In today’s fast-paced business world, most companies rely on suppliers and
contractors to help them deliver their products and/or services.
This might be professional assistance behind the scenes or at the front end of the
business in a client/customer facing role.
While outsourcing can offer a range of benefits, working with the wrong supplier can
hurt your bottom-line big time, and, if you’re not careful, result in financial losses,
legal disputes, and reputational damage.
This is why - and we cannot stress this enough - it is absolutely crucial all
businesses take due diligence seriously when choosing what suppliers to partner
with.
Just like the employees you bring into your business; you need to look beyond first
impressions and assess whether working with this company is in your best interests.
In this blog, we’ll share our views on why due diligence matters, the common
mistakes we see businesses make, the power of a contract and what you need to
look out for, and warning signs businesses should be aware of before they sign the
dotted line to safeguard the business you’ve worked so hard to build.
Why due diligence matters
To begin, why does due diligence matter?
Due diligence is the process of assessing a potential supplier to determine whether
they are capable of fulfilling their contractual obligations.
It seems straightforward, of course, but our experience in the industry working
closely with clients mitigate business risk, has demonstrated to us many businesses
aren’t being careful enough in this area.
Proper due diligence can prevent a business from partnering with suppliers who may
not be reliable, financially stable, or have a history of providing subpar services.
It can also identify opportunities for improvement. For example, renegotiating
contracts or finding new suppliers who can provide better quality or more affordable
goods and services.
Common mistakes businesses make
So, what are the common issues we see come up for business?
Well, one mistake businesses make is not having contracts in place at all, or not
having enough terms in place to cover them in the event of a crisis or if things don’t
quite go to plan.
Unclear project timelines
While most businesses will have a contract that stipulates work is billed at a certain
rate per hour or job, there may be major gaps or no clauses that ensure the supplier
will deliver the goods from start to finish in entirety.
Some suppliers will divide jobs into smaller tasks, so they can invoice sooner or
make it easier for the client's cash flow. However, if the supplier does not want to
deliver the goods for the remainder of the contracts and they have not started the
subsequent set of orders, they can cancel these and refund the client, which can
leave you with a half-finished program of work, missed deadlines etc, leaving your
business in a very difficult situation.
Not assessing contract terms
Another mistake we see businesses make is not paying attention to jargon or
contractual fine print, particularly unfair liability clauses. For example, companies
may exclude parts of acts from contracts which are set up to protect parties from
unfair liability.
Some companies will put clauses in their contracts that state if both parties are at
fault, they can choose the percentage of fault they are, leaving the other party to
bear the majority of the liability. This can be particularly problematic for smaller
businesses, as they may not have the financial resources to cover such liability.
According to the Australian Competition and Consumer Commission (ACCC),
contract terms are deemed unfair if they give one party a significant advantage over
the other, are not necessary to protect the legitimate interests of the party with the
advantage, and would cause financial or other harm to the other party if enforced.
It is important to be aware that the current unfair contract terms legislation only
covers contracts up to $1 million over a 12-month period and businesses with under
20 employees. As of 10 November 2023, this is set to change to 100 or fewer
employees or making less than $10 million in annual turnover. Therefore, businesses
must do their due diligence when signing contracts that exceed this sum.
In addition, you will also separately need to assess your insurance coverage fine
print and look at what percentage your insurance or these agreements cover.
Working with a company in financial trouble
You also don’t want to be getting into business with a bad egg.
It’s hard to know what’s really going on behind the scenes of a business without
actually being in it and having a copy of a business’ balance sheet.
However, this is an area many businesses don’t do enough due diligence into, and
there is plenty of easily accessible information online that can give you added peace
of mind and highlight red flags.
Put simply, bankruptcy and insolvency are a massive risk when relying on third-party
suppliers and contractors.
It’s up to you as a business to ask contractors and suppliers to provide some
financial information and evidence they haven’t gone bankrupt previously or currently
entangled in bankruptcy agreements.
What’s stopping a company from signing a contract with your business and two
months down the line they’re unable to meet deliverables, leaving your business
scrambling financially after a huge cost outlay, wondering how you’re going to meet
deadlines, find staff and money to finish a job, and deliver on your services/products,
with no timeline in sight on when (and if) you’ll recoup the funds lost.
The Australian Securities and Investments Commission (ASIC) says if you’re a small
business before you deal with another business “ask them for their Australian
Company Number, Australian Business Number and any licence or authority they
hold to operate in certain industries”.
“Verify the information about the companies, businesses or licences by checking
ASIC’s registers and other government agencies,” ASIC states.
“ASIC’s registers can help you confirm if the company is registered and identify the
officeholders; confirm the business name and who holds the name; check whether a
company or person is banned or disqualified from managing companies, being
involved in financial services or in the credit industry; and check whether a company
or person has entered a court enforceable undertaking.
“If people are managing a legitimate business, they should have no concerns
answering your questions.”
Warning signs to look out for
On top of the business name check-ups, there are also some other warning signs
businesses should look out for before entering into contracts. These include:
Assessing where the business is operating from. Is there an absence of an office or physical location where you can meet a supplier/contractor in person?
Poor customer service reviews (Google Reviews, Social Media reviews) or no reviews at all, or lots of positive reviews in a short space of time that look fake?
If the owner of the company is hard to get hold of directly on the phone or by email and isn’t responsive in a timely manner.
If the owner has multiple companies listed under their name or run multiple companies under different names that are not related to one another. This may be an indication of potential fraud.
When a company is demanding large lump sum upfront payments before starting work. This could be a sign that the company is in financial trouble and needs the cash flow to stay afloat.
The owner has a history of filing bankruptcy/foreclosure proceedings (this can indicate financial trouble and a lack of responsibility).
The owner has been convicted of crimes including fraud or embezzlement (this could indicate a lack of honesty).
Is the business registered with all required organisations, licenses, permits or industry associations?
One promising step forward in the business world over the last 12 months has been
the introduction of Director IDs in Australia where all directors now need to legally
obtain a Director ID for greater transparency and accountability. The ultimate goal of
this is to prevent fraudulent director identities and unlawful phoenix activity where a
company is liquidated to avoid paying debts and a new company is formed offering
the same services and free of paying said debts.
As Australian Business Registry Services puts it, “Shareholders, employees,
creditors, consumers, external administrators and regulators are entitled to know the
names and certain details of the directors of a company”.
You can even take this a step further and conduct a credit check to see if the
company has a good credit rating. This can help give businesses an idea of how
financially stable the company is and assess whether they feel comfortable
proceeding.
ASIC said there was also an option to monitor other companies by registering for its
free Company Alert Service.
“This service will automatically notify you if documents are lodged relating to the
company you nominate. The categories of documents you can include are internal
administration documents, debt documents, deregistration documents, financial
documents.”
How Goldfields Security Services can help?
We understand for some, this may be an information overload. If you are in the
process of bringing in suppliers and contractors into your business or having some
difficulties with existing suppliers, we can help.
As a professional security consultant and accredited auditor with qualifications in
Governance, Risk and Compliance, we can perform a gap analysis to see if the
supplier is completing the tasks that they claim to be completing and to make sure
that the processes they are using are best industry practice.
If you have any questions or would like to discuss this further, we’d love to hear from
you. Call us on 0457 463 662 or email chelsey@goldfieldssecurityservices.com.au.
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