Due diligence on a trades business

Due diligence on a trades business means verifying four things in parallel: the earnings the seller claims, the condition of the vehicles and equipment being sold, the status of every licence the business needs to keep operating, and whether the work already in progress on closing day has been counted honestly. A trades deal that skips any one of these tends to surface its problems within the first few months of new ownership, not before.

Financial due diligence: verifying earnings, not just add-backs

Financial due diligence starts with seller’s discretionary earnings, but it does not end with accepting the seller’s add-back list at face value. Every add-back — a spouse on payroll, a personal vehicle run through the company, a one-time equipment purchase — needs a receipt or a bank record behind it, not just an assertion in a spreadsheet. Buyers should also reconcile revenue against invoicing software or job-costing records rather than relying on the tax return alone, since trades businesses that do a mix of invoiced commercial work and cash residential jobs sometimes show a gap between what was recorded and what actually moved through the bank. Where that gap exists, it needs an honest explanation, not a wave of the hand, because it directly affects what the business can support in financing.

Work-in-progress needs its own schedule

Work-in-progress deserves its own line of inquiry, separate from the historical financials. A trades business almost never has a clean stopping point; there are jobs partly billed, deposits collected against work not yet performed, and materials already purchased for projects that finish after closing. A buyer needs a job-by-job schedule showing what has been invoiced, what has been collected, and what work remains, so the purchase price reflects only what the seller has genuinely earned and the buyer is not effectively paying twice for the same job.

Licensing, WSIB and regulatory status

Licensing and regulatory status is where a lot of trades deals run into trouble late, simply because it gets left until the end. Most trade certifications are held by individuals rather than the corporation, so due diligence has to confirm who currently holds the licences the business relies on, whether that person is staying, and what the path looks like if they are not. A current WSIB clearance certificate is standard due diligence in Ontario, since it confirms the business is registered and current on its premiums and protects the buyer from being held liable for the seller’s unpaid amounts; other provinces run their own workers’ compensation boards with their own clearance process, but the same underlying check applies everywhere in Canada. Depending on the trade, a buyer may also want to confirm the status of any commercial vehicle safety registration and any municipal business licences the operation needs.

Equipment and vehicle condition

Equipment and vehicle condition is a physical, not just a financial, check. A visual walkthrough will not catch deferred maintenance, and it is common for trades sellers, consciously or not, to defer non-urgent repairs in the final year before a sale. An independent mechanical inspection on major vehicles and equipment, and a review of maintenance logs where they exist, tells a buyer more than a fresh coat of paint on a truck ever will. Any equipment carrying a lien needs to be identified and cleared, or accounted for, before closing, since it can otherwise follow the asset rather than the seller.

Contracts, customer concentration and environmental exposure

Contracts and customer concentration round out the picture. Trades businesses that depend heavily on one or two general contractors, or on a single large recurring maintenance client, carry real risk if that relationship does not survive a change in ownership, and a buyer should ask directly whether key contracts are assignable or whether the counterparty needs to consent to the change. Environmental exposure is worth a look too, particularly for trades that store fuel, solvents or refrigerants, or that have done excavation or demolition work, since contamination or improper disposal history can create liability that outlives the original owner.

Key-person and crew dependency

Key-person and crew dependency is worth checking directly rather than assumed from the org chart. It is common for a trades business to have one estimator who knows every client, one licensed technician the schedule quietly revolves around, or one long-serving lead hand who is the reason jobs run on time. Losing that person in the first few months of new ownership can hit performance far harder than a similar departure would at a business with more depth on staff. Due diligence should include a candid conversation, where possible, with key employees about whether they intend to stay, and a look at whether pay, role and reporting lines are likely to change enough under new ownership to push someone out.

A trades due diligence checklist

A due diligence checklist for a trades purchase reasonably includes:

• Three years of financial statements reconciled against bank deposits and invoicing records
• An itemized, documented add-back schedule
• A current work-in-progress schedule by job
• A current WSIB clearance certificate and claims history
• Confirmation of who holds required licences and whether they are staying
• An independent mechanical inspection of major vehicles and equipment
• A review of key contracts for assignability and customer concentration