Thrift and consignment store due diligence

Under a letter of intent, the work on a thrift or consignment store can be organized around one proof: that the business owes consignors what the seller says it owes, and holds the stock the seller says it holds. Everything else, from licences to liens, is checked in support of that. This guide sets out what to ask for, what to search, and what each kind of finding can mean for the price or the deal.

The three-way reconciliation

Start by tying together three sets of records for the same date: the payouts the point-of-sale or consignment system says are owed, the bank records showing what has been set aside and what has been paid, and the stock physically on the floor and in the back room. Pick a sample of consignor accounts and trace each from intake through sale to payout. Test the cut-off by looking at sales in the days either side of the count date. Compare the system’s aged-item report with what is actually on the racks. The CRA’s records guidance covers keeping audit trails of business transactions, which is what these records should be able to support. Any gap between the three sources is a question for the seller, and a large one is a price conversation.

Documents to request

Ask for documents that show how the ledger is built, not only what it totals.

• The consignment agreement template, every signed variation, and any side arrangement with a favoured consignor
• Consignor, payout and aged-item reports exported by month for the whole period under review, not a single current snapshot
• Purchase records for stock bought outright, and records of what has been donated and to whom
• The markdown, return and disposal policy, with evidence it has been followed
• Municipal licence documents, transaction-reporting records and any correspondence from the municipality or the police
• The lease and every amendment, plus landlord correspondence about assignment

Searches and registry checks

Run a lien search against the seller and the business name, because a registered security interest can cover the equipment, point-of-sale hardware or stock the buyer thinks it is acquiring. In Ontario the Personal Property Security Act governs those registrations, and the province’s Access Now service is where a security interest is registered or a lien searched; for a seller located elsewhere, ask your lawyer which registry to search. Add searches for litigation and judgments against the seller, and ask whether any consignor has made a formal complaint. A lien on the equipment does not change what consignors are owed, but it can change what the buyer is able to finance.

Licences, reporting and recalls

In the cities cited here, second-hand dealer rules turn on municipal bylaws, so the file should show a licence in good standing and a clean reporting history. Saskatoon’s Business Licence Bylaw regulates businesses that buy or sell non-exempt secondhand goods, and the city’s page says transaction records must be available for inspection by the City and the police service; the page lists goods exempt from reporting, including books, most adult and children’s clothing, and furniture. Regina distinguishes electronic from manual reporting for its second-hand dealers. A gap in that record is a compliance question to put to counsel. Product safety is a second check. Section 8 of the Canada Consumer Product Safety Act prohibits advertising or selling a consumer product the seller knows is a danger to human health or safety, or is the subject of a recall order or of a voluntary recall in Canada because it is a danger, or of a measure required by an order that has not been carried out; sections 5 and 6 prohibit selling products listed in Schedule 2 and products that do not meet the regulations. Section 4 excludes the products in Schedule 1, among others, from the Act. Ask how staff screen donated and consigned goods, particularly children’s items.

Privacy records

A consignor database holds names, contact details and payment history. The federal breach-reporting guidance says an organization subject to PIPEDA must report to the Privacy Commissioner breaches of security safeguards that pose a real risk of significant harm, and must keep records of all breaches whether or not they are reportable. Ask to see that breach register, even if it is empty, and ask how the system and its backups are secured. Whether PIPEDA or a provincial privacy statute governs a particular store is a question for counsel.

Findings that can change a deal, and what each can mean

Findings can change the price, the structure or the timing, and some may be serious enough to stop a deal.

• A payout liability larger than represented: this can lead to a repricing or a holdback, because the buyer might otherwise pay twice for the same stock
• Consigned stock held well past the agreement’s terms: this may signal unresolved obligations and unhappy consignors, so ask for a clean-up plan before closing
• Top consignors who will not commit to staying: this affects the supply side and can be the basis for a closing condition
• A licensing or reporting lapse: ask that it be resolved with the municipality before closing rather than inherited silently
• An unexplained lien or an unreported breach: either one needs a written explanation and, if real, a release or an indemnity before funds move