China Due Diligence: Sherlock required
Every few months, one of our international lawyers will get an email from a company seeking to buy our due diligence checklist (as though we have just one) for their (usually not described) overseas deal. My pat response is usually something like the following:
We don’t have just one due diligence checklist because the due diligence we recommend always varies depending on all sorts of factors, including the country, the nature of the deal, the value of the deal, the industry of the parties, and even what we know about the parties before we conduct any due diligence. The location of the parties also can be important.
Though we do use our previous due diligence checklists in formulating due diligence checklists for current deals, we never just re-use an old one for a new deal. For this reason, we are not willing to sell any of our due diligence checklists because the risk of their not working well for you are just too high and we do not want our law firm name in any way attached to what could very well turn out to be inadequate due diligence. Not to mention that I find it nearly impossible to believe anyone without a huge amount of international legal and business experience could appropriately use a due diligence checklist even if it does randomly happen to perfectly fit your deal.
If you want to see what I mean about how important it is to tailor your due diligence to the situation at hand, I urge you to read a just completed three part series on China partner due diligence best practices over at the Health Intel Asia Blog [link no longer exists]. Ben Shobert — a true expert on international senior care — wrote this three part series to set out due diligence “best practices” when dealing “with real estate developers, property management companies, or institutional investors” in the senior care industry.
Ben begins by listing out the following as the most important factors you should consider and then he provides a massive (yet no doubt too general to apply perfectly to your specific situation):
- Financial ability of the partner to execute.
- Reputation of the partner.
- Relationships in the locality where development will take place.
- Experience in real estate development or investing.
- Track record in development – residential, mixed use, etc.
- Track record in developing senior housing.
- Commitment to senior housing vs. senior housing as a way to acquire land use rights.
- Dedicated development team.
- Dedicated senior housing team – familiarity with development and operational issues.
- Long term investment horizon – commitment to operating senior housing vs. build and sell.
- Common strategic vision for their involvement in the industry.
- Experience dealing with foreign partners.
The above is about 15% of the information Ben advocates securing from your senior care partner and I list it not merely to give you some flavor of how complicated it is to tailor your due diligence to your specific deal. If you read the remaining half of Ben’s initial post and his two subsequent posts I am sure you will be convinced as to why no off the shelf checklist can be adequate.
For more on what is involved in international due diligence, check out the following book on China due diligence: Risky Business in China: A Guide to Due Diligence.