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The Importance of Due Diligence, Part One.

May 28, 2013

Posted in Business Litigation, Business Start Ups, Partnership Law

When entering into a contract with an individual or a business, due diligence is very important and often simple. Due diligence may save you from entering into an undesirable or even fraudulent transaction. Part one of this article addresses the basics of due diligence, and in part two I share a personal story about how I engaged in simple due diligence, which potentially saved me from becoming a victim of an e-mail scam.

Due diligence means investigating practices, entities, or persons with the aim of determining the material facts of a particular business transaction. Simply put, it is a fact-gathering process that helps us to make a business decision or transaction.

There are several reasons that practicing due diligence is important before we hire key employees or enter into a business venture. First, you need to know the person you are doing business with, whether or not he or she is a good fit for your company. The process of due diligence will determine whether or not he or she has a criminal background, pending lawsuits, or liens filed by a third party, and his or her financial strength. For example, if you find that a particular person has been sued for fraud or breach of contract, you may be at risk doing business with this individual.

Second, you need to know if the business opportunity is what it appears to be. If a person asks you to invest in his or her company and asserts that your investment will have a rate of return of a certain percentage, it is prudent to inquire about the products or services concerned, the business plan, the financial statements, past sales performance, sales projections, the existence of signed long-term contracts, and market demand. Don’t take the person’s word at face value. Investing in another person’s company is always a risk, and you want to make sure that the risk is manageable and avoid getting involved in speculation.

Third, you need to protect your money or property. You work hard for your money, and the worst thing that can happen to you is to fall for a scam. In part two, I will share a little how of how I engaged in a 30-minute due diligence exercise and exposed an Internet scam that targeted attorneys.

If you have any questions about the joint venture or partnership that you are about to enter into, you should contact an experienced business attorney. We have access to a database that enables us to conduct a background check on any person or business in the United States. Contact the Law Offices of Tony T. Liu for more information today.