When Due Diligence Uncovered Inflated Numbers in Collingwood

The situation

Natalia built a small veterinary practice near Collingwood over almost twenty years, incorporating it early on her accountant's advice as it grew from a single exam room into a clinic with a small staff and a loyal client base. Her husband, Bohdan, worked as an insurance adjuster and had gently pushed her for years to put an actual date on retirement rather than simply keep going until she couldn't. When she finally decided she was ready, she did not want to sell to a stranger or to a chain buyer who might change how the practice was run.

Tesfay had worked alongside her for close to a decade as the clinic's office manager, running its scheduling, billing and day-to-day administration. He knew the appointment flow, the supplier relationships, and which weeks of the year were quiet and which were not, arguably as well as Natalia did herself. When she raised the idea of selling to him directly rather than listing the practice publicly, he agreed, and the two of them worked out an asking price with the help of Natalia's own accountant: roughly $1.1 million, based on a multiple of the clinic's reported annual earnings, a common way to value a small professional practice.

Natalia's accountant prepared a summary showing the business earning a healthy, stable income each year, built around a set of add-backs — expenses added back into the earnings figure on the theory that a new owner would not have to carry them. Tesfay's own lender made clear it would not commit to financing anywhere close to that asking price without an independent set of eyes on the numbers first. Natalia came to Treadstone Law to represent her through that scrutiny and get the sale to closing on terms she could actually stand behind.

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 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 a purchase price gets built on — and that trouble lands on the seller as much as the buyer once someone actually checks.

Tesfay's lender retained its own accountant to test Natalia's numbers, and the findings came back with two specific objections. A locum veterinarian's fees, brought in to cover Natalia'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 add-back summary had quietly excluded from the earnings a buyer would actually face.

A second item raised a similar concern. Roughly $40,000 in equipment repairs had been treated as a one-time cost, but invoices showed comparable repair spending in each of the two prior years as well — aging equipment that would keep needing this kind of money, not a single unusual event. Added together, the two 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 original 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 — and it arrived at our desk as the buyer's finding, not something Natalia's own numbers had flagged first.

What we did

1. Tested the buyer's findings against Natalia's own ledger before responding. Rather than treat the objection as an opening bid to argue down on principle, we asked Natalia's accountant to pull the underlying invoices behind both disputed add-backs directly from her own books. The locum and repair costs matched the buyer's numbers almost exactly across all three years, which meant contesting them would have meant contesting Natalia's own records — a losing position however the negotiation went, and one worth knowing before taking a stance publicly.
2. Advised Natalia early that digging in carried more risk than conceding the point. A stalled negotiation over a number her own ledger already supported risked losing the sale entirely to a lender that had already flagged the original figure as unsupportable, at a point when she had told her staff and long-time clients she planned to retire. Conceding a defensible number quickly protected the timeline she actually cared about, rather than a figure she was unlikely to collect regardless.
3. Negotiated the reduced price directly, rather than let the buyer set it unilaterally. Using the same $210,000 normalized figure and valuation multiple both sides had already discussed informally, we proposed the revised price ourselves at roughly $940,000. Putting the number forward from Natalia's side, backed by her own records, kept her in control of the negotiation instead of simply accepting whatever figure the buyer's lender happened to be willing to fund.
4. Narrowed the earnings representations before Natalia signed them. The buyer's lawyer wanted a broad, open-ended promise that the historical financial statements were accurate and complete. We limited the representation to what Natalia's own records could actually support, and negotiated a fixed survival period long enough to cover one full accounting cycle but no longer, so she was not left exposed to a claim years down the road over a good-faith judgment call made at the time.
5. Talked Natalia out of holding firm on the original asking price. Holding out for $1.1 million would not have produced a sale — Tesfay's lender was not going to fund a price its own accountant had already flagged as unsupportable, regardless of how long the negotiation dragged on. We framed the revised number as the price that would actually close, not as a concession from money she was ever realistically going to receive.
6. Coordinated the revised figures directly with the lender's underwriting team. Rather than let the renegotiated price sit while a second full underwriting review ran its course, we provided the lender's team with the normalized earnings analysis and the supporting records as soon as the price was settled, keeping the file moving on close to the original closing timeline instead of triggering a fresh round of delay.

The outcome

The deal closed roughly ten weeks after the buyer's lender first raised its concerns, 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. Natalia accepted the outcome without a fight once her own records confirmed the recurring nature of the locum and repair costs; she had not set out to mislead a buyer, and the corrected number still reflected a fair, sellable practice built over two decades of work.

What Natalia avoided was the alternative: a contested negotiation that dragged past the retirement date she had already told her clients and staff about, or a representation broad enough to leave her answering for a problem years after she no longer had anything to do with the practice. She also avoided the trap of holding out for a number no lender would ever fund, which would have cost her months without changing the eventual price at all.

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 the buyer's due diligence had flagged — confirmation that the adjustment reflected the practice as it actually ran. No claim was ever made against the earnings representations Natalia had signed, and she retired knowing the practice she built had passed, cleanly, to someone who already understood it.

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