What is Due Diligence?

Due diligence comes in several levels, depending on the size and risk of the contract. For a small office supplies vendor, a quick check of company registration and creditworthiness suffices. For a strategic IT supplier gaining access to your business-critical systems, a thorough investigation is warranted.

Financial due diligence involves checking annual accounts, creditworthiness (through agencies such as Dun and Bradstreet or Experian), outstanding debts, and any liens or charges. A supplier in financial difficulty may go bankrupt midway through a contract — with all the consequences for your business operations.

Legal due diligence focuses on the legal entity, the authority of the signatory, pending litigation, and the applicable terms and conditions. Is the company properly registered? Is the person signing actually authorised to do so? Are there ongoing disputes that could threaten continuity?

Operational due diligence assesses whether the supplier can deliver what they promise. Do they have the capacity, expertise, and resources? References from existing clients are invaluable here. Ask not just whether they are satisfied, but how the supplier handles problems and delays.

For SMBs, due diligence does not need to be complicated. A structured checklist of ten points — company registration, credit check, references, annual accounts, certifications, insurance, signatory authority, terms and conditions, privacy compliance, and financial stability — covers the majority of risks.

The investment in due diligence is far outweighed by the cost of contracting with an unreliable party. A few hours of research upfront can prevent months of problems and legal costs.

Every contract carries risk. Without due diligence, you take that risk blindly. You rely on the supplier's sales pitch without verifying whether they can deliver what they promise, whether they are financially healthy enough to see out the contract period, and whether they are legally in order.

For SMBs, the risk of a failing supplier is proportionally greater than for large organisations. A supplier going bankrupt can hit a smaller business disproportionately hard, particularly if no alternative is ready.