Sporting goods store due diligence

A buyer under a letter of intent is no longer asking whether the store is attractive but whether it is what the seller says it is. Gaps can open in places such as stock worth less than its book value because of the season or a recall, security registered against assets, and relationships that exist in conversation rather than on paper. This guide sets out what to ask for, whom to ask and what each finding means. Put what you learn into the purchase agreement as a representation, a closing condition or a price adjustment, instead of leaving it as an understanding.

Count the stock by season, close to closing

Insist on a physical count rather than an estimate from the books, carried out as near the closing date as practical and compared with the seller’s records. Ontario legal guidance on verifying inventory and equipment makes the same points, adding that obsolete, damaged or unsellable stock is worth far less than book value, and that a price adjustment mechanism can deal with a final count that differs from the one assumed when the price was set. In this trade, sort what you count into current-season goods, carry-over from earlier seasons, items already marked down and anything held for customers. A count showing a large share of carry-over is a finding that can bear on the price, whatever the total says. The same guidance suggests that both sides take part, or an agreed independent party conducts the count, so there is no later dispute about what was there.

Search the registries for security interests

Ask your lawyer to search for security interests registered against the seller and the business before closing. In Ontario, the Personal Property Security Registration system lets users register a notice of security interest or search for a lien on personal property, and the Personal Property Security Act defines inventory to include goods held for sale or lease. Other provinces have their own legislation and registries, so ask your lawyer which registry to search. Two findings to look for are these. A lender’s registration may remain after the loan was repaid; Ontario’s Access Now page says that in that case the buyer should insist that the seller require the lender to register a discharge before the sale is completed, which can be made a closing condition. A supplier’s registration is different: under section 33 of the Ontario Act, a purchase-money security interest in inventory can rank ahead of any other security interest in the same inventory given by the same debtor if its conditions are met, which include written notice, before the debtor receives possession, to earlier registrants whose financing statements describe the debtor’s inventory in the ways the section lists. A supplier that sold stock on credit may therefore have a claim on the very goods you are buying.

Check recall status and the records behind protective gear

Helmets, pads and other protective equipment an individual buys for sport are the kind of product the Canada Consumer Product Safety Act reaches, since its definition of a consumer product includes recreational and sports purposes. Section 8 prohibits advertising or selling one the seller knows is subject to a recall order or a voluntary recall in Canada because it is a danger to human health or safety. Section 13 of the Canada Consumer Product Safety Act requires a retailer to keep documents showing from whom it obtained a product and where and during what period it sold it, until six years after the end of the year they relate to unless another period is prescribed, and section 14 requires a person who sells a consumer product for commercial purposes to give the Minister and, if applicable, the person from whom they received the product all the information in their control about an incident related to the product within two days after they become aware of it. Recalled stock still on the shelves is something to settle with the seller before closing, and a gap in the records is one to raise with the seller’s lawyer.

Confirm vendors, accounts and technicians with the people themselves

The seller’s description of an arrangement is not evidence of it. Ask each major vendor to confirm in writing, to you, the brands and terms that would apply under your ownership, including any territory exclusivity. If a vendor will not continue exclusivity, or the largest accounts say they would review their supplier, the assumptions the price rested on have gone and the deal should be revisited, not patched. Check technicians’ start dates against payroll too, because the Ontario guide to the Employment Standards Act credits employees hired by a purchaser with past employment for certain entitlements, subject to an exception it describes for a gap in employment of more than 13 weeks, which makes tenure a cost you take on.

• Order histories or contracts for the largest team, school and league accounts, with renewal dates and payment records
• Service-department job tickets across several seasons, showing who performed each job and how work bunches at peak
• The seller’s recall checks, supplier records and any incident file
• Samples of flyers and online advertising that make regular-price or reduction claims
• The lease, any amendments and the correspondence with the landlord about assignment

Read the lease and the advertising

Read the lease for its assignment clause, term, renewal rights and restrictions on use. In Ontario a covenant against assigning without consent is deemed, under section 23 of the Commercial Tenancies Act, to be subject to a proviso that consent is not to be unreasonably withheld unless the lease expressly provides otherwise. Then compare the advertising samples with the sales history. An ordinary-price claim that the retailer cannot support with the sales or good-faith offering described in section 74.01 of the Competition Act is a risk worth raising with your lawyer before closing.