Due diligence on a commercial partner: what to check before signing

In short: before signing an important commercial agreement, such as a framework contract, a channel partnership or a distribution agreement, five categories of public data are enough to form a solid picture of the partner. The point most checklists stop short of is what to do with that data in the contract itself: which clauses to write based on what the check reveals, not just whether to proceed or not.

Why an M&A-style due diligence is not needed

The due diligence that large law firms know (financial, legal, tax, operational) is designed for acquisition or merger transactions, involving weeks of work and five-figure fees. For a commercial agreement, even an important one, but not an acquisition, that level of depth is disproportionate. What is really needed is a targeted check: the data that, if negative, would change your decision to sign or the terms on which you sign.

The five things to always check

• Financial strength: net equity and share capital from the filed financial statements, with the date. Financial statements more than 18 months old show a dated snapshot, not the current situation.
• Beneficial owner: who actually controls the company, not just who legally represents it, and whether that person also controls other companies.
• Corporate officers and their stability: a recently changed director is not, in itself, a problem, but it is a data point to keep in mind alongside the others.
• Protests and ongoing proceedings: public events on record, with source and date. None alone is decisive; the combination builds the picture.
• Payment behaviour towards suppliers: a company that systematically pays its own suppliers late is a useful signal for a commercial partner too, not only for a direct creditor.

How to read the picture as a whole, not the individual data points in isolation

None of the five data points above, on its own, tells you whether it is worth signing. A young company with minimal capital is not automatically a risk: it could be a solid start-up with shareholders who have other established businesses. An isolated protest from years ago weighs differently from a recent one combined with eroded net equity. The value lies in the whole, read with the specific purpose of the agreement you are about to sign in mind.

What to do when a signal emerges, without giving up the agreement

A negative signal does not necessarily mean giving up the partnership. Often it means negotiating different terms: a smaller deposit where supplies are reciprocal, a periodic review clause, a shorter withdrawal period, or simply proceeding with greater caution in the first few months before expanding the agreement.

Four contract clauses to write based on what the check reveals

• Eroded net equity or reduced capital: a clause for periodic review of financial strength, with a right of withdrawal if net equity falls below an agreed threshold during the life of the contract.
• Beneficial owner with other businesses in difficulty: a personal guarantee from the beneficial owner for the first months of the agreement, the period in which a new partner is most exposed.
• Isolated, dated protests, not recent ones: no additional clause needed, but it is worth documenting the check carried out (date and source) as an attachment to the contract.
• Payment behaviour towards other suppliers already late: stricter payment terms in your favour, or a deposit instead of a payment term, for the first orders under the agreement.