economy and frequent economic activities, the risks exist all the time. Every company hopes to minimize the risks. While the first step of preventing risk is to conduct beforehand due diligence investigation. Prevention beforehand is better than remedy afterwards. Through the due diligence investigation on a company, the blindness of investment and operating risk are decreased, the misplay of decision-making is avoided, and then the company remains its invincible position in the fierce market competition. Among Steele’s cases, there is one like this.

In June 2000, a company in Nanjing sent a letter to Steele, claiming that they had invested RMB50million to develop a project in Nanjing and wanted to transfer this project to a real estate company. To avoid the misplay in operation, this company requested Steele to conduct the full due diligence investigation beforehand to help the leadership with the decision-making.

Through serious and meticulous work, our operators got clear about the current situation of the real estate company and handed in an detailed investigation report, in which it could find that the real estate company is a private company, though the registered fund is RMB20million, the stock is transferred from debt, and all the fund had been invested into the construction of mansion, which was in stopping status due to the lack of fund. Because the real estate company did not pay the ground rent, the company failed to obtain the certificate of land use right, hence it could not get the bank loan. Up to now, the company owed the engineering project fund in an amount of RMB10million. Besides, the company couldn’t afford the office rent, the business office had been taken back by the office owner. What is more, our operators got a piece of important information that the boss of the company had a good companionship with a vice-president in the governing body of the consignor in Nanjing and planned to get illegal profit by selling the land with the help of this vice-president.

On the basis of Steele’s investigation, the consignor, the company in Nanjing gave up the idea about cooperating with the real estate company and turned to search for a new cooperation partner. Probably there is a fatal investment trap for the company in Nanjing, which may get the company in Nanjing into a financial risk; luckily it was the leadership’s worshipful consciousness of defending the potential risk beforehand that saved the company. Through due diligence investigation, the fact of the investment objects including investment environment or co-operators is clearly known, which can understand the potential partners’ credit for making the investment decision, as well it can minimize the risk.

Due diligence investigation is the most effective means to know the investment object, and also the investment object can be examined from the main factors which possibly cause investment risk. Due diligence, just as its name implies, refers to the quality and credit of a company, and the contents of quality and credit are prolific, in which the main elements reflecting the credit of a company include company history financial situation, operation status, shareholders and the background.

From company history, it can show the company’s operation and changes in past, for example, whether the shareholders have changes, whether the business scope has changed, and if so, the cause of the changes should be analysed. Simultaneously, the time of its operating history is also a sign of the operating level. If the company has a long operating history, the company should have rich operating experience and administrative level, and then it is reassured to cooperate with such a company.

A company’s financial and operating status include the items as follows, balance sheet, profit and loss sheet, financial percentage analysis, main business, accessory business scope, main products and output, purchase of raw materials, distribution areas of products, purchasing channels and payment terms, commercial credit, information of the main suppliers, the essential information of the subsidiary companies, the stuff’s status, the working surroundings, and so on. The financial and operating status above show a company’s profit and loss status and payment capabilities, the exact diversified operation, the market of its products and services and the business size as well. All these information reflects the operating level and operating status of a company.

The background of shareholders and their held-stocks are also important elements. The more a shareholder holds the stock, the more he/she controls the company. Especially in companies of medium and small size, the big shareholders are proprietors as well, so it is particularly important to know them. Besides, it is also should be noted whether the main shareholders have invested other companies and how the operation status is in these companies. Particularly for enterprises of exclusive investment and unlimited partnership corporations, their shareholders take unlimited responsibilities. If circumstances like debt and bankruptcy occur in some company they invest, their other invested companies are probably affected. What is more, the shareholders’ personal credit, wisdom and experience should be understood. The essence is seen through phenomenon. In fact, the credit of a company is the credit of its governing body. The essential information about the shareholders attaches too much influence to the operation and development of the company, because the shareholders are the operators and they decide the operation policy, establish the developing strategy, administer all the activities and make decision of all great events. Their personal credit, wisdom and experience directly influence the ideology and techniques of the operation

Another clue that is hard to catch people’s attention is the company’s background. What we should review is not only the academic background, for example, the registered information reflects the incorporated date, founder members, fund resources and operating contents. What is more important is to conduct verification with the actual background, the real fund resources and factual means of original capital accumulation. If the fund is obtained in illegal ways such as smuggle and drug selling, no matter how solid the strength of the company is, there is too much law risk to cooperate with it. For example, if a company wants to cooperate with Xiamen Yuanhua, the obtained academic background is that Yuanhua is a well-running company with rich capital. But when its smuggle discloses, the enterprise group becomes a building which collapses within a night and all investment becomes irrevocably lost. However, if we investigate beforehand on its actual background that Yuanhua started from smuggle and continues smuggling, no matter how strong it is, no companies are willing to take law risk to cooperate with it, and spontaneously the investment risk can be avoided.