What are the steps to buying a business in Canada?
SHORT ANSWER
Most buyers define what they want, find opportunities, sign an NDA to review the details, make a non-binding offer, sign a letter of intent, arrange financing, complete due diligence, sign the purchase agreement and close. The process usually takes six to twelve months.
- Set your criteria: industry, size, location, and the role you want to play.
- Find opportunities through brokers, M&A advisors, listing sites and direct approaches to owners.
- Sign an NDA and review the confidential information memorandum.
- Value the business on normalized earnings, not the asking price.
- Submit an Expression of Interest, then negotiate a letter of intent.
- Arrange financing. Lenders size loans to what the earnings can repay.
- Complete due diligence on financials, tax, legal, customers and operations.
- Sign the purchase agreement and close, with a transition plan agreed.
How do buyers value a business in Canada?
SHORT ANSWER
Most buyers value a Canadian mid-market business as a multiple of normalized EBITDA, meaning earnings adjusted for one-time costs and a market salary for the owner. Industry sets the starting range, and the eight checks below decide where a specific business lands within it.
For buyers using bank financing, the lender also sets a ceiling, because the business's earnings need to cover the loan payments with room to spare.
Then there is the gap between the price and what the seller receives. Debt is repaid, working capital is adjusted and deal costs come off. A buyer who understands that bridge negotiates differently, and so does a prepared seller.
What buyers look for: what are the eight things they check?
SHORT ANSWER
Every check tests whether the earnings are real and will last without the owner. For each one, here is what buyers do and how sellers can prepare before going to market, so the buyer finds a well-organized business instead of a list of reasons to lower the price.
| The check | What buyers do | How sellers prepare |
|---|---|---|
| 1. Are the earnings real? | Run a quality of earnings review, matching reported revenue to bank deposits and tracing every add-back to a document. | Three to five years of CPA-reviewed statements, personal expenses removed, and a file behind every adjustment. Some sellers run their own review first. |
| 2. How concentrated are the customers? | Look at revenue by customer. When a few customers make up a large share of revenue, buyers usually push the multiple toward the bottom of the range. | Track revenue by customer by month, put key accounts under written contracts, and move relationships from you to your team. |
| 3. How dependable is the revenue? | Separate revenue that must continue (contracts, subscriptions, service agreements) from repeat business with no commitment and one-time project work. | Convert repeat work into agreements where you can. Contracted recurring revenue is one of the strongest drivers of a higher multiple. |
| 4. Does the business run without the owner? | Ask whether the business could run for 90 days without you. When the owner makes every decision, buyers lower the multiple and ask the owner to stay on. | Document systems, delegate key relationships and build a management team. This takes 18 to 36 months. |
| 5. Is there a team behind the owner? | Look for a second in command and single points of failure. High key-person risk lowers the price. | Name and develop key people, and put a retention or phantom equity plan in place well before the sale. |
| 6. Will the contracts survive a sale? | Review customer, supplier and lease agreements for change-of-control or assignment clauses that let the other party walk away. | List every material contract and flag any that need consent. Leases often need landlord approval. |
| 7. Is there enough working capital? | Set a working capital peg: the normal level of receivables plus inventory, less payables, required at closing. A shortfall cuts the price dollar for dollar. | Keep a 12-month working capital schedule, track receivables aging, and agree the method in the letter of intent. |
| 8. Are tax and legal records clean? | Check tax filings, CRA correspondence, minute books, shareholder loans and share ownership history. | Bring filings current, repay shareholder loans, update minute books, and confirm your shares qualify for the Lifetime Capital Gains Exemption. |
The share check needs to happen early, because the exemption tests look back 24 months before the sale (CRA guide T4037). Buyers also look at the age of equipment, vehicles and systems, and maintenance that has been put off shows up as a price reduction.
Why do buyers prefer asset purchases?
SHORT ANSWER
In an asset purchase, buyers choose which assets and liabilities to take and get higher tax deductions on what they buy. Sellers usually prefer share sales, which can qualify for the Lifetime Capital Gains Exemption (CRA). When a buyer insists on assets, sellers often negotiate a price premium to close the gap.
What causes a buyer to lower the price after the letter of intent?
SHORT ANSWER
A price cut during exclusivity is called a re-trade. It is most often caused by the business's performance slipping during the process, add-backs that don't survive review, working capital that wasn't agreed up front, undisclosed problems, or customer concentration worse than represented.
Sellers who disclose the difficult items early, agree the working capital method in the letter of intent and keep exclusivity short give buyers fewer reasons to re-trade. For more, see why deals lose value in due diligence.
What this means for you
If you are buying, this is your checklist. If you are selling, it is the exam, and you can see the questions in advance.
Every item above is fixable with enough runway. Found three years before a sale, a weak spot is a line in your action plan. Found three months before, it becomes a price reduction.
For the full process, see how to sell a business in Canada: the 12-month playbook.
