Avoid Costly Mistakes: Why Financial Due Diligence Matters More Than Ever in 2025

If you're thinking about buying or selling a small business, 2025 brings both opportunity and risk. The economic landscape is anything but steady—interest rates are still high, inflation is squeezing profits, and global trade isn’t getting any simpler.

That’s why doing your financial due diligence has never been more important. At Pratik Mehta Professional Corporation, we help first-time buyers and business owners in Oakville and across the GTA dig deeper into the numbers—so you don’t overpay, undersell, or walk into a deal blind.

Let’s unpack what’s really happening this year—and how it could impact your business decision.

1. Impact of Tariffs on Supply Chains and Profitability 

Trade restrictions and tariffs continue to disrupt global supply chains, affecting costs and profit margins. Financial due diligence should assess: 

• The extent to which tariffs influence material costs. 

• Dependence on international suppliers and potential alternatives. 

• The company's ability to transfer increased costs to customers. 

• You may be looking at a business where costs are rising, not because of mismanagement, but because their materials or inventory are more expensive. In a 2024 survey by Deloitte, 41% of Canadian businesses cited trade policy as a major cost concern.
  

2. High-Interest Rates and Debt Sustainability 

The Bank of Canada has maintained its policy interest rate at 2.75% as of April 2025, following a series of cuts from a peak of 5% in 2023. While borrowing costs have decreased, businesses with existing debt may still feel the strain. Due diligence considerations include: 

• Evaluating debt structures and refinancing risks. 

• Assessing interest rate hedging strategies. 

• Determining cash flow adequacy for debt servicing. 
  

3. Inflation’s Effect on Operating Margins 

Rising costs for labor, raw materials, and energy have compressed business margins. Due diligence should: 

• Analyze historical and projected cost structures. 

• Assess pricing power and demand elasticity. 

• Review contracts for inflation-linked pricing clauses. 
  

4. The Softening Canadian Economy and Revenue Projections 

With slowing GDP growth, companies may find it challenging to meet revenue targets. Canada's GDP growth is projected to be around 1.8% in 2025, reflecting a moderate economic expansion. However, trade conflicts and other uncertainties could impact this outlook. Due diligence teams should: 

• Examine industry-specific economic trends. 

• Validate revenue forecasts against current market conditions. 

• Analyze customer concentration risks and demand volatility. 
  

5. Environmental, Social, and Governance (ESG) Considerations 

ESG factors are increasingly integral to investment decisions. According to KPMG's Global ESG Due Diligence Study 2024, 80% of dealmakers report that ESG considerations are on their M&A agenda, with 71% noting an increase in importance over the past 12 to 18 months. Due diligence should include: 

• Assessing compliance with environmental regulations and sustainability goals. 

• Evaluating social responsibility initiatives and governance structures. 

• Identifying potential risks of non-compliance affecting valuation. 
  

6. Regulatory Compliance and Antitrust Considerations 

Stricter regulatory oversight, particularly concerning antitrust laws, can impact deal feasibility. KPMG's 2024 Technology M&A Survey highlights that 73% of corporate investors consider regulatory hurdles a significant deal risk. Due diligence should: 

• Assess potential regulatory challenges and compliance requirements. 

• Evaluate the impact of new regulations on the target company's operations. 

• Consider the implications of the Hart-Scott-Rodino (HSR) Act's new rules on the M&A process. 
  

7. Stress Testing Business Resilience 

Given economic uncertainties, financial due diligence should incorporate stress testing models to evaluate: 

• The company's resilience under adverse economic scenarios. 

• Liquidity and capital adequacy during revenue downturns. 

• Business continuity planning and risk mitigation strategies. 
  

Final Thoughts 

Financial due diligence now extends beyond historical financials to encompass future-proofing investments. As factors like tariffs, high interest rates, inflation, and economic slowdowns present new challenges, investors and businesses must conduct comprehensive, forward-looking assessments to make informed decisions. 

Partnering with experienced due diligence professionals ensures a thorough analysis and risk mitigation strategy tailored to the evolving financial landscape. 

Disclaimer:

This blog post is intended for informational purposes only and does not constitute legal, financial, or tax advice. Always consult with a qualified professional before making decisions related to business purchases or valuations.