Warning Signs When Looking at a Business for Sale in BC

A listing that looks like a bargain can hide problems that only surface after you have signed: profits that depend on unreported cash, a lease about to run out, or tax and employee obligations that follow the business to its new owner.

None of these warning signs automatically means walking away. They are prompts to ask harder questions, adjust the price or terms, or get advice before you commit to anything.

The numbers do not hold together

Financial statements are where most problems first appear. Be cautious if:

• The seller says the real profit is higher than the books show. Income that was never reported is income you cannot verify, a lender is unlikely to count, and that may carry tax problems of its own.
• Records are thin or slow to arrive. Missing tax returns, bank statements that do not match the sales figures, or financial statements prepared in a hurry for the sale all need explaining.
• Revenue jumped just before the listing. A recent spike may be real, or may reflect one-off sales or deferred expenses.
• A few customers make up most of the sales. If one or two contracts drive the business, find out whether they can be ended or will follow the seller.
• "Add-backs" do most of the work. Sellers often add personal expenses back to show higher profit. Each add-back should be backed by documents.

The business depends on the owner

Many small businesses run on the owner's personal relationships, skills or reputation. Warning signs include key customers or suppliers who deal only with the owner, licences or accounts held in the owner's personal name, and no staff who can run things day to day. Ask what the seller will do to hand over relationships, how long they will stay to help with the transition, and whether they will agree not to compete with you afterwards.

The lease is short or uncertain

For a retail or restaurant business, the location is often the business. Check how much time is left on the lease, whether there is a renewal option, what the rent will be, and whether the landlord must consent to an assignment or a change in control. A lease that ends soon after closing, with no renewal right, can wipe out the value you are paying for. Our article on lease assignments when buying a business explains what to look for.

Unpaid taxes and debts that can follow the business

Some liabilities stay with the business or pass to the buyer. Two common examples:

• Provincial sales tax. The Province says a buyer of a business's assets who does not obtain a clearance certificate is liable for an amount equal to any PST the seller still owes. A buyer can apply online or with form FIN 447, with the seller's consent. A seller who resists this request is a red flag.
• Share purchases. If you buy the company's shares rather than its assets, the company keeps all of its history, including debts, tax issues and claims. Our guide to share purchases versus asset purchases explains the trade-offs.

Also watch for equipment that is leased or financed rather than owned, registered security interests against business assets, and any lawsuits or disputes the seller has not mentioned. Our article on liabilities a buyer can inherit covers these in more detail.

Employee obligations come with the business

Under section 97 of BC's Employment Standards Act, when all or part of a business is disposed of, an employee's employment is treated as continuous for the purposes of that Act. If you keep the staff, their years of service may come with them. Ask for a list of employees with start dates, wages and accrued vacation, and look for workers described as contractors who may in fact be employees. Our article on employees when a business is sold explains the options.

The seller's behaviour

Sometimes the warning sign is how the deal is being run:

• pressure to sign quickly or pay a large non-refundable deposit before you have seen the records;
• reluctance to provide documents even after you offer to sign a confidentiality agreement;
• resistance to conditions such as financing, due diligence or landlord consent;
• permits or business licences that have lapsed or are held by someone else;
• explanations that change from one meeting to the next.

What to do when you spot one

A warning sign is a reason to dig deeper, not necessarily to walk away. Depending on what you find, the answer may be a lower price, part of the price held back until a risk passes, an indemnity from the seller, or a condition you can rely on to end the deal. A letter of intent lets you set out the key terms and your access to information before the binding agreement is drafted, and our due diligence checklist shows what to check next.

Found a business you like? Talk to us before you make an offer

Our business purchase and sale lawyers can review the listing information and seller documents with you, flag the issues that need checking, and structure your letter of intent and purchase agreement to deal with them.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.