Buying a Business in Canada: Due Diligence & Valuation Guide to Avoid Getting Duped

Buying a business in Canada is one of the biggest financial decisions you will ever make.
For many entrepreneurs, it represents years of hard work, savings, financing approvals, and personal sacrifice finally coming together.

When you find the right opportunity; an established business with revenue, staff, systems, and a track record. It’s exciting.
You start imagining growth, stability, and what life looks like once you own the business.

But this is also the moment where buyers make their most expensive mistakes.

Without proper due diligence, business valuation, and independent verification, buyers risk overpaying, inheriting hidden liabilities, or purchasing a business that cannot sustain itself long-term.

Before you sign an LOI, wire a deposit, or trust a broker’s summary, you need to slow down and verify the facts.

And you should never do it alone.

Your Deal Team is The Foundation of Smart Due Diligence

Every successful business acquisition relies on a deal team — professionals whose role is to protect your capital, your future, and your peace of mind.

A proper deal team is built on three pillars:

Financial Due Diligence is Where the Truth Lives

Financial due diligence is handled by an experienced accountant or valuation professional.
This is where deals are confirmed — or quietly fall apart.

Financial due diligence verifies:

• Whether revenue is real and repeatable
• Whether expenses are understated
• Whether add-backs are legitimate
• Whether EBITDA has been inflated
• Whether CRA filings are clean
• Whether cash flow supports financing
• Whether margins are stable or declining
• Whether liabilities exist but are undisclosed
• Whether the seller’s story matches the documents

Sellers sell potential.
Financial due diligence uncovers reality.

Legal Due Diligence is Protecting You From Hidden Risk

Legal due diligence ensures the business is safe to own.

Your lawyer reviews:

• Lease terms and assignment conditions
• Supplier and franchise agreements
• Employee contracts and obligations
• Customer contracts
• Corporate minute books
• Liens and encumbrances
• Regulatory and licensing compliance
• Lawsuits or contingent liabilities
• Asset purchase vs. share purchase risk

Financial due diligence answers: “Does this business make money?”
Legal due diligence answers: “Can this business hurt me?”

Financing & Lender Review is Because the Bank Has a Vote

Even though this article focuses on buyer due diligence, it’s important to understand:

Banks conduct their own due diligence.

Lenders evaluate:

• Cash flow coverage
• Industry risk
• Historical performance
• Borrower experience
• Collateral
• Repayment capacity

If a bank won’t finance the deal because the numbers don’t make sense, that is a signal is not an inconvenience.

Share Purchase vs. Asset Purchase and What Buyers Must Understand

Deal structure plays a major role in risk.

There are two primary ways to buy a business in Canada:

Share Purchase (Buying the Corporation)

Pros

• Seller may qualify for the Lifetime Capital Gains Exemption (LCGE)
• Contracts, licences, and leases often remain intact
• Can simplify continuity in some industries

Cons

• Buyer inherits all historical liabilities
• CRA issues follow the corporation
• Payroll, HST, WSIB, and legal exposure transfer to the buyer
• Requires much deeper due diligence

Sellers often push share sales because LCGE can save them hundreds of thousands in tax.
Buyers assume significantly more risk.

Asset Purchase (Buying the Assets Only)

Pros

• Buyer selects which assets and liabilities to assume
• Avoids most historical tax and legal exposure
• Cleaner structure
• Easier to value
• Preferred by lenders

Cons

• Some contracts or licences may require reassignment
• Slightly more transition work

For most buyers, asset purchases are cleaner, safer, and easier to finance.

The Financial Due Diligence Checklist

Before committing to a deal, request the following documentation.

Financial Records

• 3–5 years of financial statements
• General ledger
• Trial balance
• Bank and credit card reconciliations
• Inventory valuation reports
• Year-end accountant working papers

Tax Filings

• Corporate T2 returns
• Schedule 100, 125, and 8
• CRA Notices of Assessment
• HST filings and NOAs
• Payroll records (PD7A, T4/T4A, WSIB)

Operational Records

• POS reports
• Accounts receivable aging
• Accounts payable aging
• Staff lists and payroll summaries
• Vendor statements
• Customer concentration reports

Missing or delayed documentation is a major red flag.

Recasting EBITDA is The Core of Business Valuation

Sellers present Adjusted EBITDA.
Buyers must verify it.

Generally Acceptable Add-Backs

• One-time professional fees
• Owner discretionary expenses
• Family wages not tied to real work
• One-time equipment repairs

Questionable Add-Backs

• Removing all owner salary
• Removing rent when rent is required
• Cash income estimates
• Large adjustments without documentation

Often Invalid Add-Backs

• Removing recurring repairs
• Removing utilities or insurance
• Over-normalizing revenue
• Adding back interest when buyer debt continues

If EBITDA needs heavy massaging, valuation risk increases.

Business Valuation is Determining Fair Market Value

A proper valuation considers both earnings and risk.

Normalized EBITDA

Recalculated using verified data — not seller assumptions.

Industry Multiples (Typical Ranges)

• Restaurants: 1–2x
• Retail: 1–2x
• Construction & trades: 2–4x
• Pharmacies: 3–6x
• Clinics & salons: 1.5–3x

Multiples increase with recurring revenue and stability.
They decrease with risk, volatility, and poor documentation.

Red Flags vs. Green Flags

Red Flags

• Missing CRA filings
• Unreconciled accounts
• Heavy reliance on cash
• Inconsistent inventory
• Unexplained add-backs
• Short or unfavourable leases
• Seller resisting disclosure
• Aggressive push for a share sale

Green Flags

• Clean, reconciled books
• Stable margins
• Consistent revenue
• Low owner dependency
• Strong staff retention
• Clear systems and processes
• Lender confidence

Why Due Diligence Is Not Optional

Due diligence is not paperwork.
It is risk management, wealth protection, and confidence.

Your future deserves verification — not assumptions.

Why MiAccounting’s CEPA Accreditation Matters

Most accountants can read financial statements.
Very few can assess whether a business is safe, transferable, financeable, and fairly priced.

What Is CEPA (Certified Exit Planning Advisor)?

CEPA is an advanced international designation from the Exit Planning Institute, focused on:

• Business valuation
• Risk assessment
• Transaction strategy
• Intangible asset evaluation
• Value acceleration methodology

CEPA-trained advisors evaluate businesses using financial, operational, legal, and market frameworks — giving buyers a complete picture.

Our Valuation Methodology

• Value Acceleration Methodology™
• Intangible Capital Analysis (Human, Customer, Structural, Social)
• Business Risk Scoring
• Independent EBITDA Verification

Every add-back is tested.
Every assumption is challenged.

Final Takeaway: Fall in Love With the Data, Not the Listing

A business can look perfect.
It can sound perfect.
It can feel like destiny.

But emotion doesn’t protect your money.
Due diligence does.

👉 Before you buy a business, speak with MiAccounting.
We help buyers avoid getting duped — and buy with confidence.

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