Business Due Diligence Is An Essential Element Of Competent Legal Representation

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Your client has just called you and requested that you draft a contract for a new business relationship they are contemplating. They may be dealing with a potential new vendor that will be a key to their supply chain, a new business partner with whom they intend to invest significant capital or they may be extending credit to a new client. You listen closely to your client’s description of the deal, review all pertinent documents and draft a superb agreement that fully protects your client in case the relationship goes sour. You have fulfilled your duty to your client. Or have you?

The contract you artfully draft ed may protect your client after a deal goes bad, but your client will oft en endure a substantial loss of time and resources dealing with the problem relationship – not to mention more than a few sleepless nights. Sure, your contract will shine in a courtroom and your client may prevail in recovering damages (assuming the other party is collectable). But what if your client could have dodged the whole experience and, with your sound counsel, had instead moved on to a different deal at the outset.

Often, during the course of commercial litigation, it is learned that the defendant had a long history of lawsuits for nonperformance; tax liens or judgments; does not have the appropriate licenses to successfully perform the contract; or even have principals with criminal records. Poor performing companies typically do not deliver promised results, causing legitimate companies to spend unnecessary human and capital resources unraveling problems. They can disrupt supply chains, jeopardize customer relationships and tax internal resources. They are more likely to get companies involved in litigation and oft en vanish or become uncollectible when a judgment is obtained. Discovering this information during discovery in a lawsuit and aft er the deal has gone bad is usually too late.

Many firms and attorneys perform a business background investigation prior to allowing their clients to enter into any significant transaction. A business background investigation typically includes an inquiry into public record sources for the company and its principals. The goal is to verify the legitimacy and integrity of the company and its key officers. The scope of the investigation will diff er depending on the nature of the deal and the risk involved.

The starting point for the investigation is to verify the existence of both the company and its key principals. Secretary of State records are searched to verify the existence of the business and to ensure that the company is in good standing. A report is then obtained from a business credit reporting service to determine financial standing, business history and to identify key officers and employees

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Once the key players are identified, their existence is verified through address history traces. The address histories then dictate where to run county and federal court searches to check for civil suits, criminal records and bankruptcy filings for the company and the key individuals. National and, in some cases, international criminal databases are searched for debarments, sanctions, State Department watch lists and connections to terrorist organizations. National newspaper databases are searched for negative news articles and may reveal other issues. Be aware that the national databases are not complete and contain less than 40 percent of available court records. Those searches should always be supplemented with a county court search of applicable addresses.

For companies in specialized industries, regulatory records are searched and may include records from the SEC, EPA, FTC, FINRA or from other regulatory or professional agencies. It is not uncommon for education histories and professional licenses to be verified on principals, especially where a license is an important part of the engagement. In addition to these searches, specialized searches can be performed, including facilities and location verification.

The results are then reviewed by a business analyst who prepares a comprehensive investigative report. These reports should take no longer than five to seven business days and typically cost a fraction of the value of the proposed deal or the expense of an ill-fated relationship.

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My firm began offering this service to major auditing firms over 50 years ago. We continue to serve that industry today. However, we have found that more law firms and businesses are seeing the value of avoiding negative associations for their business relationships and clients.

The return on investment from a sound business screening program is clear and obvious to businesses. Simply put, problem companies are more expensive to do business with than companies with excellent track records and operating results. Avoiding the cost of one bad association will typically justify the entire cost of a character assurance program.

Drafting an air tight contract is only half of the equation. Assisting your clients, and your firm, in avoiding a bad relationship is an essential element of effective representation. Kevin P. Prendergast

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