When a Disclosure Schedule Item Came Back to Bite the Buyers

The situation

Craig, Beth and Yanni had worked together for years at a home care staffing agency in Kingston that placed personal support workers and nurses with clients recovering at home. Craig ran the scheduling systems and IT support for the agency's roughly 40-person office and field staff. Beth, a registered nurse, was the clinical director who set care protocols and vetted new hires. Yanni managed day-to-day operations. When the founder decided to retire, the three of them pooled savings, brought in a silent minority investor, and arranged financing to buy the business themselves rather than watch it sell to an outside buyer who might gut the team that had built it.

The deal priced out at roughly $22 million, reflecting the agency's client contracts, its trained workforce, and several years of steady revenue. Structuring a purchase like this as a share purchase — buying the company itself rather than just its assets — meant the buyers would step into the seller's shoes for essentially everything the company had ever done, including liabilities nobody had yet discovered. That is the entire reason representations and warranties exist in a purchase agreement: they are the seller's contractual promises about the state of the business, and they are what lets a buyer allocate the risk of the unknown back to the person who actually ran the company before the sale.

What the disclosure schedule revealed

A representation and warranty is only as strong as its exceptions. Standard warranties in a purchase agreement say things like "the company is in compliance with all applicable employment laws" or "there is no pending litigation or regulatory proceeding against the company." Attached to those warranties is a disclosure schedule — a separate document where the seller lists every exception to that clean promise. Anything properly disclosed on that schedule is, legally, no longer a breach of warranty. The buyer bought the business knowing about it, priced it in (or should have), and generally cannot later sue for a loss connected to a disclosed item.

Buried on page eleven of this seller's disclosure schedule, under a heading for regulatory matters, was a single line: a reference to an open file with the employment standards branch relating to overtime calculation for shift workers, with no further detail and no estimate of exposure. It was the kind of entry that is easy to skim past in a stack of forty pages of schedules, especially when everything else in the file looked routine — leases, insurance policies, a couple of expired supplier contracts.

Our team flagged it during the diligence review specifically because of how thin the disclosure was. A one-line reference without a description of the underlying facts, the number of employees potentially affected, or the agency's position on the complaint told us almost nothing about the actual size of the risk. We asked the seller's counsel for the underlying correspondence with the regulator. What came back showed the complaint had been open for over a year and involved a scheduling practice — rounding shift start and end times in a way that under-calculated overtime — that plausibly affected most of the field staff, not just the one employee who had filed the original complaint.

What we did

1. Pushed for a fuller disclosure before treating the item as closed. A vague line in a schedule does not tell a buyer what they are actually accepting. We required the seller to supplement the disclosure with the regulator's correspondence and the agency's own internal review of its overtime calculations, so the buyers were pricing a known risk rather than a guess.
2. Negotiated a specific indemnity holdback tied to the item. Rather than relying on the general indemnity cap that applied to the deal as a whole, we negotiated a separate holdback of roughly $250,000 held in escrow for eighteen months after closing, earmarked specifically against the overtime issue. This mattered because general indemnity provisions often carry a threshold — a minimum loss amount before a claim can be made at all — and a dedicated holdback avoids that fight entirely for a known risk.
3. Kept the survival period long enough to matter. Representations dealing with employment and regulatory compliance were carved out to survive for a longer period than the general warranties, which is standard practice for exactly this kind of slow-moving liability that a regulator can take a year or more to resolve.
4. Documented that partial disclosure does not fully protect the seller. The purchase agreement specified that the holdback could be drawn against any loss connected to the overtime matter, not just amounts exceeding what a generic reading of the disclosure schedule might have suggested was disclosed. This closed the gap that sellers often rely on — a technically-true but incomplete disclosure that later gets argued as covering more than it did.
5. Advised the buyers to keep operating the agency's scheduling practices unchanged pending the regulator's decision. Changing the disputed practice mid-review can look like an admission or complicate the regulator's assessment of past liability; we recommended the buyers document the practice going forward separately from resolving the historical claim.

The outcome

About nine months after closing, the regulator issued its finding. The agency had, in fact, under-calculated overtime for approximately 45 field staff over roughly two years before the sale, through the rounding practice the seller had known about but never fully corrected. The order required back pay of roughly $190,000 plus statutory penalties, and the agency's own legal and administrative costs to respond to the order and process the corrected payroll added a further $45,000 or so. All told, the buyers were looking at a liability of roughly $235,000 connected to conduct that happened entirely before they owned the company.

Because the item had been disclosed, even thinly, the seller's counsel argued that the general warranty about employment law compliance no longer applied to it at all — the standard "you knew, you can't claim" position. That argument would have left the buyers absorbing the full amount themselves had the purchase agreement stopped there. It did not. The dedicated holdback we had negotiated specifically for this item covered $250,000, and because the agreement was drafted to reach the full loss connected to the matter rather than some narrower reading of what the schedule had disclosed, the buyers were able to draw the entire $235,000 liability from the escrowed funds rather than from the company's operating cash or their own pockets.

It was not a clean win. The buyers still had to manage a difficult nine months of uncertainty, correct the agency's payroll practices under regulatory scrutiny, and have an awkward conversation with staff about back pay owed for work performed under the previous owner. Had the holdback not existed — had the deal simply relied on the general indemnity cap and threshold that applied to everything else — the outcome would likely have gone the seller's way, given how easily a one-line disclosure can be stretched to cover a much bigger problem than it appears to describe. The loss was real. It was also fully contained to funds that had already been set aside for exactly this possibility, rather than becoming a hole in the business the three new owners had to fill themselves.

What you can learn from this