Specialty food retailer due diligence

Due diligence on a specialty food store has to verify things that are mostly relationships, using a handful of records the seller does not control. Some verification comes from documents the seller provides, some from public records any buyer can search, and some can only be done by standing in the stock room. This guide sets out which is which for a Canadian specialty food retailer and what each finding means for the deal. It assumes a letter of intent is in place. Provincial regimes differ, so the examples come from several health authorities.

Public records to search before asking the seller anything

Several health authorities publish inspection history for food stores. Peel Public Health publishes inspection results and convictions for retail food premises, a category that includes food stores. Fraser Health publishes food facility inspection reports and violation tickets, and Alberta Health Services posts reports on food facility inspections, listing the violations an inspector noted. If the reports show a repeated pattern on cold storage or pest control, ask what repair it points to and whether that belongs in the price. Also look the store, and any importer that supplies it, up in the Canadian Food Inspection Agency’s “Find a food licence” tool.

Then search the provincial personal property registry under the seller’s legal name. British Columbia’s registry page explains that lenders and sellers register their interests in a debtor’s personal property, and Ontario’s Personal Property Security Act sets up that province’s registration system. A supplier that extended credit on imported goods may have registered against the stock, and a registration the seller never mentioned can mean the stock is not free and clear.

The stock count is where specialty food deals can come apart

Count the stock yourself, or have someone independent do it, and record what you find by supplier, lot and best-before date. Imported lines with long lead times may deserve the closest look, since a buyer who finds a problem may not be able to restock quickly. Stock found near or past its best-before date at the count is the kind of finding that can end a deal. It can mean either that buying has run ahead of selling, so the stock figure in the price is overstated, or that the range includes lines that no longer sell. Ask for purchase records as well. O. Reg. 493/17 requires an operator to keep records of the purchase of food for use in the premise on the premise at least until the first anniversary of the purchase date, so a store without them has a compliance question and you have a reconciliation problem.

Recalls and traceability

Ask whether any product on the shelf, or sold in the past year, was subject to a recall. The Agency’s recall guide describes a business conducting a recall preparing a distribution list that identifies its clients by type, retailers among them, and it refers to Part 5 of the Safe Food for Canadians Regulations for traceability requirements. Ask a store with imported lines to show how it would trace an affected lot, remove it from stock or display and count what remained.

Supplier paperwork, and what a missing document means

Ask for every supplier and importer agreement, with credit terms and any correspondence about exclusivity. Read each for a clause that limits assignment, requires consent or ties the arrangement to a named individual. Where nothing is written, a call or letter from the supplier becomes the only evidence you can rely on, and it should be obtained before closing. Note whose name each account is in; accounts held personally by the seller do not move with a company. In a share purchase the company’s contracts stay with the company, whereas an asset purchase can mean assigning each one, with any consent required, as asset sale versus share sale explains. A supplier who will not continue on the same terms is a finding that can end the deal, because part of the price is then for something that is not transferring.

Labels, claims and the store’s own products

Review every house-made and private-label product as a customer sees it. The Food and Drugs Act bars any person from labelling, packaging, selling or advertising food in a manner that is false, misleading or deceptive or is likely to create an erroneous impression regarding its character, value, quantity, composition, merit or safety. The Consumer Packaging and Labelling Act, by contrast, does not apply to any food commodity as defined in the Safe Food for Canadians Act. The Competition Bureau adds that it is against the law under the Competition Act to advertise or market in a way that is false or misleading. A label that calls a product handmade, local or imported without support is a finding for a lawyer.

Which findings end a deal and which only move the price

Three findings in this sector can end a deal: a main supplier declining to continue on the same terms, stock near or past its best-before date at the count, and a customer base that proves loyal to the seller personally rather than to the store. Test the last by looking at wholesale accounts, standing orders and online customer records instead of footfall. Other findings can move the price. Worn refrigeration, a poor inspection history or an activity that needs a licence it lacks can each become a cost, a holdback or a condition of closing. The wider list is in the buyer due diligence checklist.

Ask for these first, because they unlock most of the checks above:

• Purchase invoices by supplier for the last year, reconciled to stock on hand and to the purchase records kept at the premise
• Written supplier and importer terms, or the seller’s list of arrangements that have no document behind them
• Inspection reports, orders and any correspondence with the health authority
• The federal licence, if the business holds one, and any recall notices received
• Every house-made or private-label label in current use