How do I find undisclosed debts and personal guarantees before buying a business?

Undisclosed debts usually sit in one of three places: claims registered against the company’s assets, contracts that carry a guarantee, and obligations that appear in neither. Personal guarantees can be missed when they are on neither the financial statements nor a registry, so they take a deliberate search. How do I check a business for hidden debt? gives the wider picture; this page is about tracing the seller’s guarantees and lender claims.

Search the registries for claims

Each province keeps a personal property registry where lenders register security. New Brunswick describes its registry as recording security interests, money judgements and certain other claims affecting personal property, and Alberta’s offers searches by business debtor name, individual debtor name, serial number and registration number. Search the company under its exact legal name, and search the owner personally using the individual debtor option where the registry has one.

Ask the secured party what is owed

A registration shows who claims security, not how much is owed or whether a guarantee stands behind it. In Ontario a debtor can require a secured party, by written notice, to give a statement of the amount of the indebtedness and the terms of payment, so ask the seller to make that request, or to authorize your lawyer to, for every secured party the search turns up. Where the registry is in another province, ask your lawyer what the local equivalent is.

Look for guarantees in the loan paperwork

Federal small business loans are one place guarantees are written down. The Canada Small Business Financing Program’s guidelines let a lender take personal guarantees as well as corporate ones, and require the guarantors’ names, or the shareholders’ names for a corporate borrower, to be listed on the loan registration form. If the seller’s financing came through that program, ask for the registration form. For other loans, equipment leases and the premises lease, read the signature blocks to see who signed personally and in what capacity.

Confirm in writing and settle at closing

Ask each lender, landlord and major supplier to confirm in writing the balance, any default and any guarantee. Whether a lender releases the seller from a guarantee is that lender’s decision, which Am I released from my personal guarantee when I sell my business? explains from the seller’s side. For your purposes, the point is that every debt the search found is paid out or expressly assumed in the purchase agreement.