Preventing Headaches: Do Your Due Diligence

30 Sep

We’ve encountered a few situations lately that underscore the importance of following basic sound contracting practices.  Rushing to move projects along as quickly as possible may lead companies to contract with vendors before thorough investigation, at their peril.  Far too often researching a potential supplier to discover whether the company is able to perform according to plan is ignored. 

Time spent on conducting due diligence up front can save you money and headaches down the road.  Due diligence means investigating a prospective vendor to ensure that the company is what its agents say it is, and that the company can do what they say they will do.

 Why should you bother?  Scrutinizing every prospective contracting party may avoid lost opportunities, costly mistakes, litigation, and degradation of your good name later on.  In situations where the supplier will be performing a service to your customers, the company will affect your profitability and influence how the customer perceives the quality of the service.  In other cases, a vendor may be manufacturing a piece of equipment or developing software, and inexperience may result in months or years of delay.  The few hours that it takes to complete due diligence will reveal information indicating whether the company is able to perform – information that you are better off knowing before the contract is signed.

 Below are the basics of a due diligence policy to get you started:

 The Policy.  Contracting procedures should require that a “due diligence checklist” be filled out on every prospective vendor.  The checklist will highlight key information that should be explored.  Some of the material may be sensitive in nature, so the prospect may feel more comfortable disclosing such information after both sides sign a confidentiality agreement.  The due diligence policy should require that the disclosures be updated at least annually on companies with whom you will have a continuing relationship. 

 The Inquiry.  Every situation is unique, but at a minimum the following should be examined:

*          The company’s most recent financial statement, audited if available. 

*          Talk to at least three business references that have a contractual relationship similar to the one you are contemplating.  Dig deep, asking the references about challenges they have faced working with the prospective vendor. 

*          Professional biographies on individuals in the company with significant management responsibility. 

*          A schedule of all material insurance policies in effect. 

*          Disaster contingency plans. 

*          Outstanding, anticipated, and recently concluded legal action by or against third parties and all government investigations. 

*          Policies and procedures covering security controls. 

The investigation should be thorough enough to uncover information that will reveal whether or not the company can perform the best job for you, and will be there for the long haul.  A good due diligence policy that has the support of senior management can be your best defense against problems down the road. 

–Holli Targan, Partner, Jaffe, Raitt, Heuer & Weiss, P.C.


Holli Targan

Attorney & Partner

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