Customs brokerage due diligence

Under a letter of intent, a buyer of a customs brokerage can separate findings that would end the deal from findings that adjust the price. The first group is about authority and people: is the firm in good standing with the Canada Border Services Agency, and will the individuals it depends on stay? The second is about the client book and the quality of the work. Work through both with documents rather than assurances, and decide in advance which findings would make you walk away. Writing that list before you see the data keeps the decision honest.

Standing with the border agency

Ask for the firm’s licence and accreditation documents and for every notice, review, audit or penalty it has received from the border agency, whether closed or open. Ask your lawyer to confirm in writing what the agency requires on a change in ownership or control, and to ask the agency directly if the documents leave doubt. An open review or an unresolved penalty is a finding to understand fully. It may be priced, held back from the purchase price or treated as a reason not to proceed. Make sure the purchase agreement says who bears the cost of anything that surfaces after closing.

The people who hold the qualifications

List every person whose qualification the firm relies on, and confirm each one’s status from the documents, not from conversation. Ask each whether they will stay, on what terms and for how long. A deal conditioned on a key individual who has not yet agreed to stay is not secure. Check employment agreements for restrictions that may limit or help you, and read the answer on whether non-competes are enforceable in Canada before you rely on one to keep anyone from leaving for a competitor.

Client files and corrections

The border agency’s guide to importing describes making corrections after goods have been accounted for. A brokerage’s correction history may therefore show how accurate its work has been. Ask for the number and cause of corrections over several years, who paid for them and whether any client claims against the firm are open or threatened. Test the client book against the contracts, not the list: which clients are under written agreements, on what terms, with what notice, and do any have change-of-control clauses? Contact the largest clients only with the seller’s agreement and after the confidentiality terms allow it.

• Authority documents, plus every notice, review or penalty from the border agency
• Client contracts, with notice and change-of-control terms flagged
• Fee history by client and by type of work over several years
• Records of corrections, who paid for them and any claims arising
• Staff agreements and written intentions from key individuals

Findings that end deals

Decide in advance what you will treat as a reason to stop. Candidates include an authority status that the border agency will not confirm, a key individual who will not commit to stay, an open penalty or review that nobody can size, and a client book that turns out to depend on a single account. Each has a different remedy. Some can be fixed with a price change, a holdback or a closing condition; some cannot. Write the list down before the data room opens, and show it to your lawyer, so that a bad finding is measured against a standard you set when you were calm.

Data handling and privacy

A brokerage keeps client records, some of which may contain personal information. Section 7.2 of PIPEDA lets organizations that are parties to a prospective business transaction use and disclose personal information without the individual’s knowledge or consent if conditions are met, including an agreement limiting use to the transaction, requiring safeguards appropriate to the sensitivity of the information and requiring it to be returned or destroyed within a reasonable time if the transaction does not proceed; the information must also be necessary to decide whether to proceed. Keep to that. Ask where client data is stored, who has access, and whether the firm has recorded any breach. The Privacy Commissioner says organizations must report breaches of security safeguards that pose a real risk of significant harm and must keep records of all breaches, so ask to see those records.

Tax and structure

If the purchase is of assets, ask your accountant whether the GST/HST election concerning the acquisition of a business or part of a business, which the Canada Revenue Agency publishes as form GST44, is relevant to your deal. In a share purchase the company, with its history, stays the same company under new ownership, so ask your lawyers what to review in past tax filings, employment matters and contracts. Ask your advisers to confirm which structure suits the licensing position described above.