A seller’s forecast is a claim about the future, made by the one party in the room with the strongest incentive for it to look good. The only honest test available is how accurate this seller’s own past forecasts actually turned out to be.
Key takeaways
Formal Canadian assurance standards define an audit, a review and a compilation as distinct engagement types, each with defined procedures — the Not-for-profit Corporations Act grid is a clean, published example of how those three scale with the size of the entity. (ised-isde.canada.ca) None of the three is built to test a forecast. A statutory audit opines on historical financial statements as presented; it does not certify that next year’s projected revenue will actually arrive. Outside regulated public-market disclosure, there is no equivalent standard a private buyer can point to and say “the forecast was reviewed to this benchmark.” The absence itself is the finding: a forecast in a private deal carries no assurance at all unless the buyer builds one.
If the seller has prepared internal budgets, board projections, or lender forecasts in prior years, the single most informative exercise is not scrutinizing this year’s assumptions in isolation — it is pulling last year’s forecast and comparing it to what actually happened. A seller who forecasts revenue growth accurately, or conservatively, in each of the last two or three cycles has earned some credibility for the current projection. A seller whose prior forecasts consistently missed high, or who has no documented forecast history at all, has not, and the current projection should be discounted accordingly rather than taken at face value.
Treadstone Law’s explainer on quality of earnings reports notes the deliverable is explicitly “forward-looking in orientation,” distinct from an audit’s focus on historical compliance, and that it tests “seller-proposed adjustments to profit.” (treadstonelaw.ca) A forecast built on the same normalized-earnings base the QoE review is already testing should be reconciled against that same base — a forecast that assumes away the same one-time items the QoE report has just added back is not a fresh, independent projection, it is the seller’s prior narrative extended one more year.
Most small and mid-market Canadian targets have never prepared a formal forecast for anyone but the current buyer, which makes the track-record test unavailable in its cleanest form. The fallback is a trend baseline: two to three years of actual historical financial statements plus the current-year interim statements — the same base data deavo’s due-diligence checklist for first-time buyers lists as the starting point for financial review. (deavo.ai) A straight-line or modestly conservative extension of that historical trend becomes the reference point. Any part of the seller’s forecast that sits meaningfully above that extension — a step-change in growth rate, a new product line with no sales history, a margin improvement with no documented cause — is the part the buyer has to underwrite themselves, because nothing in the seller’s own numbers supports it.
The same source notes something worth carrying into this exercise directly: “Two accountants reviewing the same books can reasonably normalize a few borderline items differently.” (deavo.ai) A forecast built on a normalized-earnings base that was itself judgment-dependent inherits that same uncertainty one layer further out. Testing the forecast without first confirming how the base year was normalized tests the wrong number.
Treadstone Law’s explainer on how a QoE report affects lender financing describes the mechanism this test feeds into directly: positive findings can expand what a lender is willing to advance, while “significant adjustments or red flags” typically bring stricter conditions, reduced amounts, or extra collateral demands. (treadstonelaw.ca) A forecast that survives the track-record test, or the trend-baseline test where no track record exists, strengthens the case for financing the deal on the numbers as presented. A forecast that fails either test does not necessarily kill the deal — it is simply evidence that the price should be built off historical earnings rather than projected ones, shifting the burden of the growth story onto the buyer rather than the seller.
A seller projects 22% revenue growth next year, driven by a new regional contract. The buyer pulls the seller’s internal forecasts from the prior two years, prepared for a since-lapsed line of credit: year one projected 15% growth against actual growth of 6%; year two projected 12% against actual growth of 4%. Neither prior forecast was close, and both missed in the same direction — consistently high. Applying that track record, the buyer does not treat the new 22% figure as a credible base case. Instead, the buyer builds a trend baseline from the three years of actual results, which shows average growth of roughly 5%, and treats the new regional contract as a specific, separately verifiable item: is it signed, what is its minimum committed volume, and does that volume alone explain a growth rate materially above 5%. If the signed contract terms support, say, an incremental 6 points of growth on top of the historical trend, the buyer has a defensible 11% case built from two things that can each be checked — not the seller’s 22% headline, and not a blanket rejection of any growth at all.
Related: scoping a quality of earnings review to the questions that matter, why a monthly view changes the picture an annual average hides, the red flags a forward-looking review is built to catch
Not for a private acquisition. Formal Canadian assurance engagement types — audit, review, compilation — are defined for historical financial statements, illustrated by the size-linked grid in the Not-for-profit Corporations Act. (ised-isde.canada.ca) None of them is built to test a forward projection, which is why the track-record and trend-baseline tests described here are the practical substitute rather than a citation to a formal standard.
That is the common case for smaller targets. The fallback is building a trend baseline from two to three years of historical statements plus current-year interim figures — the same base data a general due-diligence checklist already calls for — and treating anything the seller projects above that trend as unproven until a specific, checkable reason for it is produced. (deavo.ai)
After. A forecast is only as reliable as the base it grows from, and treadstonelaw’s description of a quality of earnings review notes it tests “seller-proposed adjustments to profit” as part of the same exercise. (treadstonelaw.ca) Settle what last year’s real earnings were first; testing a growth rate off an unsettled base tests the wrong number.
A short call is enough to work out whether this target has a track record worth trusting.
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