Due diligence for a VAR or hardware reseller in Canada

Diligence on a reseller is an exercise in proving two things: that the manufacturer relationship will transfer, and that the balance sheet says what it appears to. The documents are few but decisive. They are the partner agreements and tier schedules, the stock listing, the warranty and return files, the rebate statements and the contracts behind any recurring revenue. A finding in the first group can end the deal, while a finding in the others can become a price adjustment, an indemnity or a closing condition. What follows is arranged by what you verify and what the result tells you.

The vendor and distributor paper

Start with every reseller, partner and distribution agreement, together with the current tier schedule, rebate terms and any volume commitments. Read for assignment and change-of-control wording, for termination rights that need no cause and for what becomes of registered opportunities and earned-but-unpaid rebates when ownership changes; what a change-of-control clause is explains the mechanics. Then ask each manufacturer, with the seller’s consent, to confirm the reseller’s status, tier and good standing in writing, and whether it would approve you. A written statement from the manufacturer is better evidence than the seller’s description of the relationship, and a manufacturer that stays silent when asked leaves the question open.

Searching the registries for security over stock

A search of the personal property registry shows whether a lender, distributor or equipment lessor has registered a security interest against the reseller’s assets, and the registries are provincial. Ontario’s Personal Property Security Registration system can be searched through Access Now. British Columbia’s Personal Property Registry records security interests and liens against personal property belonging to businesses and individuals. Alberta publishes its own search process, and Quebec keeps a register of personal and movable real rights under its Civil Code regulations. Match each registration you find to a debt that will be paid out or assumed at closing. Read what a PPSA search is and why you need one.

Stock, returns and warranty exposure

Do your own count rather than relying on the seller’s listing, matching serial numbers to the system and separating stock the reseller owns from stock held on consignment, lent for customer evaluations or waiting to go back to a manufacturer. Check the age of what remains, since models can be superseded and unsold units can become hard to move. Then reconcile the return and warranty files: open return authorizations, credits a manufacturer has promised but not issued, and claims customers have lodged. If the reseller sold its own extended warranties or service plans, ask what it still owes for the unexpired period and whether that obligation appears as a liability. Verifying inventory and equipment covers the count itself.

Customer data and the privacy record

Resellers that stage, configure or support devices can end up holding customers’ personal information, and that is where privacy exposure can sit. Part 1 of PIPEDA applies, subject to the exceptions in the Act, to personal information an organization collects, uses or discloses in the course of commercial activities, but not to business contact information used solely to communicate with someone about their employment, business or profession, so a business-to-business contact list may carry less exposure than data found on customer devices or in a support system. Ask for the breach record. PIPEDA requires organizations to keep records of all breaches of security safeguards involving personal information under their control and to report to the Privacy Commissioner any such breach where it is reasonable in the circumstances to believe it creates a real risk of significant harm, and the Commissioner can ask to see the records. For Quebec clients, Law 25 adds an incident register that must be produced to the Commission on request, a person responsible for protecting personal information, and an assessment before personal information is communicated outside Quebec.

Findings that can end deals, and what they mean

Not every finding is fatal, but these can change the shape of a reseller deal.

• A manufacturer will not confirm you: the central value is in doubt, and the question becomes whether the customers and staff alone justify any price.
• The tier depends on a volume commitment you cannot sustain: the margins in the model are not available to you, so rerun the numbers at the lower tier.
• A registration covers stock described as free and clear: a discharge can become a closing condition, and an unexplained one calls the seller’s disclosure into question.
• Warranty or return liabilities sit off the balance sheet: they belong in the price as a holdback or indemnity rather than a later discovery.
• Rebate income booked in the earnings was never received, or is contingent: the earnings you are paying for are lower than presented.

Put the tax filing on the closing list

If the parties make the joint GST/HST election, the Canada Revenue Agency says the purchaser must file it no later than the due date of its next GST/HST return in which tax would have been payable had the election not been made, and that it cannot be made when only one or more assets of the business are sold, or when the seller is a registrant and the purchaser is not. Confirm the seller’s registration and your own during diligence, so the election is a settled item on the closing checklist rather than a scramble afterwards.