Flooring contractor due diligence

Once a letter of intent is signed, due diligence is where a buyer tests the claims the seller has made. For a flooring contractor these are places to test: agreements that may not carry over, installers whose status is unclear, obligations to a workers’ compensation board, and creditors with a claim on the stock and equipment. Each can be tested with a specific document or a search. This guide is a map of those tests and of what a bad result can mean. Your lawyer and accountant should run them against the actual deal. It is written for a buyer who has already agreed terms in principle, so it skips the early questions of whether the business is worth looking at.

Registry searches against stock and equipment

Personal property such as vehicles can be used as collateral to obtain a loan. Ontario’s Access Now service lets you register a notice of security interest or search for a lien on personal property, and Ontario says that before buying a used car or other used goods you should search to protect yourself financially. Its example is a search that may indicate a lender has rights in a used car you intend to buy. Other provinces run their own registries, so search where the business operates. If a lender is registered against the stock, ask for the debt to be paid out at closing, or for the lender’s release, before you rely on that stock.

Workers’ compensation standing

In Ontario, the WSIB says it may hold a purchaser liable for amounts the vendor owes up to the date of sale if no valid purchase certificate is obtained, and that the certificate is valid for 30 days from the date of issue printed on it. Its construction clearance policy says a principal who directly retains a contractor to perform construction work must obtain a clearance (the policy does not apply to householders, or the contractors they directly retain, for exempt home renovation work only), and that without one the principal may be liable for the contractor’s payment obligations to the WSIB, up to the value of the labour portion of the contract. Ask whether the business’s own work, or a builder customer’s requirements, bring that policy into play. Newfoundland and Labrador and other provinces have their own clearance systems. WorkplaceNL, for example, says clearance confirms if a contractor has its own coverage and is in good standing, and that if it does, the letter clears the hiring employer of responsibility for the contractor’s unpaid assessments. Ask for the current account status and any clearance history, and keep a copy of what you receive for your records.

How installers are engaged

The CRA distinguishes an employee, who generally works under the direction and control of the person who hired them, from a self-employed worker who is free to choose how to carry out the contract. Ask for the installer agreements and compare them with how the work is actually run, because the CRA’s description turns on direction and control. A mismatch between paper and practice is a finding to quantify with your accountant before closing. Ask your accountant what it could mean for the obligations that come with a share purchase and for the crew you keep. Ask also for payroll remittance records and have your accountant confirm they are current.

Licences and the contracts that carry the earnings

Where the business works in Quebec, check the Régie du bâtiment’s licence holders’ repertory and its guidance on when a licence is required, and ask what the entity actually holds. Then read the supplier agreements, builder contracts and the showroom lease for assignment, consent and change-of-control clauses. A supplier who will not carry pricing to the buyer, or a builder who can end the relationship on a change of owner, is worth weighing in the price and structure, even if nothing in the file is wrong.

Findings that can end a deal, and what each means

A registered lender who will not release security, a supplier agreement that ends on a change of control, a workers’ compensation balance the seller cannot clear, or an installer arrangement that does not match the way the crew works are each worth raising with your lawyer before you go further. Possible responses include a payout at closing, a price reduction, a holdback, a condition that the supplier confirm terms, or a different deal structure. The point of the searches is to find these early enough that you still have the choice. Write the findings down and put the remedy for each into the purchase agreement.

• Personal property security searches in each province where stock, vehicles or equipment are held
• WSIB purchase certificate or the equivalent board clearance in the province, plus clearances on subcontractors
• Installer agreements, payment records and a written explanation of how each installer is engaged
• Warranty claim history by job, with any pattern in subfloor or preparation problems noted
• Supplier, builder and lease agreements marked for assignment and consent terms