Buying a Business: What Should You Be Checking in Their Numbers?

You are checking three things, and each finding has only three uses

Financial due diligence sounds like an audit, but its logic is simpler and more commercial. First: are the earnings real, meaning would this business produce this profit for a stranger who owns it, rather than for this seller with their particular salary, perks and family arrangements. Second: will the earnings continue, or do they depend on a customer, a contract, a supplier price or the seller personally, in ways that change the day you take the keys. Third: what exactly transfers to you, which assets, which liabilities, and in a share purchase, the corporation's entire history, filed and unfiled.

Hold every finding against three possible uses, because diligence that does not change anything is tourism. A finding either changes the price, through a lower offer or a working capital adjustment; changes the structure, through holdbacks, indemnities, an earn-out or a switch from shares to assets; or ends the deal. Deciding which use each finding serves is judgment work, and it is why diligence belongs in the hands of someone who has read many sellers' books rather than one. We set out where a CPA enters the timeline, ideally before the letter of intent is signed, in when your CPA should become involved in an acquisition.

One calibration note before the checklist: most private sellers will hand you compilation-level statements, not audited ones. That is normal and not a red flag in itself; it simply means the statements are the seller's numbers assembled by an accountant, not verified by one, so your diligence supplies the verification. Ask for three to five years of statements, the corporate tax returns behind them, and the HST and payroll filings, then check that they all tell the same story, because the gaps between those documents are where problems live.

Start the work with a written request list, because it sets both the tone and the timeline: statements and corporate tax returns for three to five years, HST and payroll filings, aged receivable and payable listings, a general ledger export, bank statements for at least the trailing year, revenue by customer by year, the debt and lease agreements, and any CRA correspondence. A seller who resists producing the basics is telling you how the rest of the process will go, and that finding arrives usefully early, before your deposit and your legal bills grow.

Normalize the earnings before you believe them

The profit on a private company's statements is a number the owner chose, legally and rationally, to manage their own tax, and your first job is to undo those choices to find what the business earns on its own. This normalization, buyers and lenders call the formal version a quality of earnings analysis, walks item by item:

• Owner compensation to market. Replace what the owner actually paid themselves, salary, dividends, bonuses, with what you would pay a manager to do their job; the adjustment runs in either direction
• Personal expenses out. Vehicles, travel, insurance, the phone plan, family members on payroll beyond what their work supports: add back what is genuinely personal, and be skeptical of a seller's list that adds back everything
• Market rent in. If the seller's holding company owns the building at a friendly rent, restate to the rent you will actually pay, because that difference is often the largest single adjustment in the file
• One-time items removed, both directions. The insurance recovery and the government subsidy come out of earnings; the flood repair and the lawsuit come out of expenses
• Accounting choices smoothed. Depreciation policy, inventory costing, revenue timing around year-ends: consistent treatment across the years so the trend is real

The result is normalized earnings, the number the price should be a multiple of, and it is routinely well away from the bottom line on the statements. Then test the trend of that normalized number across the years, not just the latest one, because a seller preparing for sale has had two years to make the recent numbers presentable. On cash-heavy businesses, one hard rule keeps buyers out of trouble: you cannot pay for revenue that is not on the books. A seller who hints that the real earnings are higher than reported is asking you to pay for unreported income while they keep the tax exposure story vague; decline both halves of that offer.

On smaller deals, be precise about which earnings measure the price multiple refers to, because sellers and brokers often quote seller's discretionary earnings, a measure that adds back the owner's entire compensation on the theory that the buyer will work in the business full time. Normalized earnings after a market manager's wage and discretionary earnings before any wage can sit far apart, and a fair-sounding multiple applied to the wrong base is how careful-feeling buyers overpay.

Test the revenue, not just the total

A revenue line can be exactly accurate and still hide the thing that kills the deal, so pull it apart by customer, by type and by time. Concentration is the classic finding: if one customer is a third of revenue, you are not buying a business so much as a relationship you do not yet have, and the price, or an earn-out tied to that customer staying, should say so. Ask directly what is contractual and what is habitual, whether contracts survive a change of control, and whether any key account is really the seller's personal friendship wearing a purchase order.

Then split recurring from one-time. Maintenance contracts, subscriptions and repeat-order customers deserve a different multiple than project wins that must be re-sold every year, and sellers blur that line at exactly this moment. For project businesses, contractors especially, read the work-in-progress schedule with care: how much of the recent profit sits in estimated percentages of completion on unfinished jobs, whether historical estimates proved right, and which jobs you would inherit at what margin. Deposits and deferred revenue are the mirror image, money already collected for work you would have to deliver, which is a liability you are buying even when the balance sheet presents it quietly.

Finally, put the revenue against its costs and check the margin's story. A stable gross margin across years suggests pricing power and honest costing; a margin that jumped recently demands an explanation, a supplier change, a price increase that may not hold, or costing that moved. Where the answer is a real improvement, it should be visible in supplier invoices and price lists, not only in the statements.

Verify the forward book, not just the history. Backlog, signed orders and the pipeline the seller describes should reconcile to contracts you can actually read, and seasonality should be tested across full years, so a purchase negotiated after the strong season is not priced off the strong season alone. Twelve months of monthly revenue, plotted on one page, answers more questions than most schedules in the data room.

Read the balance sheet as a list of coming surprises

The income statement tells you what the seller says the business earns; the balance sheet tells you what you will actually live with in the first year. Work it line by line, asking of each item: is it real, is it worth its carrying value, and does it transfer to me.

The balance sheet work funnels into one negotiation: working capital at close. A business needs fuel in the tank, receivables, inventory and payables at normal levels, to run its first months, and a seller can quietly drain that tank before closing by collecting hard, stretching suppliers and letting stock run down. The protection is a working capital target written into the agreement: normal working capital defined from the historical average, delivered at close, with a price adjustment either way. Getting that definition right is worth more than most of the price haggling that gets ten times the attention.

Then hunt for what the balance sheet does not show. Warranty obligations owed to customers, guarantees the corporation has signed for others, gift cards and customer deposits, unresolved disputes, and any CRA review already in progress are real liabilities that live in agreements and correspondence rather than in the trial balance. The request list should ask for each of them by name, because no line item volunteers them, and sellers rarely do either.

In a share deal, you inherit the tax history, so audit it

Deal structure changes what diligence must cover, which is why the structure decision and the diligence plan travel together. In an asset purchase you choose the assets, leave most liabilities behind, and step into fresh tax cost on what you buy; the diligence weight sits on the assets themselves and on what liens attach to them. In a share purchase you acquire the corporation whole, every filed return, every unfiled obligation, every position CRA has not yet looked at, and the diligence weight shifts hard onto tax history. Sellers usually prefer shares, because a qualifying share sale can shelter the gain under the lifetime capital gains exemption, so share deals are common and the price often reflects that preference. The full trade-off sits in asset purchase versus share purchase.

When shares are the structure, the tax file gets its own checklist: corporate returns filed and assessed, with balances current; HST collected, remitted and reconciled to the revenue on the statements; payroll source deductions clean, because unremitted amounts carry personal exposure for directors and you are about to become one; and any past positions, aggressive expense claims, family payroll, dividend arrangements, that could be reassessed on your watch, since reassessment windows run for years. None of these findings necessarily ends a deal. They price it: representations and warranties in the agreement, an indemnity with a seller who will still be findable, and a holdback or escrow large enough to make the indemnity real. A tax problem discovered in diligence is a negotiating chip; the same problem discovered two years after closing is simply your bill.

Make the protections mechanical rather than rhetorical. Representations survive closing for negotiated periods, and the tax representations should survive at least as long as CRA's ability to reassess the years in question; an escrow or holdback gives the indemnity a source of payment that does not depend on finding the seller solvent later; and a specific known exposure is better handled as a price reduction or a specific indemnity than folded into general words. Your lawyer drafts those clauses, but the diligence findings decide what they need to say, which is why the CPA and the lawyer should be reading each other's work.

Diligence, financing and price are one conversation

If a lender is financing the purchase, plan for your diligence to be read twice, because the bank underwriting the acquisition loan will ask your questions all over again: normalized earnings, customer concentration, working capital, and projections showing the business carrying the acquisition debt. Cash flow is the hinge, the deal only works if post-closing cash flow covers debt service with room left for you, and vendor take-back financing, where the seller leaves part of the price as a loan, is both a financing source and the cheapest diligence signal available, since sellers confident in their numbers accept it and sellers who refuse all exposure to their own business are telling you something. Building that package, business financing and projections work by an Ontario CPA firm, is a standing part of our practice under Business Financing Advisory, and lenders also expect ongoing reporting after funding, which your projections should already anticipate.

Five facts, in the end, change what you should pay or whether you should proceed: the quality of the normalized earnings and how far they sit from the reported ones; customer concentration and what survives the seller's departure; the working capital the business truly needs against what will be delivered; the structure, shares or assets, and the tax history that comes with the first; and the financing terms the cash flow can actually carry. Diligence exists to put honest values on those five, and the rest of the purchase decision, tax planning, structure, the closing mechanics, is laid out in buying a business in Canada: financial and tax planning.

Hold the walk-away discipline to the end, because the pressure to close grows exactly as fast as your sunk costs do. The letter of intent should leave diligence a real exit, with findings above an agreed threshold reopening price or terms, and a buyer who decides in advance what evidence would end the deal is the only kind who reliably acts on that evidence when it appears. Most deals survive diligence; the ones that should not are the reason the work exists.

We run financial due diligence for buyers across Mississauga and the GTA as defined-scope work under Strategic Projects: a written findings report, each finding tied to a price, structure or walk-away recommendation, with the financing package built alongside when a lender is involved. Scope and fee in writing after a free 15-minute discovery call, and the best time to start is before the letter of intent locks the price.