A new supplier quoted 30% below market. Due diligence found its principal had been removed as a director elsewhere three months earlier
Corporate due diligence ·
The low price was not the problem; the reason behind it was. Before signing, the client cut the prepayment to 10% and added a performance bond
The engagement
A manufacturer received a quotation from a new supplier, 30% below its existing supplier and with a shorter lead time. The purchasing manager thought it was too good. The finance manager thought it was too good to be true. Before signing, they commissioned a due diligence check.
What we found
The supplier was less than a year old with modest capital.
Three months earlier, its principal's name had still been on the board of another company in the same industry. After that company filed a change of directors, his name was gone. Registration data records that a change happened; it never records why.
The former company had several payment disputes with customers, some still pending. The new supplier itself had no litigation and no regulatory sanctions, consistent with its age.
The registered address was a shared office with no plant. The capacity stated in the quotation came from subcontractors, which the supplier had not mentioned in discussions.
What the report concluded
Three signals side by side: low capital, a principal recently removed from a peer company's board, and outsourced capacity. Our conclusion was not "do not deal". It was "the low price comes from subcontracting and a new company chasing volume; the risk is in performance". The report also stated plainly that the registry does not show why he was removed, and that the former company's litigation does not establish his personal responsibility.
What the client did
Prepayment dropped from 30% to 10%. A performance bond was added. Payment moved to instalments on acceptance of each batch, with a clause requiring notice of any change in the principal or major shareholders. The supplier accepted. Deliveries have been on time so far.
What carries over to other cases
- A low price by itself is not a red flag. A low price with no explanation for why it is low is.
- A company's capital, age and the other companies its principal holds are things to know before you sign, not after.
- Registration data answers when someone was replaced. It does not answer why. That part has to come from elsewhere.
FAQ
- Does removal as a director mean something is wrong?
- Not necessarily. Shareholders may remove a director at any time. The reason may be a difference in strategy, a change in ownership, or a dispute. The registry tells you that it happened. The next question is why, and whether the same cause could recur in the new company.
- How long does a check like this take?
- A typical case takes five to ten working days, and urgent matters can have preliminary findings first. This one ran six working days from instruction to report, ahead of the counterparty's signing deadline.
- Can the report be shared with our lawyer or accountant?
- Yes. It is written for decisions, every item carries its source and date, and the material attached to it comes from public sources, so it can go straight to your advisers.