Due diligence means many things to different people and different professions. To a CPA, it generally means reviewing the accounts, balance sheets, income statements and consolidated returns, to make sure that the numbers make sense and don't conceal a diversion of funds. To a government contractor, it may mean making sure that a potential business partner is in compliance with all provisions of the U.S. Foreign Corrupt Practices Act (FCPA) or other government regulations. To an attorney, it may mean reviewing all relevant information to ensure that legal standards and requirements are met, and that contingent liabilities are understood in order to be contained.

But certain fundamental issues can sometimes be overlooked in a flurry of technical, legal and financial review. If the potential partner seems to meet these other corporate standards, the real question must be answered: Who is this person? Can he/she be relied upon as a partner and meet our requirements?

The most basic considerations are:

* Is the business associate or partner who they say they are?
* Can the potential business associate or partner do what they claim they can do?

These elementary considerations are often overlooked until days or even hours prior to the closing of a transaction. The reality is that multiple potential deals are simultaneously competing for scarce resources, with the scarcest resource of all being the attention of the deal-maker. But even with the pace of global business today, these basic and fundamental factors remain critical to the success of the deal.

Once a preliminary assessment is made that a transaction has merit and a potentially acceptable return, it is time to go one step further and use the necessary resources to actively commit to the deal. Preliminary due diligence is not necessary in all deals. But all transactions that appear to have a promising potential should be fully reviewed as early as possible.

That translates into a close examination of the potential partner/associate/distributor/agent:

1. Are they who they say they are?

What is the full name of the person? Transliteration from Arabic, Cyrillic or Chinese is not always uniform. Spanish or Portuguese names from Latin America do not always use the same standard surnames (matro-nymic or patronymic) from country to country. Nicknames may be critical to knowing the identity of a specific person and to developing rapport with that person. In all cases and every negotiation, a person's name is critical for working with that person; where business cards have been exchanged in early stage meetings, copies of the cards should be added to the file and made available for later meetings with other corporate representatives new to the negotiations.

What is the name of the company? A great deal of fraud is committed by persons who represent (or mis-represent) that they are associated with similarly named companies that are NOT the business that they are understood to be. A U.S.-based example or equivalent would be to assume that WalMarket is the same as WalMart. It is even easier to confuse the identity of a company in a foreign language and foreign language environment, where Sociedad Anonima/Societe Anonyme (S.A.), Public Limited Company (PLC) or Gesellschaft mit beschraenkter Haftung (GmbH) is a standard legal structure.

What is the address of the company? Is that where meetings are held? If not, why not? What does the business address say about the company? Foreign business associates will rarely use a vacant lot as a business address (although it does happen), but they might use a residence as a factory (where in-home conditions do not comply with industry standards). A business address may be a business suite or a maildrop arrangement. Neither is fatal; but whatever the facilities, they should fit the status and requirements of the business operations.

How long has the company been in business, and, almost as important, when and where was it registered to do business? Longevity of business operations should be considered. A company may have an in-country office, but be registered off-shore. Is there some satisfactory explanation for this? An entity that asserts its operations are headquartered in the Channel Islands (or the Cayman Islands in the Caribbean or the Cook Islands in the Pacific) for tax avoidance reasons may be indistinguishable from one that is a pure creature of fraud - an impenetrable hole into which money is poured, and from which it may never be recovered. From a different perspective, a business based in one country whose headquarters are in another country may call into play a whole different cast of characters, with all the strengths and vulnerabilities that come with additional players and operations, and with all the attendant advantages and disadvantages of additional offices and personnel.

What do public records, such as exist, say about the potential business associates? Public filings are available around the world. These records can provide names of principals (sometimes principals who have not been previously identified), registration and other legal information, annual financial reports, a history of litigation (often on the individual and the company), and other relevant information. These records may be difficult to acquire; they may require special access. They may be subject to manipulation (e.g., deletion of portions of records or entire files). But they should always be retrieved and reviewed, for whatever depth or details they provide, on the person or the company.

2. Can they do what they say they can do?

Are they in the right industry? Have you identified someone willing to do whatever is necessary, for the right fee? Or have you located a person whose company, background, experience and contacts are in your specific industry so that you can easily relate to each other, and operate efficiently without bringing them up to speed on your requirements?

What is the size of operations of the potential partner? Are they sufficiently grounded to take on another business partner or client? Are they already committed to a competitor, so that you are not a priority for them? Despite working with a rival, are they able to devote the necessary resources to represent your interests or compete effectively on your behalf?

What are the facilities and resources that are available to the agent/distributor/partner? If a warehouse is needed, is it available; or can it become available exactly as required, without delays? Is a fax machine available 24-hours a day? Can arrangements be made for email access, to overcome time zone inefficiencies?

What is the financial standing of the person and of the company? Is the individual well-regarded in the local business community, indicating that he can turn to other business associates to overcome any unforeseen obstacles? (And the business venture that fails to encounter "unforeseen obstacles" is a rare venture, indeed.) Is the company sufficiently solvent that it will be able to endure beyond the projected date for sustainable cash flow? (More funding, not less, is the standard rule of thumb on virtually all prospective business transactions.)

What level of political and government access is available to the business associate? Outside of North America, the level of government involvement in the private sector is beyond our typical experience. Furthermore, an outsider may not understand the byzantine negotiations that involve handling or balancing delicate political alliances or appeasing minority political factions.

Is a prominent family involved? Prominent families can be critical players in many countries, especially in the developing world. But a prominent family may be interested in placing an incompetent son at the helm of a new business operation. Only the local business community may be able to discern that the young son of a good family is more capable than the eldest son of the family. Furthermore, balancing of competing interests may be required, as the tense situation in Indonesia shows, where the Suharto family has long ruled and the family members have engaged in multiple business transactions in Indonesia. But the power of the Suharto family is on the wane, and the future of their business interests unknowable.

A side product of due diligence investigations can be information useful in the course of business. It may mean that an Asian partner has an affinity for Germany - and business contacts in Germany that were previously unknown. It may mean that a potential partner was educated in the U.S. or has children educated in the U.S., which may indicate a fondness or enthusiasm for the U.S. and U.S. products or know-how. It may mean that comments on divorce or other personal matters should be avoided at all costs.

Good due diligence does not mean "good" answers to inquiries on whether the selected partner is the right partner for a specific transaction. Good due diligence means that the complexity and the advantages and disadvantages of the potential business associate are examined in greater detail and the potential partner is better understood. This can be an invaluable asset in the course of negotiations that are likely to require patience, understanding, compromise and maybe even manipulation using all available data and business intelligence.

The pain of premature commitment to an unsatisfactory business partner can be excruciating, not to mention time-consuming. The agony associated with pursuing a deal without true commitment can be demoralizing for all sides. Finally, there are real dollar costs and identifiable career missteps associated with closing on a deal that was never meant to be.

Pay now or pay later. Or pay in time spent in administrative haggling, wasted expense and wasted manpower. In which case, you can pay now, pay later, and pay more later still.

© Copyright - Smith Brandon International, Inc.

Smith Brandon International, Inc. conducts international investigations and provides actionable business intelligence and risk avoidance counsel to assist companies in their overseas operations. The firm's principals are grounded in investigative, analytical, and intelligence gathering techniques, drawing on decades of experience in the FBI, State Department, intelligence circles and the private sector. For more information, please call 202-887-9363, or visit our website at http://www.smithbrandon.com/.