How to avoid the pitfalls when buying a trucking business
The process for buying a trucking company is not identical to the purchase and sale of other types of companies. There are different considerations to be mindful of, and pitfalls that can occur without the proper due diligence.
A purchase can proceed as a share purchase or an asset purchase. In some cases, the parties may also decide to engage in a merger.
With a share purchase, the buyer will purchase all of the issued and outstanding shares in the capital of the trucking company from its shareholders. By purchasing these shares, the buyer becomes the new shareholder of the company, which retains all its assets and liabilities.
With respect to an asset purchase, the buyer can pick and choose exactly which assets it would like to purchase from the trucking company and choose which liabilities it wishes to assume.
In the case of a merger, the trucking company and the buyer will amalgamate to create a new corporation, which will inherit all of the assets and liabilities of the trucking company and buyer.
The due diligence
The due diligence process should start before the structure of the transaction and purchase price are in final form. Through this process, the buyer will try to learn as much as it can about the seller’s operations and identify any “red flags”. This process is meant to provide the buyer with an opportunity to confirm any operational, regulatory or financial risks, and to ensure there are no additional risks that have not yet been disclosed by the seller.
This process is key because, if the due diligence reveals any major issues, the buyer can use this as leverage to push down the purchase price, or change the deal’s structure. This could involve requiring a portion of the purchase price to be held back or placed in escrow for one to two years after closing, as security against claims that the buyer might have against the seller. If there are any major last minute surprises, the buyer could even decide to walk away from the deal.
It is important to ensure that the buyer utilizes lawyers with industry experience. We have often been asked to get involved in a transaction at the last minute or post-closing to deal with repercussions of regulatory issues that were not identified early on in the transaction. Having knowledgeable corporate counsel can help to avoid these pitfalls.
Avoid the pitfalls
Here are just a few examples of things to be mindful of when completing due diligence:
- Permits and Registrations – Review the target trucking company’s safety fitness certificates, operating authorities (where applicable) and other licences, permits and registrations that are central to its operations. This type of due diligence will avoid a situation where there is not enough time to transfer a registration before the deal closes, or a last-minute realization that one of these key registrations cannot be transferred.
- Carrier safety — The target’s carrier safety program, safety ratings and driver training records should be reviewed. This review should identify any safety and operational concerns so the buyer is not left trying to remediate a poor safety record after closing. A poor safety record could taint the buyer’s existing safety record – directly in cases where parties merge, or indirectly when the Ministry of Transportation’s carrier profile is updated so that the target company shares some of the same directors and officers.
The ministry could come to believe that these directors or officers are incapable of running a safe trucking business because of their connection to a purchased company’s poor record.
- Driver misclassification — Details regarding the targeted company’s relationships with drivers and independent contractors should also be carefully reviewed. This will involve a look at owner-operator agreements and practical relationships to ensure drivers are not misclassified as “dependent contractors” or employees.
The fact that the driver has incorporated their own company may not be enough to avoid misclassification, especially considering the phenomenon known as Driver Inc. If the driver has been misclassified, the trucking company could be liable for certain payments in arrears, such as workers compensation premiums. Or the driver could be entitled to things like termination notice under employment law.
- Merger Review under the Canada Transportation Act — Very large transactions involving extra-provincial and cross-border motor carriers may be subject to filing obligations under the Competition Act and a “public interest” review by the federal transportation minister. Buyers and sellers should turn their minds to this issue as early as possible in the due diligence process. At a minimum, these requirements will affect the timing of closing, and there are significant penalties for non-compliance.
The due diligence process is extremely important when purchasing a trucking company. There are many regulatory issues specific to the transportation industry that need to be considered and reviewed.
While the buyer should definitely engage in this industry-specific due diligence prior to determining the deal structure and purchase price, it may also be a useful exercise for the seller to complete when it is considering selling its business, to determine in advance what key issues and barriers it may face as part of the transaction process.
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