Selling a drilling and well services company in Canada

An owner who has decided to sell a drilling and well services company is selling three things at once: a machine, a set of qualifications held by particular people, and a reputation built one well at a time. They do not move on the same timetable. The rig can be inspected in a day, the qualifications may depend on a regulator’s decision, and the reputation shows only when a buyer telephones customers. The sequence below puts the slow items first. Nothing here is a reason to sell or not to sell. It is a map of preparation a buyer may expect to find done.

Start with the people who hold the qualifications

The first job is to find out who in the company holds the licence or technician certification that well work requires, and whether that person will still be there after closing. If the certified person is the owner, the buyer may need someone else qualified or will have to qualify personally, and the timetable for either is worth asking the authority about. Ask the provincial authority that oversees well work, in writing, what a change of ownership requires of the company and of the buyer, and ask each province if the company has worked in more than one. Then turn to the crew. In Ontario, section 9 of the Employment Standards Act, 2000 provides that, when the purchaser employs an employee of the seller, employment with the seller counts as employment with the purchaser for calculating length of employment under the Act, unless the purchaser hires the employee more than 13 weeks after the earlier of the employee’s last day with the seller and the day of the sale, so accurate start dates for everyone belong in the sale file.

Put the rig’s paperwork in order

A buyer may want to verify the rig. Assemble an equipment list with serial numbers, a maintenance and repair history for the rig and each support truck, and any inspection reports. Then deal with the lenders. A lender that financed the rig may have registered a security interest, and a buyer’s search could find it. Ontario’s Access Now service can be used to find out whether a lien has been filed in the Personal Property Security Registration system, and Alberta, British Columbia and Manitoba, for example, keep registries of their own. Search the company’s own name first, list every registration, and arrange payout letters or discharges. A registration left behind for a loan that has been repaid can still appear on a buyer’s search until it is discharged, and clearing it is an avoidable delay.

Settle or list the open wells and open disputes

A buyer may ask what the company has left behind, in the ground and in customer files. Before listing, write down every unresolved complaint about yield or water quality, and decide whether to settle it or disclose it plainly. Do the same for abandoned wells the company drilled: record what is known about each, ask the provincial authority what it expects of an owner or a contractor, and take advice on who carries that obligation after a sale. A seller who hands over this list, with a proposed reserve against it, leaves a buyer less to discover in diligence. BDC notes that buyers typically ask to see year-end and interim financial statements and projections, so have the accountant prepare these alongside the well list.

Keeping the sale quiet in a small community

Customers and staff may hear that a company is for sale, and a buyer may turn out to be one of the company’s competitors. BDC warns that, depending on a listing site’s confidentiality procedures, word could get out to employees, customers or suppliers that you are selling. One approach is to release information in stages: a short unnamed summary first, a non-disclosure agreement before anything that identifies the company or its customers, and customer names and job files only once a buyer has shown it can proceed. BDC lists a business broker or investment banker among the professionals to consult when selling.

Sell the business, or sell the rig

An owner may really be selling equipment, and the structure changes what follows. When assets are sold, the CRA says the seller may have a recapture or terminal loss of capital cost allowance, and it adds that the joint election to have no GST/HST payable on a sale of a business cannot be made if the seller sells only one or more assets of the business, or if the seller is a registrant and the purchaser is not. A sale of the whole business brings the closing steps the CRA lists: if the business has employees the payroll account must be closed; if it has a business number the seller should contact its tax services office, since it might have to cancel the number; and if it has a GST/HST account the seller must contact that office to close it. Which structure fits is a tax and legal question for the seller’s advisers. It is better settled before buyers are approached than after an offer arrives.

What can delay a closing

• A buyer whose approval to carry on well work has not yet been confirmed by the provincial authority.
• Security registrations that nobody has asked the secured party to discharge.
• A dispute or abandoned-well question that surfaces late and forces a holdback or a price discussion.
• A lender that wants the rig inspected before it advances funds, when the rig is away on a job.
• Start dates and pay records for the crew that do not agree, which slow the employee transfer.