When representing a purchaser in a corporate acquisition, we are often asked about the due diligence that should be conducted in order to minimize the risks involved. Naturally, due diligence greatly depends on the nature of the transaction. For instance, the due diligence required when purchasing a hotel property is much more detailed than the due diligence required for the purchase of a corner retail outlet that is leased. By way of example the following are a few searches that are relatively inexpensive to conduct prior to closing your acquisition:
Bankruptcy and Execution Searches
Ensuring that a business is not bankrupt is judicious step to take. Having your legal counsel conduct a bankruptcy search is a quick and inexpensive way to ensure that the business has not declared or been involuntarily petitioned into bankruptcy.
Personal Property Security Act Search
It is vital that you ensure there are no liens or encumbrances against a business or its assets. A lien is a party’s right to take and hold or sell the property of a debtor as security or payment for a debt or duty. One way of ensuring that the there are no liens attached to the business is to conduct a Personal Property Security Act search. This search will show whether a creditor has registered a lien against the debtor; what the lien attaches to; and how long the lien will be in effect for. It is imperative that any party who has security over the assets to be purchased discharge such security before the purchase is completed.
WSIB Clearance Certificate
Attention should also be directed to ensuring that there are no outstanding amounts owed to the Workplace Safety and Insurance Board, or WSIB, as a person purchasing a business is liable for any outstanding amounts owed to the WSIB by the previous owner. Before purchasing a business, the purchaser’s counsel should contact the WSIB to determine if any such amounts are owed. If no monies are owed, the WSIB will, if requested, deliver a purchase certificate that will protect the new owner from any liability with the WSIB.
Retail Sales Tax Clearance Certificate
As in the case of the WSIB, a potential purchaser should obtain a clearance certificate from the Ontario Ministry of Finance, Retail Sales Tax Branch to confirm that all retail sales tax collectable or payable by the vendor has been paid. Once you are in receipt of such a certificate, you may rest assured that the business you are purchasing does not have any known tax liability with the branch.
Goods and Services Tax Clearance Certificate
A business may also have liabilities in respect of outstanding GST. To confirm that no such liability exists, it is recommended that a prospective purchaser obtain a clearance certificate from the Canada Revenue Agency stating that all GST collectable or payable by the vendor has been paid.
© 2005 AYLESWORTH LLP
This article is for information purposes only and should not be taken as legal advice.
FOR INFORMATION ABOUT AYLESWORTH’S FRANCHISE GROUP CONTACT:
DAVID J. GRAY
416-777-4047
dgray@aylaw.com
www.franchiseontario.com
P.O. Box 124, 18th Floor
222 Bay Street
Toronto, Canada
M5K 1H1
www.aylesworth.com
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