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How to carry out a company check in three simple steps
How to carry out a company check in three easy steps: A guide to an essential process that matters a great deal in corporate governance, specifically when exploring potential mergers, acquisitions, and even potential suppliers and customers.
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In good corporate governance, directors and C-suite leaders will always check up on companies with which they might do business. It’s especially important if you notice any red flags from the outset; any professional will tell you that proper due diligence is essential before making any decisions in these cases.
Why are company checks important?
Company checks (sometimes called corporate or entity screening) are essential because of their importance to risk management, which is a direct corporate governance responsibility.
Any company you do business with could add to your risk profile without proper screening. Deloitte notes that in modern business, this is becoming a lot harder as global business networks expand.
Ultimately, companies could fall into one or more of several risk categories:
- They’re simply fake companies, designed for illicit purposes. Recent data suggests that AI is creating vast new avenues for criminals in this area.
- Their finances are dire.
- Their compliance record is bad.
- Their reputation is lousy.
- Their values and/or mission statement don’t align with yours.
- They’re subject to national/international sanctions.
- Someone high up in the company is a politically-exposed person (PEP) – meaning any individual with strong political influence; they are seen as more likely to be connected to bribery, corruption or money laundering.
1: Check the identity
A straightforward way to check out the authenticity of a company is to check its identity. In other words, check if they legally exist.
The best way to do this is to look at official corporate registries (such as Companies House in the UK, state databases in the United States, or the national registries of the European Union).
In addition, you can also check for several basic things that every company should have. These include:
- A functioning website
- A registered address on that website
- A phone number (with a country code that matches the registered address)
- A visible presence at their registered address (any street-view app will show you this; just bear in mind that, sometimes, the street-view image might be a few years old).
- A privacy policy
- A company history or “who we are” section
- Correct spelling and grammar (you’d be surprised how often this red flag can surface).
2: Check the health
Checking the health is all about finances. Many firms can put time and money into looking good online, but they might be masking financial troubles beneath the surface – troubles that could extend to your company if you don’t do proper due diligence.
The core of any financial health research is a credit check. This gives you core financial details about a company, such as its liquidity ratios, working capital, outstanding debt, and whether assets are growing or shrinking. All are metrics that will give you a good picture of the company’s financial health.
Credit checks are usually paid services. In general, the more information you want, the higher the cost. Some regions, like Europe, will legally require businesses to make more basic financial information available, meaning you can count on more publicly accessible knowledge. Other regions, like North America, are more restrictive.
In cases of potential mergers and acquisitions, your board will likely gain access to the other company’s financial vitals without the help of an external credit check. The bottom line, however, is that if there are any outstanding financial questions, you should always ensure you get answers.
3: Check the character
If the business exists, and you think it’s financially sound, the last step is to check the character. In other words, is the business a good fit for your organisation?
This question focuses mainly on potential compliance, personal and reputational issues. You’re checking the board and C-suite of that company to ensure its leaders align with your values. You’re checking any media reporting on the company to ensure there’s no reputational risk, and you’re checking any government attention on the company to ensure there are no PEPs, outstanding compliance submissions, or law enforcement attention.
In summary
You can check the legitimacy of a company in many ways, but if something doesn’t feel right, you should always trust your instincts. Don’t do business with a company if you don’t feel comfortable doing so. The more vigilant a business and its directors are, the better they will protect themselves from fraud.
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