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How to close a deal successfully in China

A run-down of how to complete a transaction in China

InProved outlined some key factors of how to successfully close a deal in China.

Strategic Focus and Target Selection

It is important to let investors know that doing a deal is the most appropriate course of action at that particular junction in time.

Finding a suitable target is critical and this can be difficult because of the nature of deal-making when opportunities are aplenty. Navigating the sheer size of the market is a challenge, and understanding geographical and cultural differences require local attention and insights. Foreign companies trying to find the right partner(s) in this environment needs dedicated time and resources, including on-the-ground professional advisors and agents to seek out appropriate targets.

“InProved’s sales team has successfully grown businesses in China in the Energy and Resource sectors. Each of our team member has successfully grown businesses in China, establishing a total contract value of US$20mil for products such as structural products, mining machinery, agricultural and aggregate products.

There are a number of factors to consider when shortlisting targets to conduct due diligence.
  •  visibility of target’s key operational status and financial performance, locations and corporate affiliations 
  •  finding out whether or not the target is an actual potential partner 

Some of these information may be publicly available, but some require the company to approach the target individual/company for further information.

This process will require local presence, knowledge, dedication, along with an understanding of rules and regulations.

InProved is backed by a HKSE company looking to acquire in the Metals and Minerals sector.

Due Diligence is critical in any deal

Getting the information in the right format, language is critical in any deal. Finding the right person to seriously consider the opportunity can be a prolonged adventure. In China, it is important to identify the right person to look at the opportunity as early as possible, so that the person can identify issues/challenges early on. While there are many issues that can be uncovered during the course of the due diligence, it is particular important to find the major issues first and foremost, which can be in the following areas,

  •  Assumptions made by the potential target that can be hard to clarify
  •  Insufficient localisation of the company’s Financial records, Operational performance which potentially impair a buyer’s ability to conduct detailed business analyses
  •  Failure to have complete commitment by the target to conduct the necessary due diligence
  •  Government and Financial constraints borne by the potential target that significantly impedes the buyer from closing the deal
  •  Other stakeholders/decision makers that are crucial to the investment decision 

Due diligence in China is a stage not just to understand financial, operational performance but also uncover areas whereby regulations, people or additional effort is required to get to the yes/no decision.

Compared to Western due diligence when it’s relatively structured, Chinese investors/companies may have be less structured when conducting DD. There will generally be issues that crop up during the course of DD which can discontinue the process immediately.

Besides government related issues, we found that issues are generally unique. So these needs to be uncovered first and foremost, hence having a dedicated advisor who are already in the Chinese market to provide context and recommend solutions is crucial.

We have already drunk the Maotai, reducing your time-to-market. - Johnson Koh, founder InProved Pte Ltd

Negotiation

 

Setting the right deal structure early and what price it will be will shorten the process. In a minority stake deal, a key part of the negotiation will be treatment of risks identified during due diligence, and how they are incorporated into the structure. This can be factored in through proper protection terms or flexible pricing. This is particular important as China announces tightening of outbound capital in 2017

 

A good advisory team can be a strong asset during the negotiating process to manage the financial, legal, tax and valuation issues that will be considered in determining the right approach, price and structure.

In a majority investment decision, the advisors will be valuable when assessing any issues that may come up during due diligence and recommend whether they impact valuation or if key agreement terms need to be inserted into the termsheet during negotiations.

 

One chief reason why deals do not go to completion in China is a dedicated and committed approach to draw out the issues. An advisor will be helpful in managing the process and identifying any misconceptions by the buyer.

 

Closing

 

Preparing for the deal closing also requires a dedicated approach, ensure that relevant supporting documents are correct and agreed by both parties. Deal parties need legal advisors to draft and finalise sales and purchase agreements. This document is typically prepared upfront and consistent for all minority stakeholders. The document can be specially prepared in a case of a majority shareholder undertaking. For instance, it will contain rights or indemnification to protect the company from post-deal results.

 

Role of Dedicated Investment Relations Officer

 

Target Identification

  • Shortlist targets
  • Establish communications mechanism
  • Compile Dataroom

Due diligence execution

  • Call and urge the due diligence process
  • Communicate buyers risk upfront
  • Apply context 
  • Drive process and DD uptake

Negotiation

  • Ensure approvals and documentations are in-place
  • Setting the right structure
  • Address financial, legal, tax and valuation issues 
  • Incorporate issues and risks into structure

Closing

  • Witness signing of papers
  • Provide on-going communications support 
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