Who Are You Dealing With? Client Background Check Essentials

Leverage the Information You Find

At this point, you should have accumulated a fair amount of info about your potential client. Now it's time to make decisions. If there is little or no information about the company, you can assume it's either brand new, is not a recognized business entity (the client's a sole proprietor, for example), or is lying about it's identity. In this case, you'll have to make a judgment call about how to move forward.

In most cases, however, you'll be looking at your results and assessing the 'big picture' about the company, considering things such as:

• Have there been any bankruptcies? When?
• Is it currently in litigation with other clients or partners? Have other vendors had legal proceedings with this company?
• Has the company been late on its state or federal tax filings? This is found on the Secretary of State site in some cases.
• Is the business's corporate status ok? A corporate status of 'forfeit' or 'deferred' might be major a warning sign.
• Are any of the principals involved in other litigation? Perform a name check on all the principals to see if they are litigant or otherwise problematic business people.
• Are there any sales/size estimations or reporting? DnB sometimes provides this information, but be sure to note if the data is reported or was simply estimated by Dunn and Bradstreet.
• Does the company's self-description correspond to the records you're finding?
• Has the company been involved in successor corporations, complex stock dealings, or other activities not consistent with their size or business type?
• Are there any liens, judgments, lawsuits, or injunctions about the company? If so, look for the Website of the court that holds the information about that event -- they might have publicly available records, too.

Finally, be on the lookout for anything that's just plain suspicious. Use your best judgment and you'll be able to make the right decision, armed with lots of highly relevant information.

Let's look at some real-world examples of how the above process can result in a good business decision that protects you without interfering with your ability to grow.

Example 1: A Small Company's Record Doesn't Match your Signed Agreement

Recently, I signed a small ($3,000) agreement with a company in Los Angeles. They were in a great hurry to get started, and returned the signed contract almost immediately. However, I found no evidence of their company in any records at all, including a Knowx.com business search.

I sent a friendly but firm email to the company, thanking them for their business but explaining that the contract was unenforceable because their business couldn't be found on any corporate record anywhere. As a result, I explained, my company could not extend any credit whatsoever and a full payment would be required before development could begin.

The client balked at this, complained, denied, and then promptly overnighted a cashier's check to my office. It turned out, they were a sole proprietorship and the 'President' liked to add "Inc." to the name to make things look more professional. The contract would have been totally unenforceable, and I was glad I demanded the full-payment.

Example 2: A Legitimate Company has Ongoing Litigation or Judgments

Another company I worked with seemed very legitimate when a basic background check was performed. Later in the project, however, they became a non-payer and I began considering how much credit I would be willing to extend while waiting for payment.

I invested approximately $100 in various corporate records searches. I learned that the company had no large-scale litigation against it (which I already knew), but that 2 of the 3 the principals were immersed in an ugly court battle in civil court. In addition, they owed $300,000 USD in back taxes to the State of Delaware and a local print shop was taking them to small claims court. I learned all of this from a US$20 search on Knowx in the span of 5 minutes. Needless to say, that company's credit line was promptly ended.

Incidentally, I was never paid by that client. I only wish I'd done a bit more research before the whole thing started...

Example 3: A Large Company Has a Clean Record

Sometimes a company is just fine, and it's a good feeling signing a contract with a firm that has a clean record and perfect history. Keep in mind that every company will have the occasional legal hassle, stock reissue, change in the board of directors, or other corporate event. The important thing, though, is that they are stable, honest, and legitimate.

When a company "checks out clean", don't think that your investment in their history check is wasted -- you've simply bought some security for yourself and eliminated a risk factor from your business.

Look Out For Number One

In the end, you can save yourself incredible amounts of time, stress and money by doing a bit of due diligence at the beginning of a client engagement. Considering the low cost of record searching and the incredible hassle associated with collections and litigation, pre-engagement research is about the best insurance policy you could ever find.

Protect your bottom line, yourself, and your business by doing a little work up-front, and you'll thank yourself in the future!