How to Get the Most Money When Selling a Family Business in Canada
- Mar 24, 2022
- 6 min read
Updated: 4 hours ago
Selling a family business is a process that should begin two to three years before the actual transaction. Preparation, not market timing, is what drives sale price. The families that get top dollar are the ones who clean up their financials, lock down key contracts and employees, plan their tax strategy early, and build a team of specialized advisors.
In this episode of The Artisan Podcast, Joseph Abramson, MBA, CFA, Co-Chief Investment Manager & Portfolio Manager at Northland Wealth Management, speaks with Andrew Abdalla, CPA, CA, a partner at MNP and one of Canada’s leading mid-market M&A specialists, about what Canadian entrepreneurs need to know before, during, and after a business sale.
The Canadian M&A Market: More Buyers Than Sellers
The demand side of Canadian mid-market M&A has been strong, driven by several structural factors: low interest rates that made acquisitions cheaper to finance, private equity firms pursuing consolidation and roll-up strategies, and a generational wave of entrepreneurs reaching retirement age. Andrew Abdalla notes that cash flow lending, which barely existed in Canada twenty years ago, has fundamentally changed how buyers finance acquisitions. Where lenders once only advanced against hard assets, buyers can now borrow three to four times a business’s EBITDA at rates that have fallen from 15-20% to 5-6%.
Cross-border activity has also accelerated. Canadian businesses are increasingly attracting European and American buyers, while Canadian acquirers are expanding into U.S. and European markets. Montreal and Toronto in particular have seen significant activity in financial technology, medical technology, and logistics, sectors that barely existed in the mid-market a decade ago.
Start Preparing Two to Three Years Before the Sale
The single most important factor in maximizing sale price is preparation time. Abdalla is direct about the timeline: the exit process should begin at least two to three years before the anticipated transaction. That lead time is needed because several workstreams need to converge simultaneously.
Get the Legal and Organizational House in Order
Buyers conduct exhaustive due diligence, and gaps in documentation kill deals or reduce price. Before going to market, business owners should ensure that their minute books are current, all employees have proper employment agreements with non-compete and non-solicitation clauses, premises leases are secured for the long term, supply and distribution contracts are locked down, and intellectual property ownership is clearly documented and legally defensible.
Abdalla recounts a deal where a seven-store retail chain nearly collapsed at closing because three of the seven store leases were up for renewal within six months. The buyer refused to commit until those renewals were in place, but negotiating lease renewals while the market knows you’re selling eliminates your leverage. These problems are avoidable with a two-to-three-year runway.
Normalize Your Financials
This is where many entrepreneurs unknowingly cost themselves millions. Private business owners routinely manage their reported earnings, depressing profits to minimize income tax or inflating them to satisfy lenders. Both habits create problems at sale time.
“If you’ve purposely depressed your earnings by half a million dollars, you’re saving about $120,000 in income tax. But if your business sells at six times EBITDA, that half million just cost you $3 million on the sale price.”
— Andrew Abdalla, CPA, CA, Partner, MNP
Buyers look at trailing twelve months of earnings, long-term trends, and forward projections. Normalized, audited financials are the foundation of a credible sale process. Abdalla recommends considering an upgrade to review engagement or audit-level financial statements, particularly if the buyer may be foreign and require International Financial Reporting Standards (IFRS). These changes take time to implement and should be started well before going to market.
Tax Planning Must Start Early
Canadian tax law offers meaningful benefits to business sellers, but most require advance planning to implement. The most commonly used tool is the Lifetime Capital Gains Exemption (LCGE), currently approximately $971,190 (indexed annually) on the sale of qualified small business corporation shares. A business owner selling alone can shelter that amount from capital gains tax. But the exemption can be multiplied across family members, including a spouse and adult children, if shares are properly structured and held for at least 24 months.
Setting up this structure takes a minimum of two years to be effective. Rushing it in the months before a sale invites scrutiny from the CRA and risks having the plan denied. The tax savings can be substantial: a family with five members each claiming the exemption could shelter nearly $5 million from capital gains tax.
Beyond the LCGE, sellers should work with their tax advisors to maximize the extraction of value through tax-free intercorporate dividends to a holding company before the sale. The cleaner and simpler the corporate structure at closing, the more confident the buyer will be, and the fewer adjustments they will demand to the purchase price.
Dividend Recapitalization: Taking Money Off the Table Before You Sell
For owners who are not yet ready to sell but want to reduce their concentration risk, Abdalla describes a strategy that has gained traction in the past five years: the dividend recapitalization. A bank lends three to four times the business’s annual EBITDA, and the owner pays that amount as a tax-free dividend to their holding company. The money can then be invested in a diversified portfolio, real estate, or other assets.
For a business generating $3 million in annual EBITDA, this could mean extracting $8-12 million in proceeds while continuing to own and operate the business. The strategy is not without risk, the business now carries debt, but it addresses the concentration problem that nearly all entrepreneurs face: having 90%+ of their net worth locked in a single illiquid asset. For families working with a multi-family office or OCIO, the proceeds from a dividend recapitalization can be immediately deployed into a diversified investment strategy.
Common Mistakes That Reduce Sale Price
Abdalla identifies several errors that he sees repeatedly in mid-market transactions:
• Not having a data room ready. Once a buyer gets serious, they expect organized access to financial records, contracts, employee data, and corporate documents. Scrambling to assemble this information signals poor management discipline and slows the deal, giving the buyer leverage to renegotiate.
• Not knowing your price and terms. A seller who hasn’t worked with advisors to determine a realistic valuation and acceptable deal structure is vulnerable to being manipulated. Getting $5 million for a business sounds good until the terms are $500,000 at closing and the rest payable over ten years.
• Letting ego drive the narrative. Business owners naturally want to talk about what they built. But a buyer is paying for the future, not the past. If the story is “I did this, I did that,” the buyer hears “this business can’t run without the owner.” The goal is to demonstrate that the business operates independently of the founder.
• Skipping professional advice. A successful sale requires an M&A lawyer, an M&A specialist or business broker, and a CPA who understands transaction tax. These are not the same professionals who handle day-to-day legal, accounting, or financial advisory work. Specialization matters.
Government and Institutional Programs for Business Transitions
Both the federal and Quebec governments have established programs to support business transitions, particularly intergenerational transfers. Organizations including Investissement Québec, the Fonds de Solidarité FTQ (labour-sponsored venture capital), and the Business Development Bank of Canada (BDC) offer financing programs designed to help buyers acquire Canadian businesses. Several banks also operate dedicated business transition lending programs.
These programs can be a meaningful part of a deal’s financing structure. Sellers should be aware of them not just for their own benefit, but because flagging available financing to a prospective buyer can make the acquisition more feasible and potentially increase the price the buyer is willing to pay.
After the Sale: Managing the Proceeds
For many entrepreneurs, the sale of a business represents the single largest liquidity event of their lifetime. A family that has had 90%+ of its wealth concentrated in a single illiquid asset suddenly holds a diversified need: cash that must be invested, tax obligations that must be managed, estate plans that must be updated, and often a new identity that must be navigated.
This is the point at which many families engage a multi-family office or outsourced CIO to manage the transition from concentrated business wealth to diversified investment wealth. The disciplines required, asset allocation across public and private markets, tax-efficient portfolio construction, estate planning, consolidated reporting, are fundamentally different from the skills that built the business. Having a team with institutional-quality due diligence capabilities and access to alternative investments becomes critical at this stage.
About the Guest
Andrew Abdalla, CPA, CA provides management advisory services including strategic planning, financing, tax and succession planning, and M&A advisory. With over 20 years of experience helping Canadian business owners maximize the value of their businesses, Andrew specializes in acquisitions and divestitures, business valuations, corporate reorganizations, and government assistance programs. He holds a Bachelor of Commerce and a Graduate Diploma in Public Accounting from Concordia University and has completed the CICA In-Depth Tax Course.
Make sure to check The Northland’s YouTube Channel for more episodes.
