How do I check a business’s books before buying it?

Checking a business’s books means testing whether the numbers you were shown can be tied to records that other people produced. It is a different job from valuing the business. You are not yet asking what it is worth. You are asking whether the figures can be trusted at all, and the answer shapes everything that follows, including how a lender sees the file.

Start with a request list

BDC notes that buyers typically ask to see a seller’s historic and interim financial statements, projections, tax returns and other records, and it asks for the business’s financial statements or income tax returns when you apply for a purchase loan. Request the same years across every document so you compare like with like. Interim statements matter because they show how the current year is running against the last.

Tie the statements to what was filed

According to the CRA, resident corporations, with a few exceptions, have to file a T2 return every tax year even if no tax is payable, so a corporate seller should have a return for each year you are shown. Compare revenue and profit on the statements with the return and ask the accountant to explain each difference. Timing and non-cash items have ordinary explanations. An unexplained difference is the one to chase. If the business is not a corporation, ask which return reports its income.

Look at how the books are kept

How records are kept tells you as much as what they say. Ask who prepares them, how often accounts are reconciled, and whether personal costs run through the business. BDC advises sellers to review their records with an accountant so they are up to date and interim statements are accurate, so ask whether that was done. For a test of the cash side, see how to check whether a business actually makes money.

Use a second pair of eyes

The Canada Small Business Financing Program expects lenders to apply the same due diligence as for a conventional term loan of the same amount, so a lender’s questions preview what any stranger will ask about the books. Your own accountant should review the records independently of the seller’s.