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Oct 31, 2011

Due Diligence or Get Robbed by the Bar Sisters in China.

I can remember about 5 years ago here in the Jungle (Shenzhen, China).  There was a new bar street that had just opened, and while there were about 7 bars, only one was relatively modern and western, and ultimately, the only one with customers.  As the shopping mall to which the bar street was attached became more popular, so did the other bars, only because there was nowhere else to go.  It’s the law of numbers in China, especially in cities like Shenzhen where there is so much money and relatively little culture.

But, this isn’t about lamenting the few choices or lack of culture in Shenzhen, China, it is about the discussion I had with one of the small bar owners, who almost never had any customers.  The bar had a bad name and a picture of a dodgy kangaroo (it didn’t even look like a kangaroo) and was supposedly an Australian wine bar.  In turns out one of the owners who put in most of the money lived in Australia and the bar was run by the other two owners who happened to be very clever sisters. 

I asked one of the sisters one evening why they didn’t have any customers, and if she would like me to bring in some friends to make the place more popular.  She emphatically said it wasn’t necessary because they were trying to make the bar lose money so that the absentee partner would accept a fraction of his initial investment in a sale to the sisters.  She said that they knew the bar street was going to be really popular – and eventually it was standing room only every night – and that she and her sister would share all the profits.  He eventually acquiesced, as he didn’t spend much time in China and had no idea what was really going on, and the rest is history.

I haven’t seen the sisters in quite awhile, but, I imagine them driving one of those new Mercedes SL Class Roadsters that are a dime a dozen here in the Jungle, smiling all the way to the VIP counter at the Bank of China.

One of the people I most respect in the world once told me, “nothin’ is ever what it seems.”  That lesson is driven home to me every day that I spend here in the Jungle.  I always tell my clients in China and anyone that will listen, do as much due diligence as you possibly can, peel back the layers of the onion until you reach the core, take your time, never be in a hurry and then once you make the investment or hire the factory or the distributor or the general manager, never stop doing due diligence. Never, never, never.  That is if you really want to make money.

The post is by Frank Caruso.  Frank Caruso is the head of the China Law Group at IPG Legal and has lived and worked in Shenzhen of over 12 years.

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SeanHayes@ipglegal.com