A Checklist for Conducting Due Diligence

Canadian companies looking to complete a significant transaction or business deal in China should seriously consider using a professional service provider to conduct comprehensive due diligence on the potential business partners. If you are unable to hire a professional service provider, here is a checklist of some key steps:

  • 1. Registration Information
  • 2. Financial Information
  • 3. Reference Check and Third-Party Evaluation
  • 4. Others

Registration Information

It is ultimately your responsibility to make sure that you are dealing with a legitimate company. It is mandatory for a Chinese company to register with State Administration of Industry and Commerce (SAIC) or local SAICs, government agency in charge of all business registrations.

The registration information is accessible on most local SAIC's websites. It provides an effective way for you to verify the information with what you have been told by the local company, such as the registered capital (indicating the amount of legal limited liability), registered legal person, registered address, scope of activity as permitted, and license expiry date.

Compliance with the business license can be an indicator of the reliability and longevity of the company.

Furthermore, it is relatively common to not be dealing with the person listed on the business license. That said it is still important to confirm whether the person you are dealing with is who they claim to be or whether he/she has the negotiation/decision-making power in the company they represent.

Financial Information

Once you are confident that you are dealing with a lawful entity, you should consider the Chinese company’s financial accountability, especially before a significant transactions. Below are some recommended areas that you can begin your investigation.

For a listed company, look into the equity structure, percentage of shares, capital availability ratio, forms of investment, major shareholders, etc.

Financial statements and cash flow statements are hard to access in China. But balance sheets, which provide useful information on current assets, current debts and long-term liabilities etc., can be obtained through certain channels.

Other financial information you should consider includes bank statements, bank loans or credits with any financial institutions or private lenders, real estate mortgage records (either the company's or a founder's), debt records, promissory note, letter of credit, government grants, subsidies, etc.

It is worthwhile involving a professional service provider to conduct financial due diligence due to the limited open channels to the public for accessing financial information in China.

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. Depending on the nature of the potential transaction, it would be useful to learn about;

  • the procurement policy, quality and frequency, and payment status from its suppliers;
  • the sales channel, sales markets, market segments, numbers of customers; and
  • their relationships with customers, etc.

You should also obtain a description of their business with foreign companies, request names of coordinators, and if possible speak to references that speak the same language as you.

Others

In addition to the above points, there are other effective ways that Canadian companies aim to mitigate problems when entering into any business relationships in China. For example, preparing a good contract/agreement, and registration of your intellectual property in China.

For more information on how to conduct due diligence in China, read our Due Diligence: Best Practices report.

If you have any questions or would like to learn more about the services offered by the Trade Commissioner Service in China, please feel free to contact us.