TELAJET STRATEGY GROUP

An important step in the contracting process is determining the reliability of the prospective contracting third party. The quality and effectiveness of a contract is only as good as the financial strength, sophistication, personnel, integrity, and financial history of the party standing behind the agreement.

If the company or person with whom you are going to contract (“Contracting Party”) is trustworthy, has strong financial health, has discreet and professional employees, and conducts business in a sophisticated manner, then the likelihood of their complying with the contract obligations is high. If the Contracting Party is not trustworthy, has weak financial health, has poor management and control procedures, or does not operate their business in a sophisticated manner, the likelihood of their complying with the contract obligations is low.

The company representative responsible for negotiating or executing the agreement on behalf of the company (“Contract Manager”) should coordinate a due diligence investigation of the proposed contracting party. Due diligence means obtaining the information necessary to clearly and completely identify the party's ability to perform its obligations under the contract. A contract is only as good as the party standing behind the contract. A thorough understanding of the financial, business, ethical, historical, and future condition of the party is essential to properly weigh the risk of doing business with the party. The Contract Manager should obtain the quantity and quality of information necessary under the circumstances to analyze the risk of doing business with a third party.

The Contract Manager should identify the contracting party's reputation, control systems, and commitment to discrete business practices. Consider a) conducting a financial analysis including obtaining a Dun & Bradstreet report to identify possible financial risks (presence of financial risks is evidence of other compliance risks), b) checking business references as necessary, c) visiting the business site where the Contracting Party will perform their obligations (such as their offices, a manufacturing site, an R&D center), and d) reviewing any financial or market data with the finance department.

A due diligence investigation of the Contracting Party should include:

--Interviews with other third parties who previously dealt with the contracting party.
--Reviewing the Contracting Party's reputation in the industry.
--Reviewing past experience of the party with contracts, payments, and integrity trust.
--Conducting interviews of Contracting Party's bankers, lenders, business partners, vendors and customers.
--Identifying existing lawsuits involving Contract Party including what, when, where and why.
--Identifying the controlling individuals or entities of the Contracting Party.
--Obtaining a Certificate of Good Standing from the secretary of state in the state of incorporation.
--Reviewing the Contracting Party's Articles of Incorporation.
--Obtaining a credit check.
--Reviewing financial reports such as current and historical balance sheets, income statements, etc.
--Obtaining credit references from Contracting Party's customers, vendors, lenders and credit verification agencies.
--Contacting the Better Business Bureau in the locality of the Contracting Party's office.
--Inspecting facilities.
--Investigating financial and resource capacity to meet obligations.

The Contract Manager should review and analyze whether the third party has the infrastructure and financial strength to perform its obligations under the contract. Additionally, the Contract Manager should consider whether the party has the corporate culture consistent with the contract obligations.

Once the Contract Manager has coordinated the due diligence investigation of the party and is convinced that the third party is a viable contracting partner, the Contract Manager can initiate the negotiating and contract drafting step.