Financial due diligence and quality of earnings for Canadian buyers and sellers

You are buying or selling a private Canadian company. We test the numbers before you sign, so the deal rests on earnings you can rely on.

CPA-led. Accounting scope. Your lawyer documents the deal.

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What financial due diligence answers before you sign

Financial due diligence is the accounting review a buyer runs before closing. It tests whether the business matches the numbers you were shown.

Are the earnings real? Reported profit, adjusted for owner items, one-time events and accounting choices.
Will they repeat? Which customers, contracts and margins carry the profit, and whether they last after closing.
Do they turn into cash? How profit becomes cash once working capital and equipment needs are met.
What comes with the business? Debt, debt-like items, and tax or payroll gaps that can stay with the company, and with you, after you buy it.

Quality of earnings: are the earnings real?

A quality of earnings review starts with reported profit and works to adjusted earnings: what the business can keep earning as it runs today, before any changes a new owner plans. Sellers often present adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) with add-backs. We test each add-back against the books and its support, and ask whether the expense really stops after closing. Some adjustments lower earnings too.

You get a quality of earnings report. It walks from reported to adjusted earnings line by line, with the evidence behind each adjustment and the open questions for your deal team.

What a quality of earnings review looks at

Revenue quality, margin bridges, add-backs, one-time items. In plain terms:

Owner pay and perks, compared with the market pay for hiring someone to do the owner’s job.
Related-party items, such as rent paid to the owner’s holding company.
One-time items, such as a lawsuit settlement or an unusually large order.
Revenue and gross margin by customer and by product or service line.
Month-to-month trends, including the months since the last year-end.
Cut-off: income and expenses recorded in the right period.
Earnings to cash: whether adjusted earnings show up in the bank.

Quality of earnings is not an audit or a valuation

An audit gives an opinion on a company’s financial statements, and a review engagement gives limited assurance on them. A quality of earnings review gives neither. It answers a buyer’s question: what earnings can this business keep producing?

It is not a business valuation either. When a formal fair market value opinion is needed, for the deal or to support a value CRA may review, a Chartered Business Valuator usually prepares it. Our adjusted earnings give the buyer, the seller and any valuator a tested starting point.

What we test in buy-side due diligence

Buy-side diligence adds the balance sheet, tax and cash. Scope is set per engagement.

Earnings and revenue

Customer concentration, year-end cut-off, and recurring versus project revenue. If a few customers carry the profit, we look at their margins and contract terms.

Working capital and the peg

The working capital peg is the target level of working capital that the buyer and seller agree the business will have at closing. It mainly covers receivables and inventory, less payables and accruals, and usually leaves out cash and debt. If closing working capital comes in below the peg, the purchase price usually goes down by the shortfall. If it comes in above, the seller may receive more, depending on how the agreement is written. We build a proposed peg from recent month-end averages, adjusted for seasonality and one-time items, and we test the receivable aging, inventory and accruals behind it. Your lawyer writes the agreed peg and its definitions into the purchase agreement.

Debt and debt-like items

Some obligations are not bank debt but still reduce what you are getting: unpaid bonuses, vacation accruals, customer deposits, deferred revenue, shareholder loans, equipment leases and unpaid taxes for periods before closing. We list them so your deal team can decide how each one is treated at closing, as debt or in working capital, but never both.

Tax, GST/HST and payroll remittances

In a share purchase, the company keeps its history, including its tax history. Unfiled returns, GST/HST errors and unremitted payroll source deductions stay with the company after closing. We check filings and remittances against the books and flag exposures for your lawyer. Deeper planning sits with Tax advisory.

Cash flow and capex

Debt is repaid, and buyers earn their return, from cash, not EBITDA. We reconcile adjusted earnings to cash, review equipment spending, and look for maintenance that was put off before the sale.

Selling? Sell-side quality of earnings and readiness

A sell-side quality of earnings review shows you what a buyer’s team is likely to find, before they find it, so you can fix what you can and explain the rest. You go into the letter of intent with adjusted earnings you can defend. For full sale prep, see sell-side prep and transaction advisory.

How findings change the purchase price and terms

Findings typically feed into:

The letter of intent, if early findings are ready before you sign it.
The purchase price, if adjusted earnings come in lower than presented.
The working capital peg and how it is measured.
A holdback or escrow, where part of the purchase price is held back, by the buyer or a third party, for a set time after closing to cover claims or adjustments.
Specific indemnities, where the seller agrees to cover a known exposure, such as unremitted payroll deductions or unpaid GST/HST, if it turns into a bill later.

We give you and your lawyer the numbers. Your lawyer negotiates and drafts the terms.

How a diligence engagement runs

Scope and request list. We agree what to test and send a request list built for the deal.
Evidence. The seller loads the books, filings and contracts to a data room.
Testing. We analyse the data, test samples and track every exception to an answer.
Report and calls. You get the quality of earnings report, and we walk through the findings with you, your lawyer and, with your permission, your lender.

What we will ask you for

Our buyer’s guide to financial due diligence in Canada has the full checklist.

Financial statements and corporate tax returns for recent years
The general ledger and bank statements
GST/HST and payroll filings
Receivable and payable aging
Key customer, supplier and lease contracts

Who does what on the deal

Think: earnings, working capital, debt-like items, tax and cash flow.
Your lawyer: the documents and legal due diligence, including the letter of intent and the purchase agreement.
Your broker: finds the other side.
A Chartered Business Valuator: a formal fair market value opinion, when the deal needs one or to support a value CRA may review.

We do not draft deal documents or give legal advice. For structure, tax design and post-close accounting, see transaction advisory.

Our team

Think’s CPA-led team advises Canadian owners on tax planning, transaction advisory and financial strategy for buyers and sellers.

Short answers

What is the difference between financial due diligence and a quality of earnings review?

Quality of earnings is one part of financial due diligence. It tests the earnings. Financial due diligence also covers working capital, debt-like items, tax exposures and cash flow.

Is a quality of earnings review the same as an audit?

No. An audit gives an opinion on the financial statements, and a review engagement gives limited assurance on them. A quality of earnings review gives neither. It tests which earnings will hold up for a buyer.

Is it a business valuation?

No. We test the earnings a valuation would start from. When a formal fair market value opinion is needed, for the deal or to support a value CRA may review, a Chartered Business Valuator usually prepares it.

Who orders it, the buyer or the seller?

Either. Buyers order it before closing. Sellers order a sell-side review before buyers ask.

How long does it take?

It depends on the size of the business and how ready the data room is. We agree the steps when we scope the work.

Do you work with my lawyer, broker and lender?

Yes. With your permission, we share findings with your lawyer, who drafts and negotiates the deal documents, and we answer your broker’s and lender’s questions on the numbers. We do not give legal advice.

Do you work on deals outside Ontario?

Yes. We work remotely with buyers and sellers across Canada.

One call to scope the diligence.

Buying or selling? Tell us about the deal.