Why Service Providers Must Always Do Due Diligence on Potential Clients: Lessons from a Small Business Owner
CEO / Co-Founder at JetRockets
In my posts, I often address what founders can do when hiring a service provider, particularly how they can avoid working with vendors who might not deliver on their promises. However, today, I want to flip the narrative and focus on why service providers need to do their own due diligence on potential clients—and how small businesses can protect themselves from unnecessary headaches and potential financial losses.
Having run JetRockets for over 14 years, I’ve been fortunate to work with a wide range of incredible clients. I’ve experienced timely payments and had conflicts resolved amicably. However, not every story has a happy ending. One particular experience taught me some hard lessons, which I believe every service provider—especially small business owners—can learn from.
The Too-Good-to-Be-True Deal
In 2019, JetRockets was referred to a post-exit founder, launching his next venture. The deal seemed almost too easy—he was enthusiastic, well-connected, and in full “go-mode” from our very first conversation. He spoke highly of our reputation, had a solid business plan, an ambitious budget, and claimed to have investor backing to help grow his new company to success. Naturally, we were excited. A high-profile client, great word-of-mouth referrals, and an exciting new venture to be part of? We signed the contract quickly and got to work.
For the first few months, things went smoothly. Our platform development progressed well, invoices were being paid (albeit sometimes a bit late), and the client was expanding his team and leasing office space. Everything looked promising. But soon enough, the first overdue payment appeared—three weeks late. A quick email later, I was assured it was an honest mistake and that the payment was already on its way. I was patient and waited another two weeks.
The payment never arrived. Another invoice came due, and now the client was behind on two. Each time I reached out, I was met with plausible excuses: an error by a virtual assistant, a wire transfer mix-up, urgent investor meetings… you get the picture. By the time I fully grasped the situation, the client owed us over $70,000—a significant amount for any small business.
Despite constant assurances and even a personal guarantee letter (which, as I’ll explain later, was somewhat helpful), he never paid. I hired an attorney, secured a judgment, but the saga of collecting what was owed was another challenge entirely. It turned out we weren’t the only ones defrauded by this client—he was facing multiple federal charges for securities fraud, wire fraud, and even identity theft, with potentially hundreds of years in prison awaiting him.
The Red Flags I Missed
Looking back, there were signs. The client’s enthusiasm, while flattering, should have raised a flag. I was swept away by the allure of working with a so-called successful serial entrepreneur and was too eager to verify his claims.
Had I done my homework, I would have discovered a trail of lawsuits and other red flags. His “exit” wasn’t as impressive as he made it out to be, and there was a prior lawsuit from another service provider. That critical bit of research could have saved me months of stress, countless hours of legal trouble, and $70,000 in losses.
So, how do small businesses protect themselves from falling into these traps?
Actionable Tips for Service Providers to Protect Themselves
1. Always Verify Claims
Just because a potential client touts their past successes doesn’t mean you should take it at face value. Dig deeper. Look for verifiable references, public records, and previous work history. A quick search for lawsuits or complaints against the client can provide invaluable insight. It’s not about being cynical—it’s about being cautious.
2. Run a Credit Check or Financial Background Check
If you’re about to engage in a significant contract, don’t shy away from requesting a financial background check or running a credit report. You’re entering into a business relationship, and their financial stability matters. Most reputable clients will understand that this is standard practice.
3. Start Small with Payment Terms
For new clients, consider starting with smaller projects or payments in stages. This will help you build trust over time and avoid significant losses if something goes wrong. Avoid large upfront commitments until you’re sure the client is reliable.
4. Create Strong Contracts with Safeguards
Make sure your contracts include clear payment terms and consequences for non-payment. Consider including a clause that allows for work to stop if invoices are not paid by a certain deadline. Also, legal protections such as personal guarantees can help, though they should not be relied on as the only safety net.
5. Trust Your Instincts
Sometimes, you can sense when something is off. Even if everything appears fine on paper, if a client’s behavior triggers red flags (e.g., constant excuses for delays, inconsistencies in their communication), take those signs seriously. It’s better to pause the relationship than to continue working with a client who could put your business at risk.
6. Be Willing to Walk Away
It’s tempting to pursue large contracts or high-profile clients, but not at the expense of your business’s health. If you sense trouble early, be prepared to walk away. Losing a deal is far better than being owed thousands of dollars you’ll never collect.
7. Maintain Open Communication with Your Legal Team
Make sure you’re on the same page with your legal advisors. A strong contract can provide leverage in disputes, but having a good lawyer to guide you through challenging situations will save you from further complications.
Conclusion
While we, as service providers, tend to focus on delivering the best possible results for our clients, we must also ensure we are working with clients who will hold up their end of the deal. By doing proper due diligence, verifying client claims, and safeguarding ourselves with strong contracts, we can avoid the financial and emotional strain that comes with problematic clients.
In the end, no business relationship is worth the risk of your company’s stability. Take the time to research, ask questions, and protect your business before signing on the dotted line.
The Too-Good-to-Be-True Deal
In 2019, JetRockets was referred to a post-exit founder, launching his next venture. The deal seemed almost too easy—he was enthusiastic, well-connected, and in full “go-mode” from our very first conversation. He spoke highly of our reputation, had a solid business plan, an ambitious budget, and claimed to have investor backing to help grow his new company to success. Naturally, we were excited. A high-profile client, great word-of-mouth referrals, and an exciting new venture to be part of? We signed the contract quickly and got to work.
For the first few months, things went smoothly. Our platform development progressed well, invoices were being paid (albeit sometimes a bit late), and the client was expanding his team and leasing office space. Everything looked promising. But soon enough, the first overdue payment appeared—three weeks late. A quick email later, I was assured it was an honest mistake and that the payment was already on its way. I was patient and waited another two weeks.
The payment never arrived. Another invoice came due, and now the client was behind on two. Each time I reached out, I was met with plausible excuses: an error by a virtual assistant, a wire transfer mix-up, urgent investor meetings… you get the picture. By the time I fully grasped the situation, the client owed us over $70,000—a significant amount for any small business.
Despite constant assurances and even a personal guarantee letter (which, as I’ll explain later, was somewhat helpful), he never paid. I hired an attorney, secured a judgment, but the saga of collecting what was owed was another challenge entirely. It turned out we weren’t the only ones defrauded by this client—he was facing multiple federal charges for securities fraud, wire fraud, and even identity theft, with potentially hundreds of years in prison awaiting him.
The Red Flags I Missed
Looking back, there were signs. The client’s enthusiasm, while flattering, should have raised a flag. I was swept away by the allure of working with a so-called successful serial entrepreneur and was too eager to verify his claims.
Had I done my homework, I would have discovered a trail of lawsuits and other red flags. His “exit” wasn’t as impressive as he made it out to be, and there was a prior lawsuit from another service provider. That critical bit of research could have saved me months of stress, countless hours of legal trouble, and $70,000 in losses.
So, how do small businesses protect themselves from falling into these traps?
Actionable Tips for Service Providers to Protect Themselves
1. Always Verify Claims
Just because a potential client touts their past successes doesn’t mean you should take it at face value. Dig deeper. Look for verifiable references, public records, and previous work history. A quick search for lawsuits or complaints against the client can provide invaluable insight. It’s not about being cynical—it’s about being cautious.
2. Run a Credit Check or Financial Background Check
If you’re about to engage in a significant contract, don’t shy away from requesting a financial background check or running a credit report. You’re entering into a business relationship, and their financial stability matters. Most reputable clients will understand that this is standard practice.
3. Start Small with Payment Terms
For new clients, consider starting with smaller projects or payments in stages. This will help you build trust over time and avoid significant losses if something goes wrong. Avoid large upfront commitments until you’re sure the client is reliable.
4. Create Strong Contracts with Safeguards
Make sure your contracts include clear payment terms and consequences for non-payment. Consider including a clause that allows for work to stop if invoices are not paid by a certain deadline. Also, legal protections such as personal guarantees can help, though they should not be relied on as the only safety net.
5. Trust Your Instincts
Sometimes, you can sense when something is off. Even if everything appears fine on paper, if a client’s behavior triggers red flags (e.g., constant excuses for delays, inconsistencies in their communication), take those signs seriously. It’s better to pause the relationship than to continue working with a client who could put your business at risk.
6. Be Willing to Walk Away
It’s tempting to pursue large contracts or high-profile clients, but not at the expense of your business’s health. If you sense trouble early, be prepared to walk away. Losing a deal is far better than being owed thousands of dollars you’ll never collect.
7. Maintain Open Communication with Your Legal Team
Make sure you’re on the same page with your legal advisors. A strong contract can provide leverage in disputes, but having a good lawyer to guide you through challenging situations will save you from further complications.
Conclusion
While we, as service providers, tend to focus on delivering the best possible results for our clients, we must also ensure we are working with clients who will hold up their end of the deal. By doing proper due diligence, verifying client claims, and safeguarding ourselves with strong contracts, we can avoid the financial and emotional strain that comes with problematic clients.
In the end, no business relationship is worth the risk of your company’s stability. Take the time to research, ask questions, and protect your business before signing on the dotted line.
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