Due Diligence Across Borders

By Ann Longmore-Etheridge

Equally important are any factors that might become liabilities with regard to the new business partner. For instance, in the case of a prospective new third-party vendor, does this partner already have a parallel business line that is in competition? If so, might the prospective partner be intending to sell its own product line over the company’s product line? Another liability might be if the vendor is known to engage in poor business practices that might adversely affect the reputation of the company.

A company also needs to know who the real owners of the potential partner are. “For instance, China has a slew of state-owned companies, and it is often not so apparent what the ownership is and how that can impact the business,” Runyan explains.

Not every scrap of negative information found will, or should, lead to an abandonment of a prospective business partnership. One simple example might be finding out that someone working for the potential partner had several DUIs. “If that person doesn’t drive on behalf of the company, then that is typically not that big of a deal,” Runyan states. However, if it is found that one of the principals has previously been criminally investigated, has been accused of war crimes, or if the business has been involved in faulty product lawsuits, this might spell the end of the attempt to form a partnership.
Runyan says that quite often what is found is “fairly benign stuff. But these are things you may want to know because, down the road, the business parameters may change.” And when they do change, Runyan recommends a review of previous investigative information on file.

When conducting a due-diligence investigation, companies should keep in mind that a lot of incorrect information is out there, including database errors. Victims of identity theft, for example, will have incorrect information show up about them, and other people will have their good reputations confused with others of the same name who are not so clean. This makes it imperative that all information be verified by several sources, Runyan stresses.

Gathering reliable information in various countries is not easy. When the potential business partner is in a developing nation, the problems of information gathering are instantly compounded, he says, and the validity of what is obtained is often hard to prove. “You need a local or regional person to verify [information]—to go to the courthouse and pull a record or go to the actual address that the business claims to be at. It’s very important, because otherwise you’re basically doing an Internet search,” and that will leave you vulnerable to being scammed, Runyan says, noting that it is simple for anyone to set up an Internet presence—a “shelf company that looks like a legitimate storefront.”



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