How do I check a business for hidden debt?

Hidden debt is one of the most common and most preventable problems in a business purchase, because most of it shows up in public or semi-public records if you know where to look. A buyer who only reviews the seller’s balance sheet is trusting a document the seller controls, rather than confirming it independently.

Lien and execution searches

A lien search against the business and, where relevant, a personal property registry search reveal whether a lender or creditor has registered security against the business’s assets. An execution search shows whether a court judgment against the seller or the company remains unpaid, either of which can follow the assets or the corporation into your ownership depending on how the deal is structured.

Tax standing with the CRA

Unpaid corporate income tax, GST/HST, or payroll source deductions can create liability that attaches to the business, and in some circumstances a buyer can be held responsible for a seller’s unremitted amounts. Ask the seller to provide confirmation of their standing with the Canada Revenue Agency, and build a tax clearance condition into the purchase agreement where the deal size warrants it.

Reading the balance sheet critically

Compare the balance sheet against actual loan statements, lease agreements, and supplier terms rather than accepting the listed liabilities as complete. Off-balance-sheet obligations — a personal guarantee the seller gave on a piece of equipment, a side agreement with a supplier, deferred payroll — don’t always show up in a standard financial statement.

Structuring the deal to limit exposure

• An asset purchase generally lets you choose which liabilities to assume, unlike a share purchase where you inherit the corporation’s full history.
• A holdback tied to any liability that surfaces after closing gives you recourse without delaying the deal.
• Indemnity provisions specific to undisclosed debts put the financial responsibility back on the seller if something was missed.