Know your customer better – research their chain of ownership

Picture the scene. An email arrives from the procurement manager of a construction company 30 miles away. You’ve heard about a few of their projects in recent months, and they want your firm to supply materials at two new sites they’re developing. It could mean a lucrative step up for your business, which has survived those critical first few years and is heading towards its fifth birthday.

You click ‘Reply’ and start typing: “Thanks for getting in touch. This sounds great. Let’s start setting up your order.”

But hold on. Don’t hit ‘Send’. Not yet...

Yes, this is a hypothetical situation but whatever sector you’re in, KYC – know your customer – is a healthy mantra to follow if you want to protect your business from harm. Understanding your new client’s chain of ownership is an important step in that process and doing a little research will lead to better outcomes for you and your company.

Initial sources

The phrase ‘know your customer’ is often associated with anti-money laundering measures that apply mainly to financial institutions, but there’s actually plenty more to it than that. As a supplier, you want to be sure your customers will pay their invoices and do so on time. Many companies run basic credit checks when setting up new accounts and some will research potential key clients using sites like Companies House, for example.

These checks are a good starting point and they shouldn’t be overlooked, but getting a clear picture of who owns the company you’re dealing with is complex and time-consuming using traditional methods. The example we’ve used is from the construction industry, but across there’s a good chance a trading company that contacts you will have one or more parent companies and might even have five or six layers of ownership behind it.

Visualising ownership structures

At the business intelligence website Qynn, you can see a company’s chain of ownership in less than a minute. Qynn makes searchable data available to subscribers covering over 5 million UK companies, 8.5 million shareholders and 19.5 million company officers. Using machine intelligence, the site connects common data points so that you can see the relationships between business entities without spending hours researching them.

With Qynn doing the hard part, all you have to do is go to the Products tab at the top of the Qynn homepage, select Hunter from the dropdown menu, and type in the name of the company you’re researching when you get to the next screen. Choose the right company from the list if several have appeared with similar names, and select the type of chart you’d like to use – cluster, hierarchical, etc. An illustration of the company’s chain of ownership will appear.

Who are you dealing with?

Chances are, your new customer will be a trading company with at least one or two backers. However, if what you see is a complex chart with numerous layers of holding companies, it might be worth pausing for thought. When a trading company becomes insolvent, its debts disappear and if you’ve carried out a contract for them your invoice will never be paid. You might get a small amount but nothing near what is owed.

On the other hand, parent companies rarely go into administration. Using Qynn’s other tools, you can compare a trading company to its parent company and what you’ll usually see is that the parent holds the assets and that it is in a better financial position than the trading companies it owns.

Qynn also enables you to see who the persons of significant control (PSCs) are for each firm, as well as which other business entities they are involved with and have been involved with in the past. If you can see that the company you’re about to work with is owned by a company and/or individual who has wound up numerous businesses in recent years, then the alarm bells should start ringing.

How to use the information

Spending a little time researching a potential new customer could well reassure you that the company is reputable and that supplying it is a good opportunity for your business. However, if questions arise that doesn’t necessarily mean you should rule out dealing with them.

One way to protect yourself is to ask the new customer if you can contract with their holding company rather than the trading company. That way, even if the trading company goes into liquidation, you should still be paid by their parent company. A client that values you and your services should be willing to facilitate this, or at least be able to explain why they can’t and offer you assurances and further insight into how they do business.

If the answer is ‘no’ you could also respond by negotiating better trading terms instead. Raising your price a little in line with the perceived risk is one option. Another is to ask for payment up front or seven-day payment terms rather than the usual 30- or 60-day arrangement.

The final option is to walk away. It’s possible that you’ll be turning down a great opportunity. Equally, when a company won’t allay your concerns you might well be dodging a bullet in which case knowing your customer, protecting your company and mitigating risk beforehand will have paid off.

Mitigating risk using business intelligence

While most trading companies are legitimate, sometimes they are used unethically. Phoenixing, for example, is the practice whereby a holding company is used to set up a trading company which carries out business, raises lots of revenue while also accruing a great deal of debt. It then goes into liquidation, is absolved of its debts, and a new, similar business is set up by the holding company. The new business is quickly built up in the same way, and the chain continues.

Whether a business goes under for legitimate reasons, or dishonesty is involved, it’s usually the suppliers who lose out. The revenue you hoped for will be lost, but you will still need to meet the costs involved in supplying the insolvent company. It can feel like you’ve worked for them for free, which is a painful feeling indeed.

On the other hand, by being pro-active rather than reactive in the business environment, it’s possible to mitigate risk whenever a new client comes along. Using Qynn helps you know your customer in very little time, and costs only £9.99 a month.