The Dangers of Trusting Broker-Prepared Financials

Brandon Chicotsky
Aug 3, 2025
9 min read

Updated: Jan 6

When buying a business, relying solely on broker-prepared financial statements can lead to costly mistakes. Brokers often have a financial interest in closing the deal, which can result in biased or incomplete data. These statements may overstate revenue, hide liabilities, or misrepresent cash flow, creating a misleading picture of the business's actual performance. Without independent verification, you risk overpaying, inheriting hidden debts, or facing compliance issues post-sale.

Key Risks of Broker-Prepared Financials:

Overstated Revenue: Inflated income through one-off gains or unrealistic projections.
Hidden Liabilities: Unpaid taxes, vendor debts, or undisclosed obligations.
Misleading Cash Flow: Focus on accounting profit instead of actual cash flow.

How to Protect Yourself:

Hire CPAs or forensic accountants for an unbiased review.
Use financial review checklists to catch errors.
Conduct site visits and interview staff to validate data.
Verify account balances and contracts with third parties.

Skipping these steps can result in financial losses, legal challenges, or overpaying by as much as 30%. Always perform thorough due diligence to ensure you’re making informed decisions based on accurate financial data.

Common Errors in Broker-Prepared Financials

Financial statements prepared by brokers can sometimes paint a misleading picture of a business's actual condition. Spotting these common mistakes early can save you from unpleasant surprises down the road. Let’s break down some of the key issues.

Inflated Income and Misleading Cash Flow Figures

One common tactic is inflating revenue by categorizing one-off gains or future earnings as regular income. This approach can make the business appear more profitable than it really is. Additionally, brokers often rely on accounting profit instead of focusing on discretionary or net cash flow, which provides a clearer view of actual performance. Unrealistic growth projections can further skew the numbers, creating an overly optimistic picture of profitability under current conditions [1].

Concealed Debts and Overlooked Liabilities

Another frequent issue is the omission or understatement of critical liabilities. Examples include unpaid taxes, undisclosed transactions with related parties, or unaccounted-for financing and lease obligations. These hidden debts may not show up until after the sale, potentially leaving the buyer to deal with unexpected financial burdens [1].

The Impact on Business Valuation

These errors - whether inflated income or concealed liabilities - can significantly distort a business’s valuation. Buyers may end up overpaying, securing financing on unfavorable terms, or facing unexpected tax complications. Understanding these risks is essential for conducting due diligence that reflects the true financial state of the business [1].

What Happens When You Trust Only Broker Financials

Leaning entirely on financial statements prepared by brokers can expose you to serious risks that might only come to light after the deal is done. These risks not only inflate the cost of acquisition but can also saddle you with unexpected financial and legal challenges.

Paying Too Much for a Business

When revenue is overstated or expenses are hidden, you might end up paying more than the business is actually worth. Studies show that financial inaccuracies can reduce a company’s valuation by as much as 30% [2]. Overpaying for a business because of these inflated figures means you’re investing in an earning potential that doesn’t exist - a costly mistake that could have been avoided with better due diligence.

Surprise Debts After the Sale

Another danger of trusting broker-prepared financials is the risk of hidden liabilities. Unpaid taxes, overdue vendor payments, or undisclosed lease obligations often surface only after the sale is finalized. When these surprise debts come to light, buyers are left scrambling to cover the costs, sometimes resorting to additional loans or selling off assets just to stay afloat.

Legal Problems and Compliance Issues

Inaccurate financial statements can also lead to legal trouble. Tax authorities might flag discrepancies between reported income and actual earnings, which could result in penalties, interest charges, or even additional tax bills. These compliance issues can drain your resources and damage your reputation, turning what seemed like a promising investment into a legal headache.

Tools for Checking Financial Accuracy Yourself

You don’t have to rely solely on broker-prepared financials. With the right tools and expert guidance, you can verify the numbers yourself and catch potential issues before they turn into costly mistakes.

Hire CPAs and Forensic Accountants

Bring in CPAs or forensic accountants to take a closer look at the financial data. These professionals are trained to dig deep into financial records, uncovering errors, inconsistencies, or even signs of fraud that might otherwise go unnoticed.

A comprehensive audit provides an unbiased assessment of financial accuracy and ensures compliance with relevant standards [3][4]. When choosing external auditors, make sure they operate independently, as required by professional guidelines [3]. Forensic accountants, in particular, use investigative methods to track cash flows, verify revenue sources, and flag suspicious transactions that could indicate manipulation.

To further strengthen your review process, combine professional audits with structured tools like checklists.

Use Financial Review Checklists

A financial review checklist can help you stay organized and ensure no important details slip through the cracks. A good due diligence checklist should include key areas like financial statements, ratio analysis, risk factors, tax and legal compliance, cash flow, future projections, and industry benchmarks [5]. Regularly reconciling balance sheets and performing detailed analyses - such as horizontal, vertical, and ratio analyses - can help identify errors or spot emerging trends [6][7].

Engage Your Professional Network

Your professional network can be another valuable resource in verifying financial accuracy. Experienced advisors and industry professionals can offer insights and guidance that complement audits and checklists. Advisors familiar with your industry are especially useful for identifying common financial pitfalls or irregularities.

God Bless Retirement, for example, connects individuals with a network of professionals skilled in business transactions and financial verification. These experts can help you interpret financial data, point out red flags, and provide ongoing support throughout the due diligence process. Having experienced voices in your corner can make all the difference when it comes to understanding the numbers and making informed decisions.

How to Do Proper Due Diligence

When it comes to due diligence, relying solely on broker-provided financials is far from enough. A thorough investigation is essential to uncover the real financial health of the business you're considering. This process involves multiple steps and requires a deeper dive into the company's operations, finances, and risks.

Build a Team of Experts

Due diligence isn't a solo endeavor - it demands teamwork. You'll need input from specialists who can analyze every aspect of the deal. Financial due diligence, for instance, digs into the company’s financial statements to assess their accuracy and uncover any hidden liabilities[9]. To do this right, you’ll need both internal and external experts.

Your team should include M&A attorneys, CPAs, industry consultants, and operational experts. These professionals can help you identify legal, financial, and industry-specific risks that brokers might overlook[10]. For example:

Finance experts: Your CFO and finance team can evaluate the company's financial health and determine its valuation.
Legal team: They’ll focus on compliance issues and legal risks tied to the transaction.
Industry specialists: They bring sector-specific insights that can be invaluable.

Recent data shows that many directors treat M&A as a strategic priority[12]. This highlights the competitive nature of these deals and the potential consequences of errors. A cross-functional team - including legal, financial, operational, and technology experts - can help you navigate these challenges. In most cases, the entire due diligence process can be completed in about 30 to 60 days[11].

Once your team is in place, their findings should be validated through direct engagement with the business itself.

Visit the Business and Interview Staff

Numbers on a spreadsheet only tell part of the story. To get a full picture, you need to visit the business and interact with the people running it. This hands-on approach can uncover discrepancies that financial documents might not reveal.

During your visit, make sure to:

Inspect assets and verify inventory levels.
Check the condition of equipment and look for signs of deferred maintenance or outdated technology.
Assess operational efficiencies - or inefficiencies - that could impact future performance.

Conversations with key personnel are equally important. Interviewing staff can help validate revenue sources, customer relationships, and day-to-day practices. These discussions often reveal inconsistencies with broker-prepared financials.

You should also confirm account balances and transactions directly with third parties[8]. For example, reach out to major customers to verify ongoing contracts and payment terms, and contact suppliers to confirm any outstanding obligations or credit terms. These steps provide clarity and help you gauge the business's operational reliability.

Internal Review vs. Third-Party Verification

One key decision during due diligence is determining when to rely on your internal team and when to bring in external experts. Both approaches offer unique benefits and challenges:

Aspect	Internal Review	External Verification
Cost	Lower upfront costs using in-house resources	Higher costs, but often worth the investment
Speed	Faster results with familiar processes	Slower, but more comprehensive analysis
Objectivity	May have internal biases	Provides an independent perspective
Expertise	Limited to internal knowledge	Access to specialized forensic and industry expertise
Credibility	May face scrutiny from lenders or investors	Trusted by external stakeholders
Scope	Focused on areas of internal strength	Covers complex and specialized areas thoroughly

Third-party verification is especially crucial for complex financial structures, fraud risks, or deals involving external financing.

"Financial due diligence helps you make informed decisions, uncover hidden risks, and ultimately secure a better outcome." - Kison Patel, CEO & Founder of DealRoom[9]

The best strategy combines both approaches. Use your internal team for preliminary evaluations and areas where you have strong expertise. Then, bring in external experts for critical financial reviews, complex transactions, and final validations. For a complete picture, review at least five years of financial statements - such as 10-K and 10-Q filings - and proxy filings to identify trends and inconsistencies[9].

Always verify information using original documents like contracts, invoices, and receipts[8]. This detailed documentation ensures you’re making decisions based on accurate data and protects you from the risks of relying solely on broker-provided information.

Conclusion: Get Accurate Financials for a Safe Transaction

Relying only on broker-prepared financials can be risky. These documents may paint an overly optimistic picture, hiding liabilities or inflating income. According to the IRS, two out of three business owners under-report their income[14], meaning the numbers you see might not reflect the business's actual profitability.

Independent verification isn't just a good idea - it’s essential. Skipping this step can lead to legal troubles, unexpected debts, or even financial losses. In some cases, buyers who trusted broker-prepared financials alone ended up uncovering undisclosed debts later, resulting in costly disputes and legal action[13]. Ensuring the accuracy of financials is the foundation of a safer, smarter transaction.

This is where professionals like CPAs, forensic accountants, and M&A attorneys come in. They can spot errors or omissions that brokers might miss - or even intentionally leave out. Their expertise provides an unbiased, clear view of the business's financial health, allowing you to make informed decisions.

One common issue to watch for is "phantom cash", which is especially prevalent in cash-heavy businesses. This practice can exaggerate revenue, making the business appear more profitable than it truly is[15]. Without professional verification, you could base your decision on income that doesn’t actually exist.

But due diligence isn’t limited to reviewing financial statements. It’s about digging deeper - conducting site visits, interviewing staff, and verifying account balances through third parties. These steps provide insights that no spreadsheet or financial report can reveal, helping you see the full picture instead of just the version presented by the broker.

FAQs

What are the risks of relying only on broker-prepared financial statements when buying a business?

Relying only on financial statements provided by brokers can expose you to major financial risks. These statements might be incomplete, skewed, or even deceptive - possibly inflating profits or concealing liabilities. This could lead to overpaying for the business or encountering unexpected financial troubles down the road.

To safeguard your investment, conducting independent due diligence is non-negotiable. Work with trusted professionals like accountants or financial analysts to verify the financial data. Make sure you fully understand the business's actual financial condition before moving forward with any decisions.

How can a CPA or forensic accountant help detect errors in broker-prepared financial statements?

A CPA or forensic accountant can be invaluable when it comes to uncovering mistakes or discrepancies in broker-prepared financial statements. With their specialized training, they can identify problems like inflated revenue figures, concealed expenses, or missing records - issues that might slip past an untrained eye.

Through a thorough examination of the financial data, they verify the accuracy of the figures, track transactions, and confirm that the statements are both complete and impartial. This level of scrutiny ensures you’re not relying on misleading information and provides a clear, dependable financial overview before making any critical decisions.

What steps can I take to verify financial information and conduct thorough due diligence during a business transaction?

To make well-informed decisions during a business transaction, it's essential to look beyond broker-prepared financial statements. Start by verifying the accuracy of the financial data through independent audits or reviews conducted by third parties. You can also cross-reference this information with external sources like tax returns, bank statements, and industry benchmarks to ensure everything checks out.

It's equally important to dig deeper into the business. Conduct interviews with key management to understand their perspectives, inspect physical assets to confirm their condition, and review critical legal documents such as contracts and leases. Evaluating the company’s operations and processes can uncover hidden risks or inconsistencies that might otherwise go unnoticed. These steps provide a more complete view of the business's financial reality and help you avoid relying on potentially incomplete or biased information.