Due diligence checks aren't just for banks; any company can benefit hugely from carrying out background checks on both clients and suppliers. In this economic climate the majority of businesses are looking to cut back costs, and while protecting from potentially risky deals and transactions may seem like an unnecessary process, in reality, it could end up saving you big time.
While there are a number of options that can quickly become expensive and/or time-consuming, thankfully there is a way to research other companies for free. So, whether you're a startup with limited cash flow or simply want to make cost savings, here's how to perform due diligence checks without spending a small fortune.
Before we get down to the 'how', let's deal with the 'why'. What exactly makes due diligence checks so important - how do they protect your business? Well, firstly they can help spot any fraudulent behaviour. You obviously want to be sure that the companies you're dealing with are who they say they are, particularly in the case of high-value transactions and investments, so looking into their background is imperative.
Due diligence checks are also important when it comes to assessing a client's financial situation. Can they actually afford to go ahead with the purchase? If you're entering into a long-term contract, e.g. with a supplier, how stable is their business? Have they inflated their sales figures, or neglected to mention something?
Another thing to consider when it comes to a company's financials is their payment history. As is shown in the chart below, late payments are unfortunately very common but can have an extremely detrimental knock-on effect across your whole business. By establishing how likely they are to actually make payment on time you can either decide to forego the deal or manage your cashflow accordingly.
In case you need a little more evidence of why due diligence is so important, here are three examples of companies missing the mark - and it ended up costing them big.
For a bank as big as Barclays, you'd think they'd have all their background checks under control. However, they lost sight of things by failing to carry out thorough checks on many ultra-high-net-worth clients, in order to take on their accounts as soon as possible. In response, the UK's Financial Conduct Authority (FCA) imposed a fine of £72 million on them in 2015 - the largest the FCA had ever handed out.
Back in the mid-nineties, BMW made the decision to buy Rover in order to diversify its product offerings and drive more sales. However, after a pretty rushed deal (completed in just ten days), it seemed that the company hadn't paid enough attention to due diligence.
As well as a cultural clash, inaccurate sales data left BMW with a pretty big failure on its hands; towards the end of their ownership of the brand in 2000, Rover was raking up losses of around £2 million a day. The acquisition ended up costing them a total of £790 million.
The UK's largest crowdfunding platform learned a tough lesson in 2016 following the collapse of claims management company Rebus, which had received investment through the platform the previous year. Rebus was accused by the press, including the Times newspaper, of misleading investors over its finances, although the manager and Crowdcube deny this.
Whether or not it was deliberate, it caused the platform to reassess its process for background checks, and ultimately they put more in place, including introducing checks for all those involved in a pitch, not just directors, and partnering with a third party information provider to monitor the companies that receive funding.
For a free background check on a specific company, the best place to start is a reputable directory such as Global Database. Unlike many of its competitors, the platform offers a wide range of information on each company completely free. You can look at key details for over four million UK companies, including balance sheets and cash flow, profit and loss accounts, employee details, technology insights, and group structure, giving you a pretty good overall picture of a company without spending a penny.
If you'd rather do the legwork yourself, you can look at data from resources such as Companies House, annual reports, company websites, public filings, and press articles, but bear in mind that you'll most likely need to use a number of different sources in order to find complete information, and then to fact-check it.
Whichever method you opt for to carry out your company background checks, it's important to know which data to look at. Here are the main things to consider when carrying out background checks:
Company Profile - Pay attention to trading addresses and previous business names to detect any possible fraudulent activity. Details about the company's structure and directors are also very useful.
Company Size - In order to build a complete overview of the company, look at things such as the number of employees and offices - this will give you a good grasp of the scale of the company, and whether or not they're doing well enough to expand.
Financials - Financials are clearly a vital aspect of any due diligence check. Look at profits and losses, and make sure the company has been upfront and honest with all the information it's given you. Credit scores can also be extremely useful, though remember there will be a cost involved in accessing those.
Shareholders - Find out exactly who is involved or associated with the business, and how much of an influence they are likely to have over everyday operations.
Technology usage – How technologically advanced is the company? A business that is relying on outdated tech isn't likely to function as well, and it could also signify a lack of cashflow.
While due diligence checks have traditionally been seen as something required only of the financial sector, more businesses are realising the benefits they offer. With so much data now available for free, and compiled neatly in one place as in the case of Global Database, it just makes good business sense to put it to good use.