Entering into any new business relationship carries a significant degree of risk of the unknown. But this is particularly so in emerging economies such as China where inadequate corporate governance, corruption, weak enforcement of intellectual property rights and immature dispute resolution mechanisms are common place.
The existence of such issues necessitates conducting due diligence on a potential business partner before committing to an acquisition, transaction or relationship. However, this process should not merely comprise an evaluation of legal and financial positions but should also involve looking at ‘off-balance sheet’ risks related to integrity and reputation. These could include the source of the target company’s seed capital, its track record in similar ventures to that planned, the nature of any political connections that its principals might have, their reputation within the industry, and an understanding of any civil or criminal proceedings that they may have been involved in.
Finding out after the event that your new business partner has a criminal conviction or a reputation for paying bribes to government officials is often too late. That is why integrity due diligence is a key part of the risk mitigation process and can help you avoid costly mistakes, regulatory sanction and damage to reputation.
Identify business background, affiliations, professional reputation of key principals.
Know who you are dealing with up front. The information that you uncover may not necessarily be a deal killer but if it is you’ll be glad you found out about it before completing the transaction.