Due diligence is a commonly used term meaning different things to different people at different times. In the world of compliance, this usually means learning more about the person or company before engaging with them.
The Concept of Vendor Due Diligence in Business
Many companies use external resources to collect and analyze the information as part of their due diligence procedures, so it is important for them to choose the best supplier. Like any other provider, due diligence providers have legal, ethical, moral, and regulatory obligations to ensure the work they do is within the law. Nothing must be done beyond the legal mandate at any cost.
Vendor due diligence is a procedure for drawing up an objective view of the investment object, during which we will conduct a comprehensive study of the company’s activities, a comprehensive audit of its financial condition and market position, identify and assess the company’s risks. Classical project management is understood as a purposeful activity to create a new product or service or achieve a certain new result by the project team.
The rapid influx of due diligence providers in the industry, which includes former police officers, private investigators, security firms, surveillance companies, and spy agencies, has led to moral collapse. Some due diligence providers do not pay attention to the client when providing services. They are willing to circumvent the law or engage in illegal activities in order to get paid, harming the supplier’s ethical and legal goals.
To perform the successful vendor due diligence, it is recommended to know:
- What property is declared in the acquired business (real estate, rights to land, equipment, intellectual property), how this property is actually registered, are there any risks, disputes, encumbrances in relation to it.
- How the system of relationships with counterparties (suppliers, contractors, customers) is built, how stable and long-term such relationships are, what risks they may carry in the future.
- How is the system of relations with personnel built, are there risks of hidden labor relations, labor disputes, other unresolved personnel issues?
- What are the risks of the past and current activities of the business in the context of taxation, is the taxation model for a particular business correctly chosen, what may be the tax risks for a new investor?
Why Do Companies Need to Use the Vendor Due Diligence?
Vendor due diligence is not an easy task, as it implies an integrated approach. For example, an audit is carried out on the basis of the submitted financial reporting documents and determines tax risks and the reliability of accounting, while a legal audit allows you to identify corporate and litigation risks, as well as potential risks from the existing document flow and contracts concluded by the enterprise. But none of the private audits allows you to understand the true state of affairs in the company, identify weaknesses in the business, discover hidden debts or money leakage schemes organized by employees.
The owner/buyer can carry out the verification procedure on their own or involve consultants and experts for this. Before the procedure, the parties enter into an agreement on non-disclosure of confidential information. Vendor due diligence of companies is carried out during mergers and acquisitions, the acquisition of company assets, and when lending to large investment projects. Creditor banks resort to due diligence when deciding on the restructuring of large debts. The due diligence procedure is often used in the IT industry when buying and evaluating startups.