Buying A Toronto Business: The Diligence That Found $1.75 Million

The situation

Gurpreet had built and sold a small business years earlier and had been looking for the right next venture ever since. His wife Harpreet, an investment advisor, brought the financial discipline to the search. Together they had been watching the market for an established online business — something already generating revenue, with systems in place, that they could run as a couple rather than start from nothing.

They found it in a direct-to-consumer subscription brand that had been built up over roughly a decade by its founder, Amalia, who was ready to retire. The business was listed through a broker at an asking price of about $7,000,000, based on trailing twelve-month earnings of roughly $1,400,000 and an agreed multiple of five times earnings — a common way online businesses are priced, since there is no physical real estate or inventory-heavy balance sheet to anchor the number against.

For Harpreet and Gurpreet, this was meant to be a straightforward transition: the seller had already agreed in principle to stay on for a short handover period, the customer base looked stable on paper, and the multiple itself was in line with what similar subscription businesses had recently sold for. The main open question, as they saw it, was financing and timing, not the underlying number. Harpreet and Gurpreet signed a letter of intent, then a conditional agreement of purchase and sale, and came to Treadstone Law to handle the legal due diligence and closing.

What the deeper review found

The couple's accountant had already reviewed the seller-prepared financial summaries and found them consistent on their face: revenue up year over year, healthy margins, a clean profit and loss statement. That kind of review is standard, and it is often where diligence stops. Our team's role was to go a layer deeper — to ask for the underlying data behind the summary, not just the summary itself.

We requested the business's raw payment processor statements, its advertising platform spend reports, and a monthly breakdown of revenue by product line and customer, rather than relying on the year-end figures the seller's bookkeeper had prepared. Two things emerged from that data that the summary financials had smoothed over.

First, in the four months before the business was listed for sale, advertising spend had been cut sharply — by more than half — while revenue held roughly steady. That is not, on its own, evidence of anything improper. A business can coast for a few months on customers it already acquired, on repeat orders and email lists built up over prior years of marketing. But it means the trailing profit margin used to set the asking price was propped up by a temporary pause in the very spending that had built the customer base in the first place. A buyer who kept spending at the reduced rate would likely see revenue decline; a buyer who resumed normal marketing spend would see the true, lower margin the business had been running at all along.

Second, one of the final months in the trailing period included a single bulk wholesale order to one business customer worth roughly $250,000 — a one-time transaction, not a recurring feature of the business, but counted in full toward the trailing revenue and earnings the multiple was applied to.

Put together, the reported trailing earnings of about $1,400,000 included roughly $250,000 in one-time revenue and were flattered by several months of unsustainably low marketing spend. A normalized figure — what the business would actually earn under steady, ongoing operation — came out closer to $1,050,000. Applied to the same five-times multiple the parties had already agreed on as fair, that difference alone moved the justified price from about $7,000,000 to roughly $5,250,000.

What we did

1. Asked for source data, not summaries. The seller-prepared financial statements told a consistent story, but a story is only as good as the numbers behind it. We requested payment processor exports and advertising spend reports directly, which is where the discrepancies actually surfaced.
2. Traced revenue and spend month by month. A single bad month can be noise. A pattern — spend falling while revenue holds — across four consecutive months is not. Laying the two trends side by side made the picture unmistakable, and gave the clients a concrete basis for renegotiation rather than a vague sense that something felt off.
3. Flagged the one-time order for exclusion. A single unusual sale to a single customer, evident from the transaction-level data, does not belong in a figure meant to represent ongoing, repeatable earnings. We proposed removing it from the trailing earnings calculation entirely.
4. Went back to the seller's lawyer with a normalized number. Rather than walking away or accusing anyone of misrepresentation — the softer ad spend and the bulk order were both real, disclosed transactions, just not flagged as unusual — we presented the adjusted earnings calculation and reopened the price discussion on the multiple both sides had already accepted as fair.
5. Negotiated stronger representations and an escrow holdback. Beyond the price adjustment, we built in contractual promises from Amalia that the financial statements were accurate and complete, backed by roughly $500,000 of the purchase price held in escrow for twelve months after closing, available to the buyers if the business's real performance fell short of what the adjusted numbers projected.

The outcome

Amalia's lawyer pushed back initially — the ad spend reduction and the bulk order were both real events, not fabrications — but accepted that a buyer paying five times earnings is entitled to five times normal earnings, not five times a temporarily inflated number. The parties settled on a purchase price of roughly $5,250,000, reflecting the normalized trailing earnings of about $1,050,000 at the same multiple, plus the twelve-month escrow holdback of roughly $500,000 as a further protection.

The deal closed several weeks later than originally planned, since renegotiating the price and drafting the escrow terms took time neither side had budgeted for. Diligence had done its job going in: the couple avoided paying $7,000,000 for a business that could not sustainably earn what that price implied.

It did not, however, make the business risk-free. Within the first year of ownership, revenue softened further than even the normalized projection anticipated — more of the customer base built during the low-spend months churned away than the adjusted model assumed, a real risk in any subscription business and one that no amount of diligence eliminates entirely. Earnings came in roughly $150,000 below the adjusted projection for the year.

Because the escrow holdback had been negotiated at closing, Harpreet and Gurpreet were able to make a claim against it rather than simply absorbing the shortfall. Making that claim was not automatic — it required documenting the actual year-one earnings against the adjusted projection, and a round of correspondence with Amalia's lawyer before the escrow agent released the funds. They recovered roughly $150,000 from the escrowed funds, which offset the gap in full. The lesson for the couple was a real one: even careful, source-level diligence narrows the risk in buying a business, it does not remove it. Customer behaviour after a change of ownership is genuinely hard to predict, no matter how thoroughly the historical numbers are checked. What limited their actual loss to zero was not the diligence alone but the contractual protection negotiated alongside it — the two worked together, not as substitutes for each other.

What you can learn from this