- Financial statements, even properly prepared ones, are built from records the seller supplied.
- - [ ] Bank statements against reported revenue.
- Request the underlying source documents early, not just the summarized financial statements — bank statements, tax filings, GST/HST returns, and payroll records for a representative…
A set of financial statements tells you what the seller says the business earned. It doesn't, by itself, tell you whether that's what actually happened. Most small Ontario businesses for sale have compiled or review-engagement statements rather than audited ones, which means the numbers reflect the owner's own records without the level of independent verification an audit would provide. Before you rely on those numbers in an offer, the real work is cross-checking them against other, independent sources.
This article focuses specifically on that verification step — not how to read a financial statement in general, but how to confirm the numbers on it are actually real.
Why "The Seller Said So" Isn't Verification
Financial statements, even properly prepared ones, are built from records the seller supplied. A compilation or review engagement gives an accountant's professional involvement in organizing and presenting those numbers, but it isn't the same as independently confirming every transaction actually happened as described. That distinction matters most for cash-intensive businesses, related-party arrangements, and any business where the owner has strong incentive to present the strongest possible picture before a sale.
Cross-Checks That Reveal Whether the Numbers Are Real
- [ ] Bank statements against reported revenue. Deposits over a representative period should reasonably track the revenue the financial statements report for the same period, accounting for timing differences.
- [ ] Tax filings against financial statements. Corporate tax returns (and personal returns, for an unincorporated business) filed with the CRA should be broadly consistent with what the seller is showing you — a material mismatch is a serious flag, not a rounding issue.
- [ ] GST/HST filings against reported sales. Sales tax filings are based on actual reported sales activity and offer another independent data point to compare against the income statement.
- [ ] Payroll records against reported wage expense. Actual payroll remittances and records should line up with the wage and benefits figures in the financial statements.
- [ ] Merchant and point-of-sale statements against reported daily revenue, particularly for retail, hospitality, and other cash- or card-heavy businesses.
- [ ] Accounts receivable aging against actual collections history, to confirm reported receivables reflect money that's genuinely likely to come in, not just an optimistic balance sheet entry.
None of these cross-checks needs to be perfect to be useful — you're looking for consistency across independent sources, and investigating anywhere a gap shows up.
A Practical Verification Process
- Request the underlying source documents early, not just the summarized financial statements — bank statements, tax filings, GST/HST returns, and payroll records for a representative multi-year period.
- Have your accountant reconcile the key figures against those source documents, rather than accepting the financial statements at face value.
- Ask the seller to explain any gaps directly, and document the explanation — a reasonable explanation for a timing difference is very different from no explanation at all.
- Confirm one-time or unusual items separately, since these can distort a single year's numbers and shouldn't simply be assumed away without support.
- Loop your lawyer in on what the verification uncovers, so the purchase agreement's representations, warranties, and price-adjustment mechanisms properly reflect what you found — or didn't find.
Red Flags That Warrant a Harder Look
- A seller who is reluctant to provide bank statements, tax filings, or GST/HST returns to support the financial statements.
- Reported revenue that consistently outpaces what bank deposits or merchant statements can independently confirm.
- Heavy reliance on undocumented cash transactions that can't be cross-checked against any independent source.
- Significant related-party transactions (loans to or from the owner, payments to affiliated companies) that make the underlying numbers harder to interpret.
- A pattern of "one-time" adjustments or add-backs every single year, rather than genuinely isolated events.
None of these automatically means the deal should end — but each one means slowing down and getting a clearer answer before you rely on the numbers in your offer.
Frequently asked questions
Is verifying financial statements the lawyer's job or the accountant's job?
The verification work itself — reconciling bank statements, tax filings, and payroll records against the financial statements — is your accountant's role. Your lawyer's job is to make sure the purchase agreement's representations, warranties, and any price-adjustment mechanisms properly reflect what that financial verification uncovers.
What if the seller only has compiled financial statements, not audited ones?
That's common for small Ontario businesses and isn't automatically a red flag on its own. It does mean the level of independent assurance is lower, so your own cross-checks against bank statements, tax filings, and other records become more important, not less.
Can I rely on the seller's tax returns instead of doing further verification?
Tax returns are a useful independent data point, but they aren't a complete substitute for broader verification — a return reflects what was reported to the CRA, which still needs to be reconciled against the financial statements and other records to build real confidence in the numbers.
What happens if verification uncovers a real discrepancy?
This depends on the size and nature of the discrepancy and where you are in the process. It might lead to a renegotiated price, additional representations and warranties in the purchase agreement, a longer diligence period, or in a serious case, walking away from the deal entirely.
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