Just like people, businesses can be the subject of background checks. Such screenings are usually necessary before a critical merger or acquisition.
The management of the acquiring entity carries out the screening to ensure that the company they are about to buy does not pose any financial hazards to the mother entity.
What are corporate background screenings & how to conduct them
Corporate background checks seek to retrieve up-to-date information about a company’s financial health and legal liabilities.
Here are the key elements of a corporate screening report and where to find free information about each critical point.
1. The Better Business Bureau
The Better Business Bureau’s website should be the starting point of your quest for corporate information.
The Bureau gives businesses grades from A to F against the following criteria:
- Fair advertising practices
- Anti-fraud protocols
- Business ethics
- Consumer education
- Dispute management
If a business doesn’t have a registration with the Better Business Bureau, it is already a good reason to doubt its good standing.
If the company is on BBB’s website, you’ll find out where its headquarters are, its contact details, and how long it has been in business.
2. Explore Governmental Resources
If the company you are checking holds registration in the United States, The Federal Trade Commission’s website will tell you if the business entity has been flagged for unfair trade practices and cartel agreements.
Banks & lenders
If you are checking a financial services provider, you should visit the Security and Exchange Commission’s website to get the above information.
SEC regularly uploads important public offerings, securities emissions, and significant redistributions of the capital on its website.
You can also download various corporate documents, including quarterly and annual reports, shareholders’ statements, and prospectus filings.
Law firms & consultancy businesses
The American Bar Association monitors all law firms and legal consultancy agencies operating across the country.
ABA’s primary function is to guarantee that all its members are competent and follow a strict ethical and professional code.
3. Browsepublicly-available commercial code filings
When you set out to perform a background check on a company, you should also verify its financial health.
For US-registered companies, you should access the state’s UCC register. This is necessary because different states have adopted different sections of the Uniform Commercial Code.
The easiest way to access this database is via the Secretary of State’s official site. You can request information on a business entity by name, industry, or registration number.
Take a look at the balance sheet
The balance sheet reveals a company’s current financial status and has three key elements: owners’ equity, assets, and liabilities.
A healthy business’ assets are bigger than its liabilities, and the owners’ equity should be substantial. If the sum of the assets and the owners’ equity is lower than the company’s liabilities, that business is in trouble.
Check the income sheet
A business entity’s income sheet reveals its expenses, revenues, and profits over a specific period.
Pay close attention to the checked company’s earnings before interest tax (EBIT) and net profit. You will find out how much dividends the company pays its shareholders and what part of the capital is free to reinvest.
Try to find the cash flow statement
It provides critical information on the screened entity’s financial management over a particular accounting period.
You will see how the company generates and spends cash. In addition to a business’ liquidity status, the cash flow statement reveals if it has any free capital to operate with.
Have a look at the company’s financial ratio analysis
The company’s Financial Ratio Analysis (FRA) summarizes the information in the above documents and presents the bigger picture of its financial health.
The critical elements of an FRA are solvency, liquidity, valuation, and portability.The reports also include the business’s gross and net profit margins and coverage ratio.The last index shows the company’s ability to serve its corporate debts.
4. Where to check a company’s litigation status
Databases like Westlaw and Lexis Nexis will show you if the business you are checking is suing a competitor or is being sued.
The two databases are not free to access but will let you search past and current cases by name and review their developments or outcomes.
5. Hire a corporate background check company
Performing a background screening of a legal entity is a lot of work. To save time and energy, you can hire a specialized corporate background checking agency to do the heavy lifting.
Business reporting agencies like Equifax, Experian, and Smart Business Reports will send you accurate and exhaustive reports in a timely manner.
They are instrumental if you need a company’s property tax history or district and federal court records. Property tax records indicate if the company has any liens on its movable or immovable assets.
6. Where to check if the company is in good standing
You can visit the following websites to find out whether a legal entity is allowed to sell securities in particular states and if it is in good standing with the local government.
The local securities regulator
The North American Securities Administrators Association maintains a database of all state security regulators in the country.
If you want to check if a company has a clearance to sell securities in your state, request your regulator’s contact information from NASAA.
The Secretary of State
Every company must file annual reports with the Secretary of State where it was founded.
You can find the office’s contact details on the National Association of Secretaries of State’s website.
Once you’ve learnt its state of incorporation, contact the local Secretary of State’s office and request the entity’s good standing status.
7. Where to check the company’s licenses
Without shedding light on the screened entity’s licenses, no corporate background check report is complete.
Every company must have valid licenses to perform its business operations. These licenses vary by state, so you should first find out where the company does business.
Corporate screening agencies’ reports contain precious insights into the checked entity’s staff qualifications and licenses.
Federal & local licenses
If you’ve embarked on a corporate screening quest yourself, you should request the above information from the licensing authority of the state where the company operates.
You should verify its licenses on the U.S. Small Business Administration’s website if it conducts business activities in several states.
