It’s important to do business with people we like, but I confess a tendency to let my emotions drive too many of those types of decisions. I conduct what Justin Recla calls “intuitive due diligence,” and if the other person passes my gut-check, I’m eager to roll forward with a deal.
That’s not a wise approach, Recla says, and he knows a few things about due diligence. The army veteran and his wife, Tonya, both are former counterintelligence agents with the U.S. government. Now they use their expertise to help businesses vet potential new hires or service providers.
Service providers can present a unique financial drain on businesses, especially small businesses. Unlike occupational fraud where, for instance, an employee embezzles money, fraud from bad business relationships often goes unreported. They typically cost a business $5,000 to $15,000, which is enough to break a small business but not enough for an owner to spend $50,000 on legal fees trying to get it back.
Due diligence — intuitive and mechanical — is the key to protecting against the intentional con-artists of the world, but also against potential partners who simply aren’t able to deliver on their promises.
Big businesses, of course, have the budget and staff to vet most new vendors, partners, or service providers. Entrepreneurs and small business leaders don’t. They find themselves in need of a product or service, they find someone who claims they can help, and, if they pass the gut-check, they hire them.
A three-step process, however, can help avoid the lost time and money that inevitably comes from a bad business relationship.
Know What You Know
Recla recommends starting with three questions that force some critical thinking: What do you know about this person? How do you know it? And what do you need to know to make an educated decision?
If the only thing you know about a person is their name and title and the only information you have is from them or their website, then you don’t have enough information. The internet allows everyone to polish up their image. And people who intentionally run scams are going to puff up their websites and exaggerate their experiences.
Figuring out what you really can trust will help you figure out what you need to learn so that you can make a good decision.
Ask the Hard Questions
One of the questions Recla asks is, “How do I do my due diligence on you?” Business owners might be taken aback, but they should have some examples – clients you can talk to, samples of their work, etc.
Some other questions he suggests include: “How many people in my industry have you done this for? What was their experience? What’s their contact information? Do you have proof of the work you’ve done? What’s your refund policy? What happens if this doesn’t work out?”
Pay attention to how they provide the answers. If they are unwilling to answer such questions or hem and haw when coming up with an answer, that’s not a good sign.
Verify the Answers
It’s not enough to ask the tough questions. You actually need to follow up by calling the references and digging into the veracity of the answers. Google can be your friend, but keep in mind that some businesses use “reputation management” services to help hide their checkered record.
Recla recommends searching a business or person’s name along with words like scam, fraud, or lawsuit. If all you see is positive reviews, consider that a red flag, because they’re using the keyword to promote a positive review.
“If you’re a legitimate company,” Recla says, “you’re not using the keyword scam.”
The bigger the deal or the risk, the more due diligence you need to take. You might want to investigate the history of the business, examine its practices, and look for indicators that it’s solid or struggling financially.
And, remember, it’s OK to “date.” Sign up for a small project or test run, and see how it goes. Then build toward a bigger, more long-term relationship. “It mitigates the risk,” Recla says.
“If you don’t do the mechanical due diligence, you’re going to lose time and money in the long run,” Recla says. “But even if the business is legit, you don’t want to get three weeks into the relationship and find out the person’s a jerk or has a huge ego, and now you don’t want to work with them. So there’s an intuitive piece that’s important. You have to do both.”
[This post was originally published on my weekly column at Inc.com]