Can undisclosed related-party deals make a business look more profitable than it is?

Yes, and this is one of the more subtle ways reported profitability can be misleading without any single number being outright false. If a business sells to, buys from, employs, or leases space from a company or person connected to the owner, transactions that wouldn't happen on the same terms with a stranger can quietly boost the numbers — below-market rent from a landlord who's also the owner, sales to a related company at inflated prices, or services received without being properly billed at all.

The result can be financial statements that are technically accurate line by line but present a picture that won't survive the relationship ending, since a new owner typically won't have access to those same favourable arrangements. Reviewing related-party transactions specifically, and asking what the numbers would look like on arm's-length terms, is a standard part of proper financial due diligence, not an optional extra.

Ask directly whether the seller, their family, or any affiliated entity has any financial relationship with the business beyond ownership, and get your accountant to model the numbers without those arrangements in place. A Treadstone business lawyer can help build representations about related-party dealings into the agreement.