How do I verify inventory and equipment before buying a business?

Verifying inventory and equipment means proving three things: the items exist, the seller owns them, and nobody else has a claim on them. A seller’s list proves none of the three. Condition and value are separate questions, covered in How do I assess equipment condition before buying?; this page covers existence, ownership and claims.

Prove the items exist

For inventory, attend a physical count rather than accepting a count sheet, and trace a sample in both directions: from the shelf to the records, and from the records back to the shelf. Ontario’s Personal Property Security Act defines inventory broadly, to include goods held for sale as well as raw materials, work in process and materials used or consumed in a business, so decide before the count which of those categories are in scope. For equipment, match the serial numbers on the machines to the seller’s list.

Prove the seller owns them

Equipment on the premises may be leased, financed or held for someone else. Ask for purchase invoices and lease agreements, and compare the equipment list with the seller’s tax depreciation records. The Canada Revenue Agency describes equipment as depreciable property whose cost is deducted gradually through capital cost allowance, so an item that appears on the list but in neither the invoices nor the depreciation records deserves an explanation before you rely on it.

Prove nobody else has a claim

Search the personal property registry in the seller’s province by the seller’s legal name and, where the registry allows, by serial number. Alberta’s registry offers business debtor name, serial number and registration number searches, and Manitoba’s says anyone can search to see whether a security interest affects property they intend to buy. Also find out where each item physically is. In Ontario a repairer or storer can keep an article until its bill is paid, and that lien has priority over the interests of all other persons in the article.

Repeat the count at closing

Stock moves every day, so a count done weeks before closing is only a baseline. Plan a second count at closing and decide in the purchase agreement how a shortfall will be handled.