Financial Due Diligence Before Buying a Small Business in BC

Someone has shown you a business, a price, and a set of numbers that look pretty good. Now you have to work out whether those numbers are real, whether the profit will survive your ownership, and what liabilities come along for the ride.

That is due diligence. Here is how to do the financial half of it properly.

Quick Answer: The 8 Documents to Request Before You Sign Anything

Ask for these in your very first serious conversation. How quickly and completely a seller responds tells you almost as much as the documents themselves.

1. Three years of financial statements, and ideally five, prepared by an accountant
2. Three years of filed corporate tax returns (T2) with the notices of assessment
3. GST and PST filing history and account statements from CRA and BC
4. Payroll remittance history and the most recent CRA payroll account statement
5. Bank statements for the last 24 months, all accounts
6. Accounts receivable and accounts payable aging reports, current
7. A WorkSafeBC clearance letter
8. Copies of every lease, loan, licence and major customer or supplier contract

If the seller will not produce the tax filings, stop. There is no legitimate reason to withhold them from a serious buyer under a signed confidentiality agreement, and there are several illegitimate ones.

We offer a comprehensive range of Tax Accountant services in Coquitlam and across other regions of British Columbia. 

Asset Purchase vs Share Purchase, Decide This First

Everything downstream depends on this choice, so make it early rather than discovering it in the lawyer’s office.

Why It Changes Your Entire Due Diligence Scope

In an asset purchase, you are buying specific things. Your diligence focuses on whether those assets exist, work, and are unencumbered.

In a share purchase, you inherit every obligation the corporation ever incurred, including the ones nobody mentioned. Unfiled returns, an unresolved employment claim, an environmental issue on a property leased in 2019, a personal guarantee, all of it comes with the shares. Your diligence has to be far deeper.

Tax Consequences for Buyer vs Seller

This is the fight in almost every small business deal, because the interests are opposed.

The seller wants a share sale, because the lifetime capital gains exemption can shelter up to $1.275 million of gain per individual in 2026 on qualified small business corporation shares. On a $1.5 million sale that is worth roughly $318,000 in tax to them.

The buyer wants an asset sale, because the purchase price gets allocated to assets with a fresh cost base, generating years of CCA deductions, and because unknown liabilities stay behind.

There is a middle ground: a share purchase with a lower price, backed by strong representations, warranties, indemnities and a holdback. If the seller wants the tax benefit of a share sale, the buyer should be compensated for taking the risk. That trade is negotiable and it belongs in the price, not in a footnote.

Verifying the Revenue Is Real

Financial statements are a story the seller tells. Bank statements are what happened.

Tracing: Invoice to Payment to Bank Deposit

Pick a month at random, ideally not the seller’s best month. Then trace in both directions.

• Take ten invoices from the sales ledger. Find each payment. Find each deposit in the bank statement.
• Take twenty deposits from the bank statement. Trace each back to an invoice and a customer.

The second direction matters more. It catches revenue that appears in the books but never arrived, and it catches deposits from the owner’s personal accounts dressed up as sales.

Reconciling Reported Sales to GST and PST Filings

This is the fastest sanity check available, and it is free.

Add up the sales reported on the GST returns for the fiscal year. Compare to the revenue on the financial statements. They should agree, allowing for exempt or zero rated sales and timing.

If the financial statements show $850,000 of revenue and the GST returns report $610,000, one of two things is true. Either the business under reported GST, which is now a liability with penalties and interest, or the financial statements were inflated for the sale. Both are your problem and both should be priced.

Do the same with PST if the business sells taxable goods or services in BC. And note the change coming: as of October 1, 2026, several professional services in BC including accounting, engineering, architecture and commercial property management become subject to PST. If you are buying a business in one of those sectors, confirm its readiness for that change.

The Sampling Method That Catches Inflated Revenue

Cash intensive businesses need a different approach. Restaurants, salons, convenience stores and trades often have revenue that does not flow through a card terminal.

Practical tests:

• Compare cost of goods sold to revenue month by month. A stable business has a stable gross margin. A month where margin swings ten points usually means either revenue was invented or purchases were personal.
• For a restaurant, work backwards from purchases. Food cost of 30% implies revenue of roughly three and a third times food purchases. Way off, and something is wrong in one direction or the other.
• Compare payroll to revenue. Labour ratios in an industry are fairly consistent.
• Ask for point of sale reports directly from the system, not a spreadsheet the seller prepared.
• Look at utility bills and hours of operation. A business claiming to be busy has consumption to match.

If a seller tells you the real revenue is higher than what was reported to CRA, they are telling you they committed tax fraud and expecting you to pay for it. You cannot bank it, you cannot finance against it, and you now know the person you are dealing with.

Verifying the Profit Is Sustainable

Revenue is the easy part. Profit is where the negotiation actually happens.

Normalising Owner Compensation and Personal Expenses

Owner managed businesses run personal costs through the company and pay the owner whatever suits their tax planning. Neither figure reflects what the business will cost you to run.

Normalise by asking: what would it cost to hire someone to do what the owner does? If the owner takes $60,000 in dividends but does the work of a $110,000 general manager, the profit is overstated by $50,000. That difference, capitalised at a 3× multiple, is $150,000 of purchase price.

Which Add Backs Are Legitimate

Sellers present “adjusted EBITDA” with a list of add backs. Some are fair. Some are wishful.

On depreciation: it is non cash, but the equipment still wears out. Ask what maintenance capital expenditure the business actually requires each year, and treat that as a real cost.

Customer Concentration Risk

Ask for revenue by customer for three years.

• One customer above 20% of revenue is a risk that needs a contract and a conversation.
• One customer above 40% is not a business, it is a relationship, and relationships often belong to the departing owner.

The same applies on the supply side. A single supplier with an exclusive arrangement, or a franchise agreement that requires approval of the transfer, can end a deal after closing rather than before.

The Liabilities That Follow the Business

In a share purchase these become yours on closing day.

CRA Arrears

Request an account statement for every CRA account: corporate income tax, GST, and payroll. Also request the same for BC PST.

Payroll arrears are the most dangerous. Unremitted source deductions are trust funds, and CRA treats them very differently from ordinary debt. Directors can be personally liable, and the debt has priority over most other creditors.

There are also third party liability provisions, section 160 of the Income Tax Act and section 325 of the Excise Tax Act, that let CRA pursue a transferee for a tax debtor’s liabilities where property was transferred for less than fair market value between non arm’s length parties. Family transactions and related party asset moves deserve particular attention.

WorkSafeBC Assessment History and Clearance Letter

Get a clearance letter directly from WorkSafeBC, not from the seller. It confirms the business is registered and current on premiums. In an asset purchase, unpaid WorkSafeBC premiums can follow the business to the buyer.

Also ask for the claims and experience rating history. A poor safety record means higher premiums for you for years.

Employee Entitlements, Vacation Accruals and Severance

Under the BC Employment Standards Act, when a business is sold, employment is generally deemed continuous. The employees’ service with the seller counts as service with you.

That means:

• Accrued but unpaid vacation pay is a real liability. Get the schedule and adjust the price for it.
• A long service employee you have to let go three months after closing may be entitled to notice or severance based on their entire service, not just the months under you.
• Overtime banks, unused statutory holiday entitlements and outstanding expense claims are all real.

Get a full employee list with hire dates, wages, vacation accrued, and any written agreements.

Leases, Personal Guarantees and PPSA Searches

• The lease. Read the whole thing. Confirm the remaining term, renewal options, rent escalations, whether assignment requires landlord consent, and whether the landlord will require a personal guarantee from you. For a location dependent business, a lease with two years left and no renewal option is a serious valuation issue.
• PPSA searches. Run a search in the BC Personal Property Registry against the corporation and against the assets you are buying. Registered security interests must be discharged or you are buying encumbered equipment. Note that some statutory liens do not appear in the registry, so this is necessary but not sufficient.
• Personal guarantees. Ask what the seller has guaranteed. In a share purchase, the corporate obligation continues even after the seller’s personal guarantee is released, and the lender will likely want yours.
• Litigation searches in BC Supreme Court and Provincial Court, plus a Land Title search if property is involved.

Working Capital: The Adjustment That Decides Your Real Price

This is the most commonly mishandled item in small business deals, and it is worth real money.

You are buying a business that needs a certain amount of working capital, receivables plus inventory minus payables, to operate. If the seller strips the receivables and leaves the payables, you have bought a business that needs an immediate cash injection.

Do this:

1. Calculate monthly working capital for each of the last 24 months.
2. Set a normal level, usually the trailing twelve month average, adjusted for seasonality.
3. Write a working capital target into the purchase agreement, with the price adjusted dollar for dollar for any difference at closing.
4. Provide for a post closing true up, typically 60 to 90 days after, once the closing balance sheet is finalised.

Without this clause, a seller has every incentive to collect aggressively, delay payables and run down inventory in the final months. With it, they have none.

Ten Red Flags That Should Stop or Reprice the Deal

1. The seller will not provide tax filings. Nothing else matters until this is resolved.
2. Revenue on the financial statements does not agree with GST returns. Either the books or the filings are wrong.
3. Payroll remittances are behind. Trust funds, director liability, CRA priority.
4. One customer is more than 40% of revenue, with no contract.
5. Revenue declined in the most recent year and the explanation is vague.
6. Bookkeeping is a shoebox, or the books were “reconstructed” for the sale.
7. The lease is short, unassignable, or the landlord is unresponsive.
8. Key staff are leaving, or the only person who knows the technical work is the seller.
9. The seller wants a fast close and resists a financing or diligence condition.
10. Add backs are more than 30% of stated EBITDA. At that point you are not buying the business, you are buying the adjustments.

None of these automatically kills a deal. Every one of them should change either the price, the structure, or the protections you insist on.

What Your Accountant Does vs What Your Lawyer Does

You need both, and you need them early. Accountants brought in after the letter of intent is signed spend their time explaining what should have been negotiated differently.

Frequently Asked Questions

How long should due diligence take?

For a small business, 30 to 60 days from letter of intent to closing is typical. Anything under three weeks means something is being skipped. Build the timeline into your LOI as a condition.

What if the seller refuses to provide tax filings?

Walk away, or make closing conditional on receiving them. There is no acceptable explanation once a confidentiality agreement is signed.

Can I be liable for the seller’s unpaid CRA debt?

In a share purchase, absolutely, because the corporation owes the debt and you now own the corporation. In an asset purchase you are generally protected, with exceptions including WorkSafeBC premiums and third party liability provisions where assets moved between related parties below fair market value.

Do I need a formal valuation as well?

Not always, but you need a defensible view of value. A formal valuation is worthwhile where financing requires it, where there is a dispute about price, or where the business is complex. For a straightforward owner operated business, normalised earnings and an industry multiple, properly supported, is often enough.

How many years of financials should I review?

Three at minimum, five preferred. Three years shows the trend. Five shows how the business behaved through a downturn.

Should I use the seller’s accountant?

No. Their duty is to the seller. Use your own, and expect the two to speak to each other.

What is a reasonable holdback?

Commonly 10% to 20% of the price, held for 12 to 24 months, released as the representations and warranties survive. On a share purchase, longer, because CRA reassessment periods run three to four years.

How do I verify inventory?

Count it yourself, or with your accountant, as close to closing as possible. Then test valuation, and specifically test for obsolete and slow moving stock, which is often carried at full cost.

What about goodwill? How much should I pay for it?

Goodwill is what you pay above the value of the tangible assets, and it is only worth something if it transfers. Goodwill tied to the owner’s personal relationships is the most fragile kind. Transition periods, non competition agreements and earn outs exist precisely to address this.

Is a letter of intent binding?

Usually not on price and terms, but the confidentiality, exclusivity and expense provisions typically are. Have a lawyer look at it before you sign, even though it feels preliminary.

Have a Deal on the Table?

Buying a business is the largest financial decision most people make outside their home, and it is made on information supplied by the person on the other side of the table. Due diligence is how you convert their story into your facts.

Maxpro Financials provides due diligence, business valuation, financial planning and corporate tax services to buyers and sellers across BC, Alberta, Saskatchewan and Ontario.

This article is general information current as of 2026 and is not tax, legal or investment advice for your specific situation. Every acquisition has facts of its own, so engage professional advisors before committing.