business loans

How to Complete Vendor Due Diligence

  • February 19th, 2015
  • Ezra Gabay

Make sure you really want to partner with them before you pull the trigger.

Sophisticated business partnerships begin with due diligence. Verifying that a business is viable and that its officers have earned sterling reputations is essential to the success of your relationship. Obtaining the intelligence you need to make complex decisions isn’t always easy, but it is necessary to prevent wasteful problems. Are you prepared to investigate and analyze the information you find with a critical eye?

What You Need

How much due diligence you need to perform depends on the nature of your planned business relationship. The greater the risk, the greater the due diligence should be. Any business that will gain access to your sensitive financial information requires thorough investigation.

“Thorough” means more than a quick review of finances, licensure and insurance documentation. Plan to collect and review important records such as income statements, balance sheets, cash flow statements, and other critical regulatory documents or data. Don’t forget to investigate important contracts, since terms and renewals can have a significant effect on the viability of your prospective partner. Speak with current clients to gauge the level of service provided by the business, and determine your partner’s reputation for industry expertise.

Financial due diligence is only part of a thorough investigation, though. An investigation of a well-established, successful business can still reveal serious problems — problems that can affect the viability of your partnership. Plan to collect verifiable references from reasonable sources, and investigate any complaints filed with the Federal Trade Commission and Better Business Bureau.

Review any regulatory problems or lawsuits with a critical eye. Finally, review the company history and key personnel biographies carefully. One corporation scuttled a potentially promising global partnership after due diligence revealed senior management retained business relationships with organized criminal networks.

What to Ask

Although a large part of effective due diligence is about collecting the right data, you also need to ask the right questions. Even a business with outstanding finances and personnel can expose you to unwanted risk if the right policies and procedures aren’t in place. For example, has your proposed partner developed a cybersecurity policy? Do your partner’s employees have access to private data that could expose your businesses to harm?

The answers to these questions won’t appear in financial statements or consumer complaints, but they can greatly affect the health of your relationship — and your business, in certain circumstances.

There are other factors to consider. Are key personnel at risk of leaving the business and taking proprietary information along for the ride? Is the principal owner in the middle of a divorce? These real-world possibilities make ongoing due diligence an absolute priority for your most important business relationships.

How to Make Due Diligence Easier

Thorough due diligence takes time and resources. It isn’t fun, but it’s necessary. It’s definitely better than defending your business against attacks on its reputation. You can create a smooth due diligence process by creating a rulebook for potential partners to follow. You should also plan to make them accountable for the forward momentum of the deal by having them provide key information, including:

  • References
  • Financial statements
  • Notices pertaining to written complaints
  • Relevant contracts
  • Other important documentation

Keep in mind that you will not always need to collect this for every potential partner. The riskier the relationship, the more thorough your diligence will need to be.

Hiring a Third Party Provider

If you’re not prepared to invest the resources necessary to investigate your most important relationships, a third party provider may be able to help. Although third party reviews can be expensive, consider how much money your time is worth. If your investigator uncovers unsavory facts about your proposed partner, that might be the best money your business ever spent.

About the Author

  • Ezra Gabay
  • Ezra Gabay

Ezra Gabay has extensive experience in the financial services industry and currently serves as president of Native Merchant Services, LLC. He is passionate about helping entrepreneurs grow their business by working smarter. Ezra writes about business finance, strategy, and technology.

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