How Careful Due Diligence Averted a Post-Closing Claim in Guelph

The situation

Taras, a surgeon, and Andriy, a dentist who owns his own practice, had spent nine years building a side venture together: a small group of walk-in health clinics across southwestern Ontario, run day-to-day by a hired management team while both partners kept their primary careers. Neither of them had time to manage the clinics personally, and both had reached a point where the business had become more of a distraction from their medical practices than a source of pride. By the time they decided to sell, the business had grown into something worth real money, and a private buyer group led by a principal named Halima had made an offer of roughly $6,750,000 for substantially all of the business's assets.

The deal was structured as an asset purchase agreement, commonly called an APA, meaning the buyer would acquire the clinics' equipment, leases, contracts and goodwill rather than shares in the corporation itself. Asset deals are common for smaller private businesses because they let a buyer pick which liabilities to assume and leave behind anything unwanted, such as older employment obligations or a lease the buyer does not want to keep. They also mean the purchase price is usually pegged to recent financial performance, since the buyer is paying for a stream of future revenue it has never operated before and has no track record of its own to rely on. Taras and Andriy retained our team once the letter of intent, a non-binding outline of the deal terms such as price, structure and timeline, had been signed and the parties moved into drafting the binding agreement.

Neither partner had been through a business sale before. Their instinct, understandably, was to let the deal move quickly: they trusted the buyer's team, they trusted their own bookkeeper, and they wanted the transaction closed before it consumed any more of their time away from medicine. Our first conversation with them was less about the price and more about what a binding agreement actually promises, and how those promises can outlast the closing date by months or years if something in them turns out to be wrong.

What the review found

Part of preparing an asset purchase agreement is building the disclosure schedule, a set of documents attached to the agreement that lists the seller's contracts, employees, litigation history, and financial figures in detail. The buyer's representations and warranties, promises about the state of the business that the seller is making as fact, are only as good as what sits behind them, so our team asked for the underlying financial records before letting any revenue figures go into the agreement, rather than simply accepting the summary spreadsheet the buyer's advisors had already reviewed.

The clinics had migrated billing systems partway through the prior year, and in that transition, corporate wellness contract revenue from two of the busier locations had been entered into both the old and new systems for a three-month stretch before anyone noticed the duplication. Nobody had done anything wrong on purpose. The bookkeeper had simply carried balances forward during the changeover, treating the new system as a fresh start rather than a continuation, and never reconciled the overlap between the two. Reconciling that kind of overlap is exactly the sort of unglamorous accounting work that gets deferred when a small business is being run by a management team rather than by hands-on owners, and it is precisely the kind of thing a buyer's own review does not always catch, because a buyer is comparing prior years to each other rather than checking each entry against source documents.

The effect was real: the trailing twelve-month revenue used to support the $6,750,000 asking price was overstated by roughly $310,000, which meant the adjusted earnings the buyer's advisors were using to value the business were inflated too, since most small business valuations are built as a multiple of earnings rather than of raw revenue. Once the duplicated contracts were identified, it became clear the error touched every financial summary that had gone to the buyer so far, including the schedule attached to the letter of intent itself.

Left uncorrected, this was not a small problem. If the agreement had gone to signing with the inflated figures baked into the seller's representations, and the buyer discovered the discrepancy after closing, it would have had grounds to bring a post-closing misrepresentation claim, arguing the sellers had promised something about the business's financial state that was not true. Those claims are expensive and slow to resolve, often taking well over a year to work through, and they tend to sour what should be a clean exit for a business owner into a multi-year entanglement with a party they no longer control anything alongside. The goal from the moment the discrepancy surfaced was to make sure that claim never had a reason to exist in the first place.

What we did

1. Traced the discrepancy to its source before disclosing anything. Rather than flag a vague concern to the buyer's side, our team worked with the sellers' accountant to isolate exactly which contracts had been double-entered and over what period, so the correction could be explained precisely rather than defensively.
2. Recalculated the financial picture from the ground up. Once the duplicated revenue was removed, adjusted earnings for the trailing twelve months came down by roughly $280,000. That is the number that actually drives valuation in most private business sales, more than top-line revenue alone.
3. Disclosed the correction to the buyer's counsel proactively, before the agreement was drafted around the wrong figures. Sellers sometimes hesitate to raise a problem they found themselves, worried it will kill the deal. In practice, buyers respond far better to a seller who catches and explains an error than to one who is caught concealing it after the fact, and Halima's side treated the disclosure as a sign the sellers' team was being careful rather than as a red flag.
4. Rebuilt the representations and warranties around the corrected numbers. The financial statement representation in the agreement was rewritten to reference the restated figures directly, with the billing system migration and the correction described in the disclosure schedule in plain terms, so there was no gap between what was promised and what was true.
5. Negotiated a price adjustment instead of leaving the gap for later. The parties agreed to reduce the purchase price by $550,000, from $6,750,000 to $6,200,000, reflecting the corrected earnings using the same valuation approach the buyer's advisors had already applied. That kept the deal moving without either side re-opening the whole valuation from scratch.
6. Added a modest indemnity holdback as a second layer of protection. Even with corrected figures, the buyer wanted comfort against anything else surfacing. The parties agreed to hold back $200,000 of the purchase price in escrow, a neutral third-party account, for twelve months after closing, to be released to the sellers if no further financial discrepancies emerged.

The outcome

The transaction closed roughly seven weeks after the discovery, at the adjusted price of $6,200,000, with the $200,000 holdback released to Taras and Andriy in full twelve months later once no further issues came up. Because the representations in the signed agreement matched the true, corrected financial picture, the buyer had no factual basis for a misrepresentation claim after closing. There was nothing to sue over, because there was nothing left that had been misrepresented. Halima's group took over the clinics on schedule, and to our knowledge the business has continued operating under its new ownership without any dispute traced back to the sale itself.

Taras and Andriy did give up $550,000 from the price they had originally been offered, and that is worth being honest about. It stung, and there were a few tense conversations about whether disclosing the error was really necessary once it was clear the buyer's own advisors had not caught it either. But the alternative, closing on inflated numbers and having the buyer discover the gap on its own months later, would have cost far more: legal fees on both sides, months or years of dispute in the Superior Court, and a real risk of an indemnification claim eating into far more than $550,000 once the buyer's own advisors added their assessment of damages, lost expectations and legal costs on top of the underlying $310,000 revenue gap. A dispute of that kind would also have tied up a portion of the sale proceeds indefinitely while it was resolved, money that Taras and Andriy would not have been able to use or invest in the meantime.

Catching the problem before signing turned what could have been an expensive, uncertain fight into a straightforward price adjustment both sides could live with, made once, in daylight, with full information on both sides of the table. That is a much better place for a business sale to end than a courtroom.

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