Updated: Aug 4, 2021
An important part of entering into any business transaction is doing your due diligence to make sure that you are entering into a desirable, legitimate business relationship.
Firstly, doing your own research could reveal things, negative or positive, about a business that you may not know from what they tell you, or from what a contract says. Doing your own due diligence will give you valuable context for you to make more informed business decisions.
Secondly, it is even important now, where a lot of business that we do is completely or partially online. Online scams and fraud have become very sophisticated and prevalent. Doing your due diligence for a business transaction is important because you can protect yourself from undesirable or fraudulent business engagements.
For those reasons, it is worth spending time looking into a business before engaging in any commercial relationships. Below is a list of ways to help you to do your due diligence when entering into a business transaction.
Author: Millicent Nhepera, Law Graduate (LLB, LLM), located in Australia.
Google can be a vault of useful information and is a very good starting point when you are trying to find out about a business. And the best part – it’s completely free.
It can help you in the following ways:
Providing contextual information
A google search can reveal a lot about a company and you can use the Google search function to find the business’s website. Information like products and services offered by a business you want to engage with is easily accessible via Google.
This can help you to negotiate better, understand what the business is able to prove, and it can also help you understand the business better. Questions like, where are they based, what are their operating hours, can all be answered via Google. It can even help you to “put a face to the name”, where, depending on the industry, photographs may be displayed on the website.
A business’s website can be a good indicator of its professionalism. That is, a business with an informative, upfront, regularly updated website, more than likely indicates that the business is genuine. Other useful information you can find include; a listed ABN or, depending on the business, professional accreditations displayed on the company’s website. For example, an accountant with the “CPA” accreditation displayed (and verifiable) on their website, is a very good start.
While none of this information is definitive, it can give you a feel for a company. If things don’t feel right at this stage, then it will help you to ask the right questions or walk away, whatever the case may be.
Company reviews are probably one of the most beneficial tools that Google provides. Unlike reviews found on a business website, it is difficult to manipulate reviews of a company on Google. As part of doing your due diligence, it is worthwhile to see what other people’s experience has been with a particular business.
Google has a star rating system from one star to five stars. This will give you some indication as to how good a business is, and how desirable it is to work with. So, a one or two-star rating can be a cause for concern, depending also on how many reviews there are. Google will also let people write comments with their rating, so you can understand why that rating was given. You can also rank the ratings from best to poorest, and vice versa. These Google reviews can give you a good insight into a company.
Businesses also have an opportunity to respond to reviews. The tone or manner of the response can also be a good indicator of the level of professionalism.
Adverse media searches
Google also provides articles and news and these are a good source of information. You can Google search “CompanyX + adverse media”, of “CompanyX + fraud” or any other combination of words depending on what you want to see. In most cases, this search should not bring up anything. However, there are some circumstances where a business involved in fraud or scams are reported and will come up in a Google search.
The list of third party searches you can use is exhaustive. However, unlike a search in a search engine, a lot of these third-party search platforms provide a lot of concrete and official information.
One example is conducting an ASIC search. It will give you all the official details of the companies. Including its official name, ABN number and whether or not it is registered, the official address, name of owner, or the business’s directors and shareholders. All of which is important information for a commercial relationship.
Another good example of a search tool you can use to do your due diligence is InfoTrack. InfoTrack, and search tools like it, are good because they provide a “one stop shop” for due diligence searches. You can conduct comprehensive searches, including bulk property searches, company information searches, including PPSR reports and credit status reports.
Credit status reports are an important part of a due diligence search because they reveal the financial status of a business. You would not want to get into a partnership, for example, with a business that is not in good financial standing.
Personal searches can also be done on third party search tools. You can search the last known address and make bankruptcy enquiries about an individual. You can also conduct police checks on individuals to check for any criminal convictions against their name. (Please note that this can only be done with the permission of the person whose name who are searching).
You can also conduct civil litigation searches on a company or an individual you are dealing with. This will give you an indication of the litigation track record of the company or individual. Civil litigation against a potential business partner for debt recovery, or breaching contracts for example are a good indication of how a company conducts its business, and that it may be an undesirable business partner.
Engaging a lawyer
Engaging a lawyer is likely one of the most beneficial things you can do to do you due diligence in a business transaction. Lawyers are trained with the knowledge to see and pick up certain details that you may not have picked up on your own. Lawyers can help you in the following ways:
Conducting third party searches and retrieving useful information on your behalf. They can collate and explain the information and what it means to you.
Reviewing different types of contracts or agreements to make sure they are legally sound and are not detrimental to you. They can point out weaknesses and ways in which to fix them.
Explaining or elaborating on elements of the business transaction that may not be clear to make sure that you can make informed decisions.
Identifying potential problems with the business transactions and addressing them.
Specialised lawyers have sound industry knowledge, which means that can apply a high standard of knowledge and experience to your matter.
Lawyers can negotiate on your behalf before entering into a business transaction. Making sure that your best interests are kept in mind, while negotiating a favourable deal.
Ultimately, the skill and industry knowledge that a lawyer can bring to the table can prove to be invaluable. You can get a better deal out of the transaction, or even get the advise to walk away from the transaction where it is not a desirable or beneficial.
Social media searches
Social media is an easily accessible source of information when you are doing your due diligence. While the information may not be definitive or official, it can paint a good picture about the company or individual. It gives you personal information and insight that is not available on any other platform.
Social media, particularly Facebook, has a feature where you can see reviews from customers. People can write comments and reply to posts. This can give you insight into the overall customer satisfaction with the business. Because businesses have the opportunity to reply, you can also gauge the level of professionalism, and conflict resolution of the business online. This could help you with the context for the business’s work culture and how they interact with their customers.
In companies, social media reach and engagement can also work as an asset. So, seeing social media could be something you would want to include in your agreement or negotiation as an asset.
On an individual level, how people use social media can affect either their personal brand or the brand of the company they own or work for. This is definitely something you want to check on before affiliating with a person. Social media is where people feel free to express their thoughts and opinions, which is not inherently bad.
However, where a person expresses thoughts that are, for example, prejudicial, discriminatory, incite violence or otherwise adverse, then you would want to steer clear of any affiliation. This is because your business and brand may be negatively affected by that affiliation.
Requesting further documentation
In order to make an informed decision, you need to have a clear picture of what exactly you are getting yourself into. Therefore, ask for as much information as you can from the other party in order to answer your questions. The information you can request can be as general and as specific as you need it to be.
An example would be if the type of business transaction you are interested in, is an acquisition, then it is important that you get the full financial picture of how the business is actually doing. You shouldask for all the financial details and, preferably, audited financial reports. This also includes the business’s up to date tax records, and information about the sales made over a period of time. It will then give you information about what you can expect to make in sales. Employee turnover information, existing contracts that you would be bound by, and for how long. All of this is information that, if not already provided, you should make a request for.
Some professions will also have samples of work that they have done before, to show you the kind of work that they can do. Photographers, or graphic designers will have portfolios of work that they have previously done. The marketing industry will have the data of successful marketing campaigns that they may show you (barring any confidentially restraints). Evidence of a consistent good standard of work is a good indication of the general standard of work that the company or individual can produce.
Check industry standards
Many professions have rules and standards that they have to follow and maintain in their operation. Usually, there is an overarching body that governs the profession, for example, CPA for accountants, or state law societies for lawyers. All concerned professionals have to maintain a defined standard in their delivery of business. It may be beneficial to look up these rules to see the standard of care that is ordinarily owed to you by those professionals. You can then compare this and see if this is the same standard that is offered in your potential agreement or contract, and you can ask for those to be reviewed.
Within the manufacturing and engineering industry, you can look out for ISO standards. This is an internationally recognised standard, that helps to maintain consistency and quality in industries around the world. An ISO certification, or any other industry certification is a very good indicator of the quality of the business you are looking to engage.
Word of mouth
Lastly, word of mouth can be a beneficial asset in doing your due diligence because it is mainly based on reputation. Usually, entities that have a consistently good standard of work will have good reputation and will come recommended within the industry. So do not hesitate to ask around within the industry of the business venture you intend to make. Put feelers out there and see how reputable the company is. This will give you further context and assist you in making an informed decision.
How can Prosper Law Help
If you need a lawyer to help carry out due diligence before you enter into a business transaction, contact us today.
Farrah Motley | Legal Principal
PROSPER LAW - A Commercial Law Firm for Businesses
M: 0422 721 121