Corporate due diligence is taking on a new role in business. Many companies are now doing some type of research, due diligence, or background checking on vendors and business partners to help prevent fraud. Recently, I have seen two different cases relating to this.
First, we came across a situation where a company had been doing business with our client for a long period of time. The company had been buying inventory from our client every month, paying for the allotted amount, and reselling it. Towards the end of a year the company approached our client saying they had a really big order and they needed a bunch of inventory. They asked our client to send it right away and that they would pay. Now, this order represented about eight or nine times the company’s typical order so at first our client was purely excited to fulfill it. The inventory was then sent to the company but our client didn’t received payment for it. Ultimately, the one “really big order” resulted in our client losing more money than they had made from this company’s prior orders combined.
Unfortunately for our client, this loss could have been very easily discovered had some due diligence been performed. If our client had looked into it they would have found that the company they were selling to was having major financial problems. The company was behind on their bills, the owner had filed foreclosure, some of the vendors for this company had reported their inventory being diverted and instantly resold wholesale just to generate capital. Additionally, the company had a lien filed against them 30 days prior by the state sales tax department because they weren’t paying sales tax on what they were selling retail. All of these issues would have been reasons to prevent our client from doing business with the company. Had our client done some due diligence before working with this company, it could have prevented a huge loss for them.
The other situation we’ve come across recently relates to fraud and identity theft. In this particular case, a trucking company had some of their corporate documents, specifically their insurance certificate, copied from a website where they posted they were going to do work. A different trucking agent had one of their trucks and drivers use this other company’s stolen credentials to go pull up to a warehouse, load up inventory, and drive away stealing the cargo. When the inventory didn’t arrive at the other end, the company who shipped the cargo called the name and address on the paperwork only to find out the truck that had taken the inventory had used fraudulent paperwork and stolen their products.
Researching the finances and assets of an individual or company is an important measure to take prior to doing business with them, along with criminal background checks. Don’t just wait for a “really big order” to begin your corporate due diligence. Take a look at your current and prospective vendors, or even other types of business contacts, to make sure that they are legitimate. Be confident that the company or person you’re doing business with will be able to pay, will be able to follow through, and that their prior activities similar to what you’re doing have been handled with integrity. Due diligence may take some time and money initially, but it could potentially save hundreds, thousands, or even millions of dollars in the long run.