A Business Referral Does Not Mean You Should Forgo a Due Diligence Background Check
Published
July 17, 2022
A business that comes to you through a referral still needs a due diligence background check. A referral tells you someone you trust had a good experience, not what’s in the public record about the company or the person running it. Our founder, Dennis Drellishak Sr., learned that when a technology vendor he was referred to took $600,000 from the friend who recommended him.
The following is his account.
Several years ago, I needed new technology for my growing business and didn’t know who I could trust with the purchase. So, like most busy executives, I asked a few close advisors and associates for referrals. Eventually an old friend called and put me in touch with Joe (not his real name), who owned a local technology company. My friend had just started doing business with him, and I was glad to skip the work of finding a company and checking references myself. When you’re short on time, a referral feels like the easy path.
When I met Joe, he came across as knowledgeable and accomplished, and he was confident his company could handle what we needed. My policy was to run background checks on potential business partners even when they came referred. But other priorities came up, I put the purchase on hold, and I never ran the check on Joe or his company.
I didn’t think about Joe again until a few months later, when I got an urgent message from the friend who had referred him. When I called back, he was sitting in his attorney’s office. Joe had just transferred $600,000 out of their bank account and into his own.
I couldn’t understand how Joe had gotten access to their account. My friend explained that Joe had talked them into helping finance the purchase of new technology from a foreign company that had just been introduced in the United States. He told them it was gaining popularity and would bring a healthy return. To make it easy to move money and not miss the opportunity, my friend gave Joe access to their bank account. Joe moved the money overnight, and they couldn’t reach him.
When my friend told the bank the withdrawal was unauthorized, the bank said Joe was a signer on the account, so the money couldn’t be recovered. My friend asked if we could run a background check on Joe after the fact, to see if there had been any sign of this coming.
So who really was Joe?
Public records showed that before starting his own business, Joe had worked for another technology company. We found news stories, civil complaints, and criminal records showing he had embezzled money from that employer. He had been convicted of several theft offenses and spent a year in jail, and his former employer went bankrupt because of the embezzlement.
While in prison, Joe struck up a relationship with the wife of the owner of the company he had helped bankrupt. After his release, she helped him get back into business doing what he did best: taking people’s money. Joe was eventually arrested for fraud a second time. I never learned whether my friend’s business recovered its losses.
Everything we found was in the public record before my friend ever met Joe. The court cases, the conviction, and the news coverage were all there for anyone who looked. A referral can’t surface that, because the person making it usually hasn’t looked either. My friend had only just started working with Joe when he recommended him to me.
That’s the case for running due diligence even on a business that comes recommended, and for checking the person behind it as well as the company. Joe’s company was new. His history was attached to him, not the business. If you’re bringing on a vendor or partner, our vendor and supply chain page covers what we check and how.
Dennis Drellishak Sr., CEO & Founder
Dennis Drellishak Sr. founded Business Screen and has spent more than 30 years in business investigations. If you’re weighing a new vendor, partner, or deal, hit Get Started below and our team will talk through what makes sense to check.
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