M&A & Transaction Advisory
Selling a Business in Canada: What Owners Should Consider Before Going to Market
Selling a business is not simply a matter of finding a buyer. Preparation, financial performance, owner dependence, transaction structure, buyer financing and the quality of the sale process can all influence both value and the probability of closing.
Contents
- Start With the Owner's Objectives
- Understand What Buyers Are Actually Buying
- Financial Preparation Matters
- Reduce Dependence on the Owner
- Customer and Supplier Concentration Can Affect Risk
- Valuation Is More Than a Multiple
- Deal Structure Matters
- Can the Buyer Actually Finance the Transaction?
- When Should an Owner Start Preparing?
- The Role of Professional Advisors
- How CFM Approaches Business Sales
For many entrepreneurs, selling a business represents the culmination of years or decades of work.
It may also be one of the largest financial transactions the owner will ever undertake.
Yet owners frequently begin thinking about the sale only when they are ready to exit.
A successful transaction often begins considerably earlier.
Financial reporting, management depth, customer concentration, owner dependence, transaction structure and buyer financing can all influence how a business is perceived and whether a transaction ultimately closes.
Preparing for these issues before formally going to market can create more strategic options for the owner.
Start With the Owner's Objectives
Before discussing valuation or potential buyers, the owner should understand what they are actually trying to accomplish.
The objective may be a complete exit.
In other situations, the owner may want to retain an interest in the business, remain involved for a transition period, bring in a strategic partner or create liquidity while continuing to participate in future growth.
Other considerations can include:
- desired timing
- financial objectives
- continued involvement
- treatment of employees
- family or succession considerations
- willingness to provide vendor financing
- preference for cash at closing
- importance of the buyer's identity or strategic fit
The highest headline purchase price does not necessarily represent the best transaction if the structure does not satisfy the owner's broader objectives.
Understand What Buyers Are Actually Buying
A buyer is not simply acquiring historical revenue.
The buyer is evaluating the future economic value and risk of the business.
Depending on the company, this may include:
- sustainable earnings and cash flow
- customers and contracts
- recurring revenue
- management and employees
- systems and operating processes
- intellectual property
- equipment and other assets
- supplier relationships
- competitive position
- brand and reputation
- growth opportunities
Understanding what makes the business attractive — and what creates risk — is an important part of preparing for a transaction.
Financial Preparation Matters
Buyers and their advisors will spend considerable time understanding the financial performance of the company.
Financial statements that are incomplete, inconsistent or difficult to interpret can create uncertainty during a transaction.
Owner-operated businesses may also contain expenses, compensation arrangements, related-party transactions or non-recurring items that require explanation.
This is where normalized financial performance becomes important.
Legitimate adjustments can help a buyer understand the underlying economics of the business, but those adjustments should be credible, supportable and capable of surviving due diligence.
Preparation should therefore focus not on manufacturing a higher earnings number, but on presenting the company's actual financial performance clearly and defensibly.
A strong sale process begins with making the business understandable, transferable and financeable.
Reduce Dependence on the Owner
Many successful private businesses are built around a highly capable founder.
That can become a transaction risk if the company's customers, employees, suppliers or day-to-day operations depend heavily on that individual.
A buyer will want to understand what happens when the owner leaves.
Depending on the business, reducing owner dependence may involve:
- developing management depth
- documenting important processes
- transferring customer relationships
- establishing stronger reporting systems
- delegating key operational responsibilities
- creating recurring or contractual revenue where possible
Not every business can operate independently of its founder before a sale, but greater transferability can make the company easier for a buyer to evaluate.
Customer and Supplier Concentration Can Affect Risk
A profitable company may still be perceived as higher risk if a substantial portion of revenue depends on one customer, one contract or one supplier.
Concentration does not necessarily prevent a transaction.
However, buyers and lenders are likely to assess the durability of those relationships and the potential impact if they change following the acquisition.
Understanding these risks before entering a sale process gives the owner an opportunity to address them or prepare a credible explanation.
Valuation Is More Than a Multiple
Owners frequently hear that businesses sell for a particular multiple of EBITDA, revenue or another financial measure.
Multiples can be useful reference points, but they do not determine the outcome of a transaction by themselves.
Valuation can be influenced by:
- earnings quality
- growth
- recurring revenue
- customer concentration
- industry conditions
- management depth
- competitive position
- assets
- capital requirements
- transaction risk
- strategic value to a particular buyer
There is also an important distinction between enterprise value and the amount the owner ultimately receives.
Debt, cash, working capital, transaction expenses and other adjustments may affect the equity proceeds delivered to shareholders.
A headline valuation and the owner's eventual proceeds are therefore not necessarily the same number.
Deal Structure Matters
Purchase price is only one component of an offer.
The structure of the consideration can materially affect both risk and economic value to the seller.
A transaction may involve:
- cash at closing
- vendor financing
- earn-outs
- rollover equity
- holdbacks
- working-capital adjustments
- other contingent consideration
Transactions may also be structured as share purchases, asset purchases or other arrangements depending on the circumstances.
The legal and tax consequences of these structures should be evaluated with qualified legal and tax advisors.
From an M&A perspective, owners should compare offers based on both price and structure.
Can the Buyer Actually Finance the Transaction?
An attractive offer has limited value if the buyer cannot finance the acquisition.
Buyer financing can influence:
- transaction certainty
- closing timelines
- due diligence
- required seller financing
- transaction structure
- negotiations
- conditions to closing
A higher offer with significant financing uncertainty may not necessarily be superior to an offer with a credible path to closing.
This is one reason financing considerations should form part of the transaction strategy rather than being left entirely to the end of the process.
When Should an Owner Start Preparing?
Ideally, preparation begins before the business is formally offered for sale.
More preparation time can give an owner greater opportunity to improve financial reporting, address operational weaknesses, strengthen management, reduce unnecessary risk and consider transaction alternatives.
Not every owner will have years to prepare.
Even when a transaction may occur sooner, identifying potential issues before buyers begin due diligence can improve readiness and reduce surprises.
The Role of Professional Advisors
Significant business sales frequently require several disciplines working together.
Depending on the transaction, the advisory team may include:
- M&A or transaction advisor
- accountant
- corporate lawyer
- tax advisor
- financing advisor
- wealth or estate professionals where appropriate
Each advisor has a different role.
Coordination becomes particularly important when decisions regarding valuation, tax, transaction structure and financing affect one another.
How CFM Approaches Business Sales
CFM begins by understanding the owner's objectives and the business itself.
From there, the process can involve assessing transaction readiness, considering positioning and potential transaction structures, preparing the business for discussions with counterparties and supporting negotiations and execution alongside the client's legal, tax and accounting advisors.
CFM's financing and capital capabilities also provide perspective on how a potential buyer may finance the transaction and how financing considerations can affect deal structure and closing certainty.
For owners who are only beginning to consider a transaction, an early conversation can help identify strategic options before a formal sale process begins.
Sebastien Charles is the Founder and Managing Director of CFM Financial Consulting Inc. His experience spans entrepreneurship, corporate finance, M&A, capital raising, commercial financing, executive leadership and governance.
This article is provided for general informational purposes only. Transaction structures, valuations, financing availability and outcomes depend on the specific business and circumstances. The information should not be considered financial, legal, tax or investment advice.
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