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  • Hazards for Business Beginners: The Disasters Are in the Details

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    Do You Understand “Due Diligence”?

    Due diligence refers to the process of checking the background and confirming the integrity of every prospective employee, partner, investor, client or vendor with which your company will associate. The purpose is to avoid risk. To cite the most extreme example, companies have hired former embezzlers to their management team—because they failed to perform a criminal records search.

    The extent of your due diligence will vary with the situation. Certainly you’ll want to check references when hiring new employees. Online searches, including social media sites, may add context about a person’s character. Due diligence of clients is important because you need to know if they pay reliably or not. Knowing what to expect from vendors may be even more critical if they are part of your supply chain. Clients will be unsympathetic if you can’t keep your promises because of a vendor-caused bottleneck. It’s your reputation that will take the hit.

    Finally, the due diligence of prospective partners or major investors should be comprehensive. It should include full background checks, and a thorough financial and legal audit. You want to confirm in advance that all of the assets the other party claims to be bringing to the table really exist and are in good order.

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    • Here’s a nice twist: You can start by putting yourself under the due diligence microscope by checking out this checklist of due diligence red flags that angel investors use to investigate prospective companies. Even if you’re not looking for outside funding, you’ll get a better understanding of what you need to do to look squeaky clean to objective, well-informed outsiders.
    • This article from PCWorld magazine provides tips on how to glean public information about people from social media sites.