Introduction

'There are mandatory legal responsibilities imposed on all constitutions, via one piece of legislation or another, to perform due diligence!'

You should always follow your own organisation's governance policies first & foremost, but we all learn from each other & therefore I hope that readers will pick up some additional tips from my blog.

Due Diligence - what is it?

In addition to good governance, being smart about due diligence prepares your organisation well if you need to bid for grant funding & commissioning. Large funders & commissioners will be doing the exact same checks on you. I'll be writing a 2nd blog in this series on commissioning soon, please look out for it.

Remember it's your organisation at stake, your clients may potentially suffer in a service chain, & senior management will be held accountable when things go wrong. And if that doesn't whet your appetite, check out your legal & compliance responsibilities below.

"GOLDEN RULE: IF IN DOUBT, ASK!"

Legal & Compliance Responsibilities

There's a legal requirement for charity trustees to undertake due diligence to protect their charity. This includes working closely with an organisation - referring clients to them, formal partnerships & receiving any form of donation/grant. Not only that but if you hold the Advice Quality Standard & Legal Aid contracts, your organisation is required to evidence due diligence & ongoing inspection of partnerships as a quality standard. For example, Money Advice Hub is required to hold a central register of external client referrals & review the outcomes & relationship periodically. Although we're a community interest company & not a charity, this is an Advice Quality Standard.

The Charity Commission is in the throes of updating their due diligence resources but their toolkit as it stands serves as a robust guide. Even if your organisation is not a charity, I thoroughly recommend these resources & to look out for the updated toolkit in due course. In particular, Tool 8 - 'Know your partner, key issues' & 'Tool 9 - Know your partner template' these are really useful start points.

You can well imagine that the improved resource will include GDPR, my apologies in advance! In addition, it's worth highlighting the additional automatic disqualification restrictions recently imposed on other charitable positions, such as CEO & Finance Director. If you're partnering with another charity, these may be checks you want to undertake yourself, there should never be any assumption that everyone keeps up to date with the rules!

If you're a major corporation looking at the next merger/acquisition then you'll definitely need a professional legal specialist rather than this blog. But if you're a commercial firm looking at partnering with a not for profit, you may benefit from reading on.

What are the risks of not following a due diligence process?

These are explained really well in the Charity Commission's compliance toolkit which of course is being updated imminently & therefore I have simply highlighted a few additional thoughts below:

In addition to the above, the Charity Commission's report 'Consortia for the delivery of public services' makes a very interesting read & has some very helpful guide points in it.

Develop a Due Diligence Framework

The scale of a due diligence process will depend on the organisation's constitution, the deal scenario & related mandatory, regulatory standards. If you're a small organisation, a senior manager using a simple matrix & reporting to a board would suffice.

The best way to start a due diligence process is to develop a framework, I recommend starting with a basic framework, as follows:

1. What do you need to know?

The general state of the businessAbout the individuals running the business & any other business interests that they have been involved in, or are still involved inThe way the business has been run in the pastWhether the business has been operated according to industry standards or in a unique fashion because of certain factors

2. Who needs to lead & be part of the due diligence team, what skills are required, do you need to import expertise? (Knowing what you need to know. Skilled in target screening.)

3. Develop communications to prepare your target(s). (Manage expectations & timelines.)

4. Decide how you will manage communications with your target(s).

5. Develop a target screening methodology to assess & benchmark the information gathered.

TIP 1: it's advisable to design a 2 or 3 stage process. That way you can request basic & uncompromising governance information up front in stage one. You'll reduce the amount of sifting you need to do as well as minimise any sensitive information you may need to share as the process progresses. We all know how long it takes to put bids & due diligence responses together so minimising wasting people's time is both professional & courteous too. If you're due diligence exercise involves a tender, you'll also avoid becoming inadvertently distracted & tempted into the cheapest quote/highest bidder.

TIP 2:Adapt due diligence templates to save time, they won't automatically suit your objectives but they're a great start. You don't have to reinvent the wheel, there are same great templates available free on the web. You can also use your own experience, what has your organisation been asked for in the past? If you're prepared to consider alternative concepts & criteria then it's advisable to make this clear in your early communications.

Tip 3: Remain open, objective & flexible, if you're too rigid, you may exclude everyone, none of us are perfect. If you're not sure about something, raise questions & ask for more information. Sometimes underneath the detail on the surface lies a perfectly reasonable explanation underneath & it's a great measure of a prospective partner how they respond to further questions. Remember not to take any business/mission critical information on face value, it's good governance to request verification evidence, or make your own confirmation checks whenever possible.

TIP 4: Remain focused & in control, this is your organisation's process, your reputation & final decision. I've rather disappointingly been party to intimidation & threats from disgruntled due diligence rejections, yes really, & they receive short shrift as I'm sure you can imagine! It's a time to stand tough & lean on your colleagues if you face this situation, rejections should always be communicated timely, courteously & unanimously. Any individual or organisation resorting to forms of intimidation most definitely does not deserve any consideration for a partnership.

It's widely recommended to Include an appeals process in your rejection communications, this can be helpful to promote transparency, avoid misunderstandings & detract from one person being singled out at your organisation.

TIP 5: Remember that it doesn't end there, contract negotiations may require different legal skills & a different team, don't get caught out at the end of an otherwise thorough due diligence process. You'd be amazed at how much things can unfold & change when it comes to sealing the deal with the contract! For the latter reason, holding off from official announcements is a good idea until the contract is agreed & signed by all parties - the devil is in the detail.

5 Simple, (Free*) Target Screening TIPS

Your due diligence target screening will of course be bespoke to your organisational objectives but there are some very obvious, simple & free checks that most if not all organisations will include in their screening. If you do nothing else, I recommend that you undertake the below as a bare minimum:

1. Search the Companies House database

Check out the individuals running the company

You can view all the directors & other business interests that they have. Once you have their names, it's worth doing another search on each name, I have found that Companies House doesn't always link the names correctly where someone has omitted their middle name or registered with a different contact address. This may be an admin issue by the person filing or it could be a deliberate move to conceal information. If you see the same name & date of birth on multiple records, it's likely the same person, & of course you can ask for further information from the individual to be sure. You may obtain a lot of useful insight into their governance behaviours & motivations too by broadening your searches. It's also a good idea to search the disqualifications register to check key & influential individuals in a company that are not listed as directors.

Identify Persons with significant control (PSC)

From 30 June 2016, UK companies (except listed companies) and limited liability partnerships (LLPs) need to declare the person with significant control of the company when issuing their annual confirmation statement to Companies House. This was introduced to provide greater transparency as to who really runs the company & it's really useful for due diligence purposes as it is logical to exercise intensive screening on the person with significant control, you need to have faith in them.

Check filing records

a. Gazette & Strike Off

Companies House shows a chronological public record of all statutory filing submitted & this can be a great way of checking for poor governance & problems. For example, alarm bells should ring if you come across any mention of 'a gazette notice' or 'strike off action'. The gazette notice provides warning that a company is set to be struck off the register, this can be a voluntary application or it can be compulsory due to a non-compliance by a PSC or a responsible director. Either way, it's a big warning sign & it will be identified on the register as compulsory or voluntary. If there has been a non-compliance, this is a very worrying example of poor governance which can incur prosecution, fines & disqualification. By checking other linked businesses to individuals, you may even spot a pattern of poor governance.

b. Articles of Association

Checking articles of association will help you understand the nature & objectives of an organisation. This is particularly important for charitable organisations to check alignment to their aims & principles. It's also another way to check that a company does what it says on the tin, or at least what it's telling you it can do.

c. Accounts

Most grant funders require a minimum of 2 years accounts as a standard eligibility requirement so that may be a good starting point for your due diligence process. However, it does not mean that an organisation is not worthy, it just means that they don't have a long enough track record to check. I found this very irritating & frustrating as a start up, but I did completely understand the rationale.

Although I have a very broad experience in interpreting accounts, I still do not rely on it when it comes to due diligence. I recommend delegating inspection of accounts to a chartered accountant or other qualified accounts professional if you can afford* to, or perhaps you may be able to commandeer a trusted volunteer. For the latter reason, I don't feel expert enough to offer many tips here & I could not find much useful independent information to point to. However, generally an organisation showing a sizeable loss needs some further investigation & it's worth checking that reserves held are proportionate to the size of the organisation & to request the organisation's reserves policy.

Not all organisations are required to file audited accounts & this will mean that they have not been independently audited. Of course this does not mean that there is anything untoward but it may be worth requesting more detailed financial information if you require any reassurance.

"Audited Financial accounts means financial statements certified by an auditor as showing true and fair view. Unaudited just means that the financial position has not yet been audited & certified by an auditor. In practice, there is not much difference between audited & unaudited results. It's only that audited results provides a better assurance that there is no material mistake/misstatement in the financial results."

It's worth checking which professional quality standards automatically audit financial management & reporting as part of their assessment process. The presence of a quality mark usually serves as an immediate reassurance to good financial governance & other essential governance & quality areas. Three examples are:

LexcelThe Advice Quality StandardPQASSO

There are of course others, but also please do be wary of trade membership badges & organisations that have bare minimum entry requirements, some of then have a one hour application turn around, whereas quality marks usually take months. It's best to check what the membership criteria is before considering it as any measure of quality.

Check out any shareholders in a company

Shareholders can be very demanding & controlling & can sometimes create competing agendas in a company, especially if they do not play an active role in the operational side. Their focus is on their dividend but on the other hand, they will by virtue encourage the company to be successful too. I recommend doing individual checks on all shareholders to identify all their business interests, a 'joining the dots' exercise.'

2. Social Media screening

Once you have established key company individual names, you can conduct a Google search & check public & company profiles on social media sites, such as LinkedIn & Twitter. These searches can provide valuable insight to key individuals' career profiles, qualifications & expertise as well as an overview of their general values & potential alignment to your organisational aims & principles. I recently completed 2 grant applications which both requested my company & personal Twitter handle in the application!

Equally, if a key individual purporting to have a high profile appears to be a ghost or has no searchable background, qualifications & experience, you may consider requesting references. It's easy to forget that not everyone wants a presence on the internet. On the other hand, if you've got that gut feeling that someone has popped out of nowhere, go with it & explore!

3. Their Website

It seems an obvious one, but what should you be looking for? For starters you can check what they actually do & may pick up a general feel of the organisational values. You can check whether they publish required compliance & legal notices, complaints process & perhaps some policies. You may be able to check other organisations that they work with but take care, some organisations publish logos that infer a partnership or membership, it's best to check the legitimacy of these. Remember the golden rule, if in doubt, ask!

4. Check key organisational policies & customer service data

What you need to check depends on your organisational requirements, I've worked on due diligence processes where a 'green' policy is a requirement & another where CRB checks were mandatory for all key individuals involved in the service partnership. It could be that the target organisation needs to develop a new policy, personally I think that this is a positive response to a prospective partnership, it's an open willingness to work within shared principles.

Requesting customer feedback survey data & a complaints log is also a very useful insight into an organisation's approach to quality services. I am always very pragmatic about complaints, all organisations will receive them & some may well be not upheld. The key thing for me is how well they were dealt with & how they were resolved. A positive & open attitude to complaints is an essential component of any service delivery & it is a good measure of the type of communications you may encounter when problems arise in a partnership.

5. Check the Financial Conduct Authority register

I've put this one in mainly because of the sector I work in. If you're sourcing a partner to deliver any type of financially regulated activity then you'll want to be sure that the organisation is authorised & regulated; & also has the appropriate permission(s) for the activity in question. the FCA also has a warnings list to check.

You can perform a free check via the FCA register, you'll need to open up the tabs to check more detail. It is a regulatory requirement to state all associated brands & organisations on the register so if you can't find an organisation they may not be properly regulated. Remember the golden rule, if in doubt, ask!

SummaryI hope that this provides some help & guidance to small organisations that may find due diligence daunting. It's by no means exhaustive & your organisation may already have experienced due diligence professionals in situe. But I will leave you with this example from a due diligence process I conducted:

'It was meant to be a simple due diligence for a financial commitment with a project partner which I conducted on my own for a small charity with a big agenda, there was though, a vision for an even bigger agenda. I started conducting my basic due diligence checks above & from those basic, free checks I identified a trail of seriously worrying financial information & linked business activities. Devastatingly, I discovered that millions of public money given to a linked company was under a parliamentary investigation. After an extremely unpleasant follow up exchange with a key individual, the charity unanimously pulled out. I received 2 intimidating emails after that threatening me with libel action for my findings which were all in the public domain. Two of the linked companies are now reported as being subject to CVA's & the projects have all disappeared into the ether."

Let's be careful out there.