New car dealership due diligence

Due diligence on a franchised dealership is not primarily an accounting exercise, even though the financial review still matters. The distinctive risk in this sub-sector sits in three places an ordinary small-business diligence checklist does not cover in any depth: the manufacturer relationship, the floorplan financing behind every unit on the lot, and the provincial dealer registration that has to be re-earned by the buyer regardless of what the seller holds.

Documents to obtain

• The current dealer agreement in full, along with any notice of default, performance warning or facility deficiency the manufacturer has issued in recent years
• The floorplan financing agreement, the current payout letter on inventory, and confirmation of whether those terms are personally guaranteed by the seller
• Fixed-operations financial statements separated cleanly from new-vehicle sales, since a blended presentation hides exactly the split a buyer needs to see
• Technician employment agreements and certification records for factory-trained staff in the service department, along with recent turnover history
• Customer and service records and the manufacturer’s data-handling terms governing what can and cannot transfer with the sale

Reconciling inventory and working capital before you close

A dealership’s working capital target at closing is unusually sensitive to timing, because floorplan-financed inventory ages differently depending on the season and the model year, and a unit that looked current at the letter of intent stage can look stale by the time closing arrives. Confirm exactly how the purchase agreement defines the inventory being valued — at cost, at a discount for aging units, or excluding units past a certain age entirely — and reconcile that figure against the floorplan payout letter directly rather than relying on the seller’s summary. Disputes over exactly this kind of figure are common enough in Ontario business sales generally that it is worth agreeing the mechanism for resolving a disagreement before closing, not after.

Verifying who actually stays

A seller’s assurance that the service team is staying is not verification — ask for each factory-trained technician’s employment agreement, tenure, and any non-solicit or retention terms already in place, and confirm directly rather than through the seller whether any of them have discussed departure once the sale is public. The same applies to any manager whose personal relationships with commercial or fleet accounts the dealership depends on. Employment due-diligence red flags — undocumented arrangements, informal compensation top-ups, unclear reporting lines — tend to surface here before they surface anywhere else in the file, and they are cheaper to price into the deal now than to discover after closing.

Registry searches worth running

A Personal Property Security Act search against the dealership and its inventory will surface the floorplan lender’s registered security interest and any other creditor claims against equipment or the facility, which matters because that interest has to be dealt with as part of closing rather than discovered afterward. Confirming the dealership’s standing with the provincial registrar — OMVIC in Ontario or its equivalent elsewhere — tells you whether there is an open compliance issue that could complicate your own registration as the incoming owner, since that history follows the business even though the registration itself does not transfer.

The finding that actually matters

A clean-looking dealer agreement means little if the manufacturer has separately signalled it will not approve this particular buyer, or will only approve conditional on facility spending the deal economics were not built to absorb — confirm the manufacturer’s posture toward you specifically, not just the store’s general standing, before treating the acquisition as close to certain. A floorplan lender declining to extend financing to the new ownership on workable terms is an equally hard stop, because a dealership without floorplan capacity cannot stock inventory, and a seller’s existing terms rarely transfer automatically to a buyer the lender has not independently underwritten.

Other findings that kill or reshape deals here

Factory-trained service technicians leaving with the sale is a recurring finding that can quietly gut fixed-operations profitability months after closing, so confirming their intentions directly — not relying on the seller’s assurance — belongs on every diligence list for this sub-sector. For a buyer who is already an existing dealer group adding a rooftop, it is also worth checking whether the acquisition’s size triggers a notification requirement under federal competition law, since larger consolidating transactions can require a separate filing before closing regardless of how the manufacturer and provincial approvals proceed. A finding in any one of these areas rarely kills a deal outright on its own, but it changes the price, the timeline, or both, which is the entire point of running the process before signing rather than after.