Bus and motorcoach operator due diligence

Once a letter of intent is signed, diligence turns the seller’s account into documents you can rely on. For a coach operator, the documents fall into three groups: the regulatory record that lets the service run, the fleet and its ownership, and the people and contracts that produce the revenue. Your lawyer and accountant lead on the legal and financial reading. What follows describes where to look, and what each kind of finding means for a letter of intent that is still conditional.

The carrier record

In Ontario, a CVOR abstract is a summary of a carrier’s safety performance, including collisions, convictions and inspections. Ontario describes a level 2 abstract as providing detailed event data for a five-year period, and describes it as available to the carrier only, so ask the seller to order it. Ontario also lets a carrier request a copy of a Commercial Vehicle Inspection Report. Compare the record with what the seller told you, and ask about every entry the seller did not mention. Outside Ontario, ask the provincial authority what equivalent record exists.

Licences, certificates and their terms

List every authority the operator holds, and match each to the service run in practice. The Motor Vehicle Transport Act provides that no person or body shall operate an extra-provincial motor carrier undertaking except under a safety fitness certificate issued by a provincial authority or an analogous document prescribed by the regulations, subject to the regulations. A coach crossing a provincial boundary on a charter without the right authority is a problem to solve before closing. For British Columbia licences, the Passenger Transportation Board says all terms and conditions attached to a licence are transferred together, so read those conditions against the routes and vehicles the operator uses.

Who owns the coaches

Ask for ownership and registration documents for every coach, then search for security interests against the company and the vehicles. Ontario’s Personal Property Security Act provides for registering a financing statement, and other provinces run their own regimes, so your lawyer should search in each province where the operator is based or the coaches are kept. A lien that surprises you is a negotiating point at best. At worst it means the coaches you are paying for are pledged to a lender who must be paid or must consent.

Fleet, driver and client files

Request the maintenance and inspection history for each coach and have a mechanic inspect a sample. Check driver files for licence class, qualifications and any history on their own abstracts. Review the largest client contracts for term, renewal and change-of-control clauses, because a contract that lets the client walk away on a sale may be worth less than its revenue suggests. A school or tour client may have to be contacted, so agree with the seller when that happens. Check whether any contract cannot be assigned, since that decides how late the client can be left out.

Findings that can end a deal

Some findings change the deal and some end it. Ontario says an “Unsatisfactory” safety rating will cause operating privileges to be suspended or cancelled throughout Canada, so a rating heading that way undermines the revenue. A licence that will not move to you, or a service operating outside its authority, can be just as serious. Treat a fleet that needs more capital than you can raise, or a driver shortage that endangers booked work, as findings to price or walk away from.

Insurance and claims

Ask for the operator’s insurance policies and its claims history, and have an insurance adviser read both. Look for gaps between the vehicles insured and the vehicles on the fleet list, and for open or disputed claims that could follow the company to you in a share purchase. An asset purchase may leave some of those liabilities behind, depending on what the agreement says. The aim is a clear picture of what claims exist, who is liable for them, and whether the price or the agreement should adjust for them.

Sequence the work

Do the checks that can end the deal first. The carrier record, the licence and certificate review and the security search can be done early. Fleet inspections and client calls involve the seller’s staff and clients, so schedule them once the earlier results are clean. If a result is poor, raise it with the seller promptly and in writing, and ask whether the seller can cure it before closing or whether it should change the price.

• Order the carrier abstract and read every collision, conviction and inspection entry
• Match each licence or certificate to the routes, vehicles and boundaries crossed
• Search for security interests on the company and each coach
• Test the maintenance file against the vehicle itself
• Read client contracts for term, renewal and change-of-control terms