How to Check Out a Company

Editor's note: This article has been updated in August 2013.

My sister learned the hard way how important it is to check out a company before you sign on the dotted line. When she moved from Memphis, Tenn., to Albuquerque, N.M., she used a broker who hired a moving company that botched her move then held her belongings hostage until she agreed to pay a price well above what was stated in the contract.

A little checking would have revealed that the broker she hired to coordinate the move and the actual movers didn't have such a good track record. "We had no idea who we were dealing with," she says. In the end, she paid with a credit card because you can dispute the charges for goods and services that were never ordered, never received or were misrepresented, and hold up payment until the credit card issuer investigates.

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Still, it's better if you never get to that point.You want to make sure a company is reputable before you do business with it. That means doing a thorough check of movers, contractors, auto repair shops, travel consolidators and anyone else who could inconvenience you or, worse, rip you off.

Do some checking

Don't just pick a name from the phone book or off the Web. Start by asking friends and family for recommendations. Or check with an association (there's practically one for every profession and industry -- see the box below for links) for a list of members in your area. Associations often have certification programs that require members to meet a certain set of standards.

Once you have a list of companies, an easy way to start checking them out is through the Better Business Bureau.

You can search this database of business reliability reports for free to find out about a company's management, if complaints have been filed against a company, how it responded to the complaints and whether any government action has been taken against the company. All BBB member companies are listed. Nonmember companies are listed only if they have been the subject of inquiries or complaints.

Even a company that's been the subject of complaints can have a satisfactory rating as long as it has dealt with problems promptly. But don't assume a company is okay if no complaints have been filed against it. There could be problems that haven't been reported, or the company could be doing business under several names. Also, the BBB handles only certain types of complaints -- for example, it doesn't take anonymous complaints.

If you feel the need to dig deeper, turn to the government agencies, says Ken McEldowney, executive director of Consumer Action. Usually, the best place to start is on the state and local level. Many states require licensing or registration for various professions such as contractors, insurance agents and even auto repair shops, so check the Blue Pages of government listings in your phone book to find the appropriate licensing board to see if a company has the proper paperwork.

Then check with your state attorney general's office and state and local consumer protection offices to see if they have a record of complaints about the company. Again, a lack of complaints doesn't mean the company is problem-free.

And ask for references

Once you've found a company that checks out, ask for references or ask to see prior work (especially in the case of contractors). Get everything in writing, including cancellation and refund policies. Don't sign any document you haven't read or with blanks to be filled in after you sign.

And don't be pressured into signing a document. If a large sum of money is involved, such as a home improvement project, consider getting an attorney to review the contract. Finally, make sure you pay with a credit card, McEldowney says, because you can challenge the bill if there's a problem and the card company will have to investigate. The Federal Trade Commission has information about your rights under the Fair Credit Billing Act.

Even after taking all these precautions, you still can run into problems. In that case, you'll have to turn to another tool in the consumer arsenal: lodging a complaint.