When Due Diligence Uncovered Inflated Numbers in Collingwood

The situation

Tesfay had spent almost fifteen years as an office manager, the last several running the administrative side of a busy veterinary clinic near Collingwood. He knew the business from the inside: the appointment flow, the supplier relationships, which weeks of the year were quiet and which were not. When the clinic's owner, Natalia, mentioned she was ready to retire and wanted to sell to someone who would keep the practice running the way she had built it, Tesfay decided to buy it himself rather than watch a stranger take it over.

The asking price was based on a multiple of the clinic's reported annual earnings, a common way to value a small professional practice. The seller's accountant had prepared a summary showing the business earning a healthy, stable income each year, with a set of add-backs — expenses added back into the earnings figure on the theory that a new owner would not have to pay them. Tesfay's own lender wanted an independent set of eyes on the numbers before it would commit to financing anywhere close to the roughly $1.1 million asking price, which sat toward the lower end of the range typical for an incorporated professional practice of this size. Tesfay came to us to run due diligence properly before he signed anything binding.

What due diligence found

Add-backs are a normal part of valuing a small business. An owner who pays themselves a personal vehicle lease through the company, or who runs a family member's cell phone bill through the books, can reasonably argue a new owner would not carry that same cost, so it gets added back to the earnings used for valuation. The trouble starts when add-backs stretch past what a buyer would genuinely avoid paying, inflating the earnings figure the purchase price is built on.

Working with Bohdan, an accountant retained for the transaction, we requested three years of financial statements, bank records, and the general ledger entries behind every add-back on the seller's summary. Several held up: a life insurance policy on the owner personally, a one-time renovation cost, a family trip billed as a conference. Others did not survive contact with the underlying records. A locum veterinarian's fees, brought in to cover the owner's medical leave the prior year, had been added back as a one-time cost — but the ledger showed the clinic had used locum coverage in each of the three years reviewed, at a similar cost each time. That was not a one-time expense being stripped out; it was an ordinary, recurring cost of running the practice that the seller's summary had quietly excluded from the numbers a buyer would actually face.

A second item raised a similar concern. The seller had added back roughly $40,000 in "one-time" equipment repairs, but invoices showed comparable repair costs in each of the two prior years as well — aging equipment that would keep needing this kind of spending, not a single unusual event. Added together, the two questionable items were inflating reported annual earnings by close to $65,000, on a business whose real normalized earnings were closer to $210,000 than the roughly $275,000 the seller's summary implied. At the valuation multiple both sides had informally discussed, that gap alone was worth well over $150,000 of the purchase price under negotiation.

None of this pointed to deliberate fraud. The seller's accountant appeared to have applied an aggressive but not uncommon approach to add-backs, treating recurring operating costs as one-time items because they varied in size year to year. But an aggressive add-back is still a number a buyer should not pay for, and Tesfay's lender would not finance a purchase price built on earnings the underlying records did not actually support.

What we did

1. Had the earnings independently normalized. Rather than argue add-back by add-back with the seller directly, we asked Bohdan to prepare a normalized earnings figure using only add-backs the ledger and invoices could support as genuinely one-time or personal in nature. This gave Tesfay a defensible number to negotiate from, rather than a general objection to the seller's math.
2. Presented the findings to the seller's side with the supporting records attached. Each disputed add-back was raised alongside the specific invoices or ledger entries showing it recurred year over year. Framing the disagreement around the seller's own documents, rather than around Tesfay's opinion of what was fair, kept the conversation focused on the numbers rather than becoming personal or adversarial.
3. Renegotiated the purchase price against the normalized figure. Using the corrected earnings of roughly $210,000 and the same valuation multiple both sides had already accepted as reasonable, we proposed a revised price of roughly $940,000, down from the original $1.1 million. The seller's own advisor, once shown the recurring nature of the locum and repair costs, agreed the original figure could not be supported to a lender.
4. Added earnings representations to the purchase agreement. The final agreement included a specific promise from the seller that the financial statements and add-back summary provided during due diligence were accurate and complete, giving Tesfay a contractual remedy if a further, undisclosed problem surfaced with the historical numbers after closing.
5. Built a short survival period for financial claims. The representations about the financial statements were set to survive closing for a defined period, long enough to cover at least one full cycle of the clinic's accounting and tax filings, so any error that only became visible after a year-end close could still be raised.
6. Coordinated the revised numbers with Tesfay's lender. The financing commitment had been conditional on the earnings figure the lender's own underwriting supported. We provided the normalized earnings analysis directly to the lender's commercial team so the loan terms lined up with the corrected purchase price rather than requiring a second round of underwriting delay.

The outcome

The deal closed roughly ten weeks after due diligence began, at the revised price of about $940,000 rather than the original $1.1 million asking figure — a reduction of roughly $160,000 once the negotiated adjustment and closing terms were finalized. The seller accepted the outcome without dispute once the recurring nature of the locum and repair costs was laid out against her own records; she had not set out to mislead a buyer, and the corrected number still reflected a fair, sellable business.

Tesfay took over a practice priced against earnings his own lender could underwrite with confidence, rather than a figure that might have left him unable to service the debt in a normal year once the true recurring costs reasserted themselves. A year after closing, the clinic's earnings tracked closely to the normalized figure used in the purchase price, including a comparable locum and repair spend to what due diligence had flagged — confirmation, after the fact, that the adjustment had reflected the business as it actually ran rather than a worst-case reading of the seller's books.

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