DiligenceChina

Last week we started discussing the some effective approaches to finding professionals who can help you perform due diligence when entering China or expanding your business operation. We have already discussed 2 traditional approaches – lawyers and accounting profesionals. Another group you should speak with is a special type of management consultant known as a Business Entry firm.

Business Entry firms must be approached and screened carefully in China. It is one of those fields that has attracted a lot of interest from seasoned professionals, ambitious newcomers – and quick-buck (kuai-kuai ??) scammers.

We’ll get into how to assess individual firms in a moment. First, however, let’s discuss how to use a business entry firm.

DiligenceChina Warning: Business registration decisions like WOFE vs. JV should only be made AFTER you have had a comprehensive discussion about your business goals, marketing plans, resources, expectations and other business issues. My conversations with business entry consultants indicate that clients are the biggest offenders when it comes to jumping the gun and rushing to do the paperwork on setting up a business operation in China. You should be selecting a business entry firm on the basis of what kind of value they will add to your China business planning – not just who can fill out paperwork the cheapest!

What should you be discussing with your prospective business entry consultant in China?

1) Feasibility study of your plans. Be tough. Be open to bad news. Is your industry already crowded? Do Chinese buyers have any interest in what you want them to buy? Is your product LEGAL in China? Will it be accepted? If the news is bad, it’s better to find out early. Not every idea is going to be a winner in its original form. Tweaking a business plan is annoying – but retooling a factory or rebranding a product can bankrupt you.

2) Market research. Finding and interpreting data on the China market is notoriously difficult. You should definitely see if you business entry consultant can bring any useful perspective or abilities to the table. If market research is going to be crucial to your success, make it a key selection criteria. There are business entry firms that specialize in it.

3) Business structure. Do you plan on setting up a subsidiary in China that you may later sell off? Then you’ll probably need a shell company off-shore. There are a lot of similar details that a competent business entry person can help you with BEFORE you remit your funds in – but are much more complicated once your operation is already up and running. Talk to your consultants as early in the planning stage as you can.

4) Business registration. This is the paperwork part. JV, Wholly Owned Foreign Enterprise, Rep office, or other permutations and varieties – your business entry people should have some solid advice for you. Make sure the fees are visible and the timetables make sense. NOTE: Some complex-sounding issues will be handled very simply – but seemingly simple issues may take a very long time. If your guys tell your that a certain certification takes 6 months or is only given twice a year, they may very well be giving you straight information. Beware of consultants who give you great answers when others have told you about problems.

5) Expansion planning. Talk about your long-range plans early. Whether you plan on rolling out branches in every major city or want to dominate Shanghai, you should discuss options with your business entry people.

6) Partnerships. Not all business entry consultants have useful contacts in your industry – but many will pretend to. If your business plan depends on finding value-adding partners, you may want to shop around for a business entry firm that can help you execute on your plan.

7) HR has become the number one challenge for owners and managers in China. Some business entry firms are connected with employment agencies and search firms. Ask around and see if there is a way to add value here.

Due Diligence on the business entry firms: The key here is to find people who can add value. The actual registration paperwork is fairly straightforward now. When checking out business entry firms, let common sense guide you. Talk to at least three firms to get a feel for what’s available. A good consultant will make time for you and help you with background information. Beware of consultants who are too tight-lipped before you pay – they may be hiding their lack of knowledge or experience. The real value-adders know that you are paying for specific solutions to their unique challenges, and won’t try charging you for information that you can look up on the internet. (Many of the best firms have informative websites or blogs. Look at ChinaBusinessServices or ChinaLawBlog as benchmarks of what a business entry consultant should be discussing with you.)

Firms that have completed deals for satisfied clients may not be able to discuss confidential details with you, but they can give you references. Allesandro Duina of JLJ Partners says “We were careful to build our reputation on consistently superior quality work, creating a track record day after day. We used existing clients as a reference to get new business.” See Profile

1) Look for business entry firms that have a speciality you will find useful. Be it a specific industry, region, technology, language, or other criteria, there’s a good chance that you can find a business entry consultant who has experience in something you need.
Make sure they are experts in something you need expertise in. Hi-tech experience in Beijing won’t help much if you want to do marketing in Shanghai

2) Find out how long they have been doing it. Ideally, 3 – 10 years. (Someone working with business entry issues before 1995 may have the wrong kind of experience, but every situation is different.) This should be clear and specific. Be on the look-out for vague wording like, “combined experience of over 15 years helping foreign companies in China”. It may mean that one partner worked as an AR clerk at Johnson & Johnson’s for 14 years and the other 2 partners just graduated. The basic rule of doing due diligence in China is to ask naïve questions at the beginning. Assume nothing.

3) Check references thoroughly. Then check them again. This is important anywhere, but absolutely crucial in China. Find out who the partners in the business entry firm are, and what they’ll be doing for you. Find out about deals that were completed BY THIS FIRM – not just people the partners worked with at a previous job! Call past clients and make sure that the business entry firm actually did the specific transactions they said they did. Make sure that the industry and transactions are relevant to your situaiton.

4) It’s not necessary, but you might want a combination of western and local expertise. It’s available. There are plenty of pure local plays that can be helpful, but you may be more comfortable dealing with someone from your own country. They almost certainly exist.

5) You want simple solutions to complicated problems. If your guys are shaking their heads and sucking their teeth a lot, there are three possibilities: 1) your problem is truly bewildering, and you might want to take a second look at your underlying assumptions, 2) they are sandbagging and setting you up for higher fees, or 3) they truly have no idea what they are doing. Any way you slice it, you probably shouldn’t be stumping them early in the conversatoin. You want to choose a firm that’s “been there and done that”.

6) Beware the guanxi salesmen. If you came to China 10 years ago, the business entry industry was made up of shadowy operators who whispered about having powerful connections with bureaus and politicians. Nowadays, your business entry consultants are expected to have sufficient connections and contacts to do the job. Reputable consultants don’t talk about guanxi as a major reason for doing buisness any more. If you want to buy a telecoms network, special guanxi relationships are still important. If you want to source bathroom fixtures or process plastics — normal business relationships will suffice.

7) Transparent fee structures. Your consultants should be able to give you a predictable and realistic timetable. They should also be able to predict roughly how much their services will cost – and include a breakdown of expenses. Check references on this.

Final word: Don’t be anyone’s first international deal in China
Lot’s of bright young MBAs who want their own business gravitate towards business entry in China. Some day they’ll be very useful and very professional – but first there will be a steep learning curve that you want no part of. Let them make their mistakes with other people – preferably your competitors.