Freight brokerage due diligence

A buyer who has signed a letter of intent for a freight brokerage has a short list of things that can go wrong. The business arranges other people’s freight, uses carriers it does not employ, and earns a spread that may show up only in load-level records. Due diligence here therefore means checking carrier files against public records, searching registries for claims on the seller’s receivables, reading shipper contracts for what happens on a change of ownership, and tracing money from shipper to brokerage to carrier. This guide sets out those checks and what each finding means. It does not replace advice from the lawyer and accountant running your deal.

Carrier files against public records

Ask for the file on every carrier used in the past period, then test it. Transport Canada describes the National Safety Code as 16 standards, from commercial driver licence requirements to carrier facility audits. Ontario’s CVOR program reviews collisions, convictions, inspections and audits, and publishes a safety rating enquiry, a carrier search by name and lists of unsatisfactory or cancelled carriers. Its abstracts summarize a carrier’s record, with a public Level 1 summary. A carrier on the unsatisfactory list is a serious finding, since Ontario states that rating causes operating privileges to be suspended or cancelled throughout Canada. For carriers based in other provinces, ask the authority there what its records show; under the Motor Vehicle Transport Act, s.8(2), a safety fitness certificate is valid throughout Canada.

Registry searches on the seller

Search the personal property security registry in each province where the seller carries on business. Ontario’s Personal Property Security Act provides for registering financing statements, and defines an account as a monetary obligation not evidenced by chattel paper or an instrument, whether or not it has been earned by performance, but not including investment property. Unpaid shipper invoices can fall within that definition, so a lender may already hold a security interest in them. Ask a lawyer how each other province, including Quebec, handles registrations and what they would show. A registration the seller did not mention is a reason to ask what it secures and whether it will be discharged at closing. See also what to do when due diligence finds debts the seller swears are paid.

Shipper contracts and the money trail

Read each large shipper agreement for assignment, change-of-control and termination wording, credit terms, and any rate or exclusivity commitments. Then trace the money. Reconcile freight billed to deposits received and to payments made to carriers, for a period the buyer chooses. Age the receivables and the carrier payables separately. Ask whether carriers are paid on fixed terms or only after the shipper pays, and what happens when a shipper pays late. A gap between what the books show and what the bank shows needs an explanation before the price is final.

People, data and personal information

Ask how sales agents and dispatchers are engaged. The Canada Revenue Agency says an employee generally works under the direction and control of the person or business that hired them, so ask the accountant whether contractor treatment fits how each person works. Check any restrictive covenants against the guide on whether non-competes are enforceable in Canada. If the data room includes personal information, PIPEDA s.7.2 allows parties to a prospective business transaction to use and disclose it without knowledge or consent, in addition to s.7(2) and (3), if conditions are met. They include an agreement requiring the recipient to use and disclose it solely for purposes related to the transaction and to protect it by safeguards appropriate to the sensitivity of the information. Under s.7.2(4), this does not apply where the transaction’s primary purpose or result is the purchase, sale or other acquisition or disposition, or lease, of personal information.

Staff, the system and the owner’s role

Ask which staff hold the key accounts, whether each has a written agreement, and whether anyone has said they plan to leave. Ask who owns the transportation management system, whether the licence can be assigned to a buyer, and whether the load and carrier data can be exported. Find out what the seller does day to day, so the plan for replacing that work is concrete before closing rather than improvised afterwards.

Cargo claims and insurance

Ask for the brokerage’s own insurance policies and for the claims history, including claims made against the brokerage when freight was lost or damaged and how each ended. Confirm who is named as the insured and whether coverage continues after a change of ownership. Check the expiry dates on the carrier insurance certificates held on file, and look for carriers whose certificates have lapsed while loads were still being tendered to them. Look for patterns of claims tied to the same few carriers or to the same lane.

Findings that matter most

• Carriers on a public unsatisfactory list, or with no insurance certificate on file, raise the question of how carriers are vetted
• A registered security interest over receivables that the seller did not disclose should be explained, and ask whether it will be discharged at closing
• One shipper supplying most of the spread, with a contract that lets it leave on short notice, raises the question of how much of the price rests on that account
• A reconciliation that does not close needs an explanation before the financial statements are relied on
• Key staff who will not commit to staying mean the relationships may not transfer