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Why due diligence matters when working with suppliers

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.


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


“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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