Different forms of business due diligence

September 10, 2021 - Reading time: 17 minutes

What is Due Diligence?

Due diligence means different things to different businesses. It is a risk assessment where all avenues are explored prior to signing a contract or entering into an agreement with an individual or company. In many cases, due diligence or certainly parts of the process are required in the United Kingdom to protect you from things like money laundering, corruption or getting caught up in identity theft. Due diligence means that you are certain that all the facts have been gathered and analysed regarding an individual or an organisation. It is relevant as an investor before a business accepts an investor or regarding hiring individuals as employees or volunteers. Proceeding without due diligence can create all sorts of problems for you as an individual, for your business or for your employer at any time in the future.

Due Diligence is Never a One Size Fits All

There are many aspects of due diligence that apply in most circumstances, such as regarding recruitment of staff and the checking of investors. Those taking over companies or investing in businesses should also practice due diligence regarding the placing of their investments.

Thorough due diligence means obtaining, cross-referencing and checking information from a wide range of sources. The further the net is spread for information gathering, the better you are reducing the risk of missing something pertinent or failing to satisfy the statutory legal obligations to protect yourself, your company or your business. Depending on the starting point of your situation and the business depends on the information that you are obliged to check and the additional information that you will want to gather depending on the industry and exact category of the business.

The Variations of Due Diligence are Broad

When you hire someone to undertake due diligence, they will assess the requirements of each individual case, loosely categorise and niche down into the relevant fine-tuning checks required for that case. The due diligence requirements will fall broadly within the scope of the following categories:

• Employment – Employee
• Investor Assessment
• Company Investigation 
• Business Authentication
• Knowing Your Clients
• Drug Testing

Employment

When you take on an employee in the UK, it is essential to ensure that they have a legal right to work and live in the UK. It is necessary to check the person thoroughly by investigating the information that they give you. You must first ascertain their identity:

• Name
• Previous names
• Date of birth
• Place of birth
• Physical appearance
• Current address
• Past addresses
• Employment history

For UK residents, this information is best checked by government originated documents to verify name, address and date of birth. At times, you are required to undertake additional checks. Sometimes it is necessary to cross-reference information to check the reliability of the information received.

When the potential employee is not from the United Kingdom, the requirement for due diligence is even more critical. You need to glean as much information as possible about the person, starting with their passport and national identity documentation. The information you receive needs to be checked via an official overseas source, a verifiable official from the country. Due diligence may include using reputable sources to interpret or translate documents.

When a person's qualifications are important, it is also necessary to check the relevant professional directory to confirm their qualifications and suitability to undertake the role. It would also be a wise move to carry out reference checks.

Employment is the one example that is applicable to all forms of business. Other business due diligence tends to include industry or organisation situation-specific requirements.

Investor Assessment

When someone is interested in investing in your business, you will want to check them out just as much as they will check your business out. Gathering and checking information about potential investors means that you can confidently discuss their investment or politely decline when you have done the due diligence and confirmed their past for things like:

• Criminal record
• Former partner disputes
• Being sued for misconduct
• Falsely representing themselves with qualifications they don’t have
• Possible criminal activity

Above are just five examples, but by checking, you have safeguarded the business from an unsuitable investor or reassured yourself that they are a suitable investor.

Companies

Different forms of business due diligence vary depending on the type of company and the situation. Companies can be listed as the following: 

• Public Companies Listed in the UK
• Private and unlisted companies in the UK
• Public Overseas Companies
• Private and Unlisted Overseas Companies

Public Companies Listed in the UK

The due diligence operated regarding public companies varies depending on the exact circumstances, reason and if the company is a listed company, majority-owned or a subsidiary.

Private and Unlisted Companies in the UK

Generally, in the UK, private companies have a lower level of disclosure than public companies. However, there should still be easy to obtain standard identifiers:

• Full name
• Registered business address
• Nature of the business
• Director’s names

At times, additional verification may be obtained via details from company registration. Details of the company and of a director, including their address, certificate of incorporation, and their audited accounts. 

Public Overseas Companies

Due diligence may be simplified for public overseas companies when they are listed on a regulated market as a subsidiary.  The requirements of disclosure include those laid out in:

• The Transparency Obligations directive (2004/109/EC) 
• The Prospectus Directive (2003/71/EC)
• The Market Abuse directive (2003/6/EC) 

Evidencing the company status should be obtained in a similar way to UK public companies.

Private and Unlisted Overseas Companies

This is an area where due diligence is specifically important and can be challenging to obtain. You should establish the company identity the same way as for UK private and unlisted categories. Consideration should be given to robust risk management, information gathering and analysis to ensure due diligence.

Variables on Companies

• Government Organisations
• Foundations
• Charities
• Trusts
• Schools and Colleges
• Clubs and Associations
• Deceased Estate

Government Organisations

Appropriate due diligence is an essential requirement of any form of risk within government organisations. A high risk of misappropriation of public funds or corruption means that a high level of monitoring and verification is essential.

Foundations

The foundation itself must be verified and the relevant industry regulated personnel utilised to check the identity of any relevant persons who are involved with the foundation.

Foundations can also fall under the charity umbrella and due diligence is required to confirm all information.

Charities

Businesses dealing with charities should ensure they have the correct information regarding the charity. All registered charities are listed in the appropriate government registration files, which are the Charity Commission of England and Wales and The Office of the Scottish Charity Regulator for Scotland.

For countries outside of the UK, additional checks may be required to ensure that due diligence has been operated. Confirmation and information should be gained from the home country government offices.

Frequently, the additional factors taken into consideration regarding investing in or otherwise dealing with charities is to check how well known, how well established and how appropriate it is. Another source of information to check is the HMRC tax office. 

Trusts

Trusts are extensively used formations. In most cases, they present limited risk. However, there are certain situations where they create more risk, therefore, each trust situation requires careful risk management strategies and due diligence appropriate to the risk perception.

Schools and Colleges

Some schools and colleges operate as registered charities and others as private companies. Some are local authority managed and others are part of a larger academy. The operating status of the school or college should be verified depending on the category that the school or college falls under; then adhere to the appropriate due diligence for that sector.

Clubs and Associations

Generally, it is accepted that sports and hobby clubs represent a low risk. However, that perception is reason enough to ensure that due diligence is operated regarding these organisations.

The first information would be to obtain:

• The full and proper name
• The legal status of the club or association
• Any registered address and previous addresses
• Names of the officeholders
• Purpose and mission of the club or association

Verification documents include bank statements, local association listings and audited accounts. Investors or potential creditors should operate due diligence to satisfy themselves of the viability of the club or association.

Deceased Estate

Any business called to act for executors or administrator if an estate should establish the situation by obtaining copies of the death certificate, letters of administration or grant of probate. Sight of the will confirming the executors is also a useful aspect of practicing due diligence.

Pension Funds

Any operation regarding pension funds should be verified and evidenced to confirm that the product is a pension scheme.  Methods to obtain the evidence include:

• A consolidating deed for the scheme, including any subsequent amendments
• A recent definitive deed scheme page confirming the name of the scheme

Beneficial Owners

Beneficial Owners fall into these categories:

• Partnerships
• Trusts 
• Legal Entities
• Corporate
• Beneficial Owner of Deceased Estate

Partnerships

Regarding partnerships, the beneficial owner is usually any individual who is entitled to or controls over 25% of the capital or profits of a partnership or has more than 25% of the voting rights. Exceptionally, there are anomalies and due diligence should explore all possibilities.

Trusts

The beneficial owners of trusts vary from that of partnerships. Any individual who has an interest in 25% or more of the capital. Any individual who has appropriate control over the trust where a trust is not set up entirely for the benefit of persons with a specified interest.

Legal Entities

The 25% rule applies to legal entities as well, and due diligence is required to explore, analyse and verify all aspects of arrangements regarding administration and distribution of funds.

Corporate

The corporate beneficial owner is any individual who owns a control directly or indirectly through shareholdings greater than 25% or equivalent voting rights. Or, maybe an individual who operates control over the management of the body.

Beneficial Owner of Deceased Estate

In the case of a deceased estate, the beneficial owner is the executor or administrator of the estate.

Competitor Company Investigation 

It pays to know what your competitors are up to. Knowing about the state of their business affairs and gaining information or intelligence about the competitors in the marketplace to analyse their successes and business activities. Doing so could give your company the edge. There is nothing wrong with this type of checking, it's actually good practice and a good example of due diligence to protect your business.

Business Authentication

This is broadly anything connected with any of the business examples above. You may want to authenticate a business when entering into a new business relationship or if you are an investor considering an investment in an organisation.

Undertaking checks to establish the viability of investing in a business is a sensible approach when investing. By authenticating the business and exploring the identities of the major players, you can proceed with confidence, whether it is an investment or buyout offer. Checking a company profile and other information about a business is the opportunity to check all the company's mechanics before doing business with them.

Knowing Your Clients

Due diligence to check out clients s an excellent way to keep your business clean, whether it's a B2B or B2C relationship. You want to be certain to comply with the money laundering regulations and avoid potential legal repercussions that could arise from relationships with unsuitable businesses.

Drug Testing

Drug testing investigates a potential employee or existing employee to test for class A and class B drugs. Some investigators offer this service and it is a good practice when employees are operating machinery or driving. It’s something that could safeguard your business.

Industry Specific Examples

As mentioned, within the above categories, different industries and even different sectors of the same business will have different due diligence checks and requirements.

Medical Due Diligence 

Due diligence is an essential requirement of all aspects of healthcare. Ensuring that the medical team have the right qualifications and the correct skill mix at all times is only part of the picture. When employing agency staff, due diligence is essential to ensure that they are qualified to carry out the role they have been hired for. When renewing, reviewing or changing suppliers, due diligence is essential to confirm the suitability of the company as well as that the product is fit for purpose.

Financial Due Diligence

Due diligence in the financial industry is an ongoing situation of continuously assessing financial performance and viability. Financial and fiscal performance is monitored and examined, including analysis of economic forecasts and expectations of future prospects.

Operational Due Diligence

Operational checks apply to a variety of organisations and investigate how the operating procedures give value and how feasible the business plan is on a given trajectory. Operational risks and expenditure may also be covered as part of the operational checks.

IT Due Diligence

Continuously checking and keeping IT systems functional, current and safe is essential to many businesses in this digital age. Internal and external checks on IT systems, websites and other tech is an aspect of due diligence that could be ignored at great cost.

Estate Agents Due Diligence

Estate agents must carry out money laundering checks as part of a house sale. They are also required to confirm the right to live in the UK as part of their due diligence checks when renting a home. 

Due Diligence Applies to All Industries

The above is just a brief overview of some of the categories that businesses, organisations and individuals fall under regarding due diligence. This is not supposed to be an exhaustive list. These offer a snapshot into the requirements of due diligence in different circumstances.

When carrying out due diligence checks, it is essential that a wide range of resources are used and verified wherever possible. That way, you ensure that you comply with statutory requirements and safeguard the business as best you can.

Whichever industry you are in it is good practice to utilise due diligence in all areas of your business. It’s the way to safeguard your future.