What is a Due Diligence Background Check? And Why Do One?

Partnerships, deals, and investments can represent huge opportunities for your business. But, the bigger the opportunity, the bigger the risk and ramifications (both legal and ethical) for your company.

At CSBusinessScreen.com, we offer due diligence background check services that help companies better understand who they are partnering or working with, as well as where they are investing their funds and resources. But what is a due diligence background check? How is this type of check different than a traditional pre-employment background check? And under what circumstances is a due diligence background check a good idea?

Here’s a rundown of everything you need to know about a due diligence background check, as well as answers to these key questions.

The Difference Between Due Diligence Background Checks and Pre-Employment Checks

When people hear the term “background check,” they often think of a company hiring a new employee. Pre-employment background checks may include criminal records, reference interviews, education verification, employment verification, and more. Pre-employment checks are also regulated by the Fair Credit Reporting Act, which creates certain limitations and rules around what companies can and cannot do.

Due diligence background checks are more intensive. They are typically conducted by due diligence companies on business entities and their owners, officers, and key personnel as part of significant business transactions. For example, a firm may conduct an investment banking background check before funding a startup, or a publicly traded company might conduct a due diligence investigation before making a key acquisition. The goal of these due diligence background checks is to prevent fraud and to shield a company or individual from liability exposure.

Common Due Diligence Background Check Purposes

Why would you or your business need to conduct a corporate due diligence background check? There are many possible reasons, including:

• Partnerships: If you’re creating a partnership or launching a business with another person, due diligence background checks allow you to closely examine the person with whom you’re forming that partnership.
• New Clients: “Know your customer” (or KYC) is a key term in the due diligence realm. In some cases, new clients and customers are pivotal to the future and ongoing operation of a business. A business should conduct a due diligence background check so that it fully knows its customer before entering into such a significant relationship.
• Vendors: A new vendor or supplier may also play a vital role in the operation of a business. A vendor background check can help the business better understand an important vendor or supplier before entering into a relationship.
• Mergers and Acquisitions: Any time a company is acquiring a business or merging with another, a due diligence background check can provide important insights on the other company, its officers, its executives, and key personnel.
• Investments: An investment background check can be helpful before investment decisions of magnitude or when there are many unknowns (like around initial public offerings, for example).
• Franchising: Due diligence background checks can be beneficial when purchasing a franchise, or when choosing a franchise operation for your own business.
• International Operations: When your company is doing business with individuals or entities in foreign countries, a due diligence background check can help evaluate those relationships.
• Commercial Lending: Before making sizable loans to other businesses, a due diligence background check can provide a clearer picture of those businesses, their owners, and their operators.

What Information is Needed for a Due Diligence Background Check?

While the due diligence background check process is intensive and thorough, the information needed to get started is relatively limited. In fact, at CSBusinessScreen.com, we can start a due diligence background check with just the following information:

• The name of a company
• The company’s address
• Officer names (and other identifying information, like addresses, etc.)

With that information, we can use proprietary tools and processes to provide accurate results and clear reporting. Our clients can then use that clear reporting to make important decisions around partnerships, business relationships, investments, and more.

What is a Due Diligence Background Check Searching For?

During a due diligence background check, what would constitute a red flag? It’s best to break the answer to that question into two categories: 1) company-related red flags, and 2) individual-related red flags. For any given company, a business background check focuses on answering the following questions:

• Is this a legitimate business with the credentials and experience it claims?
• Has the company been involved in any corruption or fraud?
• Is this a shell company organized to obtain fraudulent contracts without any staff or permanent business purpose?
• Has the company been subject to debarment, suspension, investigation, legal action, financial issues, or negative publicity?
• Does the firm have the capacity (experience, personnel, and resources) to do the proposed work?
• Does a proposed consultancy have the educational credentials and experience claimed?

For any given individual (owner, officer, key manager), a company owner background check or company officer background check focuses on answering the following questions. Note that these questions closely reflect the same questions asked of companies:

• Is this person running a legitimate business with the credentials and experience claimed?
• Is this person involved in any corruption or fraud?
• Is this person involved in litigation that may negatively affect the company?
• Has this person been subject to debarment, suspension, investigation, legal action, financial issues, or negative publicity?
• Does this person have the experience and credentials claimed? (And that are crucial to a specific business transaction?)
• Are the owners and officers involved in fraud or corruption?
• Are the owners and officers involved in any legal actions that may negatively reflect on the business relationship?

Of course, an individual or company background check can ask any number of questions — this is just a sampling of the questions asked about companies and individuals. For any given due diligence background check, the questions asked (and the focus of the inquiry) can be tailored to the purpose of the check.

Get Support for Your Due Diligence Background Check Needs

The questions listed above are wide-ranging, and answering them, accurately, and thoroughly demands specialization and expertise. At CSBusinessScreen.com, we work each day with businesses and individuals who are making important decisions about their companies and resources — decisions that demand a due diligence background check. Get in touch to learn more about how we can help you make business decisions with confidence.