Septic services company due diligence

You have a letter of intent and a limited window to verify what the seller has told you. In this sector the documents that matter are the ones that show the work was done properly and legally, and the searches that show who else has a claim on the equipment. This guide sets out what to request, what to search and how to read what comes back.

Operator safety record

Ontario describes a CVOR abstract as a summary of a carrier’s and/or driver’s safety performance, including collisions, convictions and inspections, and says a Level 2 abstract provides detailed event data for collisions, convictions and inspections for a five-year period. Ask the seller for the current abstract and compare it to what you were told. If the trucks operate outside Ontario, ask which provincial record applies. A poor record raises questions about drivers, maintenance and dispatch, so ask how they would carry over to you. Ask what the seller changed after each incident, and ask to see inspection results and repair records for the units involved.

Who has a claim on the equipment

Ask your lawyer to search for security interests registered against the seller and against each truck and machine. Ontario’s Personal Property Security Act sets out how security interests are perfected and their priorities, and which jurisdiction’s law governs them: generally the law where the collateral is situated when the security interest attaches, except as the Act otherwise provides, including rules in section 7 that look to where the debtor is located. Other provinces have their own Acts, so ask your lawyer which provinces to search. If a registration appears that the seller did not mention, ask what it secures and whether the lender will release it at closing. Ask for the payout and release arrangements in writing. Ontario repealed its Bulk Sales Act on March 22, 2017. Ask your lawyer how unpaid creditors’ claims against the seller are dealt with in your deal, including trade suppliers such as fuel and parts vendors.

Disposal and installation records

Compare records for what was hauled and where it went with the invoices and the route schedule. Missing or inconsistent manifests are a documentation problem, and the pattern matters: one lost form differs from a year of gaps. Ask the seller to explain each gap, and ask whether any regulator has asked about them. For installations, ask for the permit, the approval and the inspection result for each job you can sample. In Ontario, the ministry notes that section 27 of the Environmental Protection Act requires an ECA for the transportation, management and/or disposal of certain types of waste, so match the company’s approvals to the activities in the records.

Approvals and amendments

Ask for every approval, registration and permit, with expiry dates and conditions. Then ask each issuing body what a change of ownership needs. Treat any approval that cannot be amended or reissued to you as a condition of closing, not a detail to settle later. If an approval has conditions that the company has not met, you may be taking on that problem with the business, so ask your lawyer how the agreement should deal with it. Compare the approvals with the actual operation too: if the company hauls waste or takes it to a site that no approval mentions, that is a finding in its own right.

The books against the records

The CRA’s guidance says records are all of your accounting and other financial information documents. Reconcile revenue to invoices, bank deposits and route schedules, and tie expenses such as fuel and repairs to equipment files. Your accountant can test whether the seller’s recast earnings are supported. Also confirm payroll and GST/HST account status, using the seller’s authorization where needed, because unpaid amounts can matter to a buyer depending on how the deal is structured.

Past-work claims

Ask for complaints, regulator letters, insurance claims and settled disputes, and ask the insurer to confirm what coverage applied to past work. A failed system found after closing is a risk you may have assumed, depending on how the deal is structured, so decide with your lawyer what protection the agreement should contain. See due diligence versus warranty protection.

Insurance and environmental history

Ask for the insurance policies the company has held, including the cover for pollution or sewage incidents if any, and for the claims history from the insurer rather than from the seller alone. Ask whether the company has ever been the subject of an order or investigation, and whether any site it has used for storage or disposal has a history of complaint. If a site is in doubt, ask your lawyer whether an environmental assessment is warranted before you close. Treat findings here with particular care: a past incident can become a claim after the business has changed hands, depending on how the deal is structured.

Employees and contractors

Ask for a list of employees with roles, tenure and any certifications they hold, and a list of contractors with the terms of each engagement. Confirm that drivers hold the licences their trucks require. Ask whether there are any workplace injury claims, outstanding wages or disputes, and what clearance or registration status the company has with the relevant workers’ compensation board. Your lawyer can say which of these liabilities follow the business in your structure and which stay with the seller.

• Current CVOR abstract or the equivalent safety record for each province of operation
• Security-interest searches covering the company and each major unit
• Sampled installation files with permits and inspection results
• Disposal manifests reconciled to invoices and routes
• Every approval and what a change of owner requires from each issuer