Canada: Buying a Business: Avoiding the “7 Deadly Sins”

Last Updated: September 18 2015
Practice Guide by Duff & Phelps

Business owners and executives sometimes look to acquire another company as a means of growing their business. While corporate acquisitions can help in achieving growth objectives, it is important to avoid those things that can significantly erode shareholder value, and possibly be disastrous. 

While there are numerous reasons that acquisitions fail to yield the results anticipated, this article addresses some of the most common reasons for failure. These “7 deadly sins” are summarized in Exhibit 1:

Exhibit 1
The 7 Deadly Sins of Corporate Acquisitions

Lack of Strategic Fit

Many business owners and executives take a reactive, as opposed to a proactive, approach to acquisitions. That is, they wait for opportunities to present themselves rather than actively seeking out prospective targets that meet established criteria. The risk in a reactive approach is that acquisition opportunities might be pursued because a target company becomes available for sale, but it might not represent a strategic fit for the buyer.

Corporate acquisitions must fit into a company’s long-term strategic plan. Based on its strategic plan, buyers should be able to compile a list of acquisition criteria, in terms of target company size, product and service offerings, markets served and other pertinent criteria. Having well-developed criteria beforehand will help the buyer to avoid expending time and effort on acquisition opportunities that are clearly not a fit. The buyer’s strategic plan should also address other key elements, such as when it would be better to build vs. buy, or when a joint venture might be considered.

Taking a proactive approach can assist the buyer in creating new opportunities and may allow the buyer to avoid a long drawn-out auction process. This is not to suggest that a proactive approach will result in a buyer paying less than fair value for an acquisition target, but rather it can allow the buyer and seller to work together in an expedited and confidential manner that facilitates structuring a deal that meets the needs of all parties involved.

Inadequate Analysis

Many buyers do not expend sufficient effort to conduct a thorough analysis of the target company. There are many reasons for this, including constraints due to time, cost or other resources. In some cases, buyers look to rely on the seller’s representations and warranties to compensate for shortfalls in due diligence. However, such a strategy seldom works out as planned. Inevitably, buyers that do not conduct sufficient analysis on the target company find themselves faced with hidden liabilities, unanticipated integration issues and other problems that consume far more time and expense than would have been incurred to conduct thorough due diligence in the first place.

Buyers should recognize that corporate acquisitions will require a considerable investment in both management time and the cost to engage the external resources needed to fully assess the opportunity (e.g. intermediaries, legal counsel, tax advisors). In this regard, business owners and executives should ensure that the external advisors who are retained are intent on providing sound and objective advice, and that they are not eager to get the deal done simply to generate fees.

Too Much Emphasis on EBITDA

Buyers tend to emphasize the target company’s most recent EBITDA (earnings before interest, taxes, depreciation and amortization) when assessing the cash flow prospects of the target company. While multiples of EBITDA are frequently referred to as the basis for business valuation and pricing, an over-emphasis on EBITDA can be dangerous.

EBITDA is a lousy measure of shareholder value. This is because EBITDA ignores important components of value, including:

  • the capital expenditures that a company will require in order to maintain and grow its operations;
  • the incremental working capital that a company will need to support revenue growth; and
  • income taxes.

A preferable approach is to adopt a discounted cash flow valuation methodology, based on forecasted discretionary cash flow, which explicitly accounts for all of the factors outlined above. Buyers should also take into account synergy expectations (discussed below), integration costs and debt servicing costs when assessing cash flow expectations.

Ignoring the Balance Sheet

Buyers usually focus on the past and prospective operating results of an acquisition target as indicated on its income statement. The balance sheet of the target company often is not given the consideration that it deserves. The balance sheet reveals the underlying assets that the target company will need in order to generate sales and profitability. In particular, the buyer should focus on the target company’s working capital and fixed asset requirements.

The buyer should ensure that it understands the working capital requirements of the target company, in order to avoid a situation where the buyer must make a capital injection shortly after the transaction date, in order to settle liabilities such as accounts payable or even to make payroll. In this regard, the buyer should be particularly cognizant of any seasonality within the target company’s operations so that it understands how working capital requirements will change over the course of the year.

The target company’s fixed asset requirements are also important for the buyer to consider. In this regard, the buyer should ensure that it understands the level of capital expenditures that will be needed in order to maintain and grow the target company’s operations. The cash flow statements can be insightful in this regard, as they will illustrate historical spending patterns. Buyers should be alert for situations where the seller has reduced capital investment levels in the years leading up to the sale, thereby leaving the buyer with outdated equipment that will have to be upgraded in the near term.

Overpaying for Synergies

Buyers frequently focus on the expected synergies that will be generated in terms of cost savings, incremental revenues and other strategic benefits stemming from combining their existing operations with those of the target company. The costs of realizing those benefits, and the risk that they may not materialize to the extent anticipated, often are not afforded adequate consideration.

The costs of realizing cost-saving synergies can include such things as severance payments, relocation expenses and restructuring costs. With respect to synergies in the form of incremental revenues, the buyer should be aware of the incremental costs necessary to generate those revenues. This may include headcount additions, new equipment and higher levels of working capital (e.g. inventories and accounts receivable). In many cases, the expenditures must be incurred up front, with the hope (and risk) of the synergies materializing as planned.

Buyers should assign a “probability factor” to the synergies that are anticipated to accrue from an acquisition. The probability factor should reflect the risk that the synergies may not be realized as anticipated. Therefore, the probability factor may differ based on the nature of the synergies (e.g. cost savings may be more readily attainable than incremental revenues). To the extent that synergies are not paid for, they represent a buffer against other unanticipated costs that may be incurred following an acquisition.

Focusing Only on Price

It is natural for the buyer to focus on paying the lowest price for an acquisition, while the seller is concerned with maximizing the price received. The buyer (and the seller) should recognize that the terms of the deal are just as important as the price that is paid.

The terms of the deal revolve around three basic elements, being (1) whether the assets or the shares of the target company are acquired; (2) the forms and terms of payment; and (3) the provisions of a management contract.

Buyers usually prefer to buy the assets of the target company in order to avoid hidden liabilities and for tax advantages (in terms of additional write-offs), whereas sellers usually prefer to sell shares for their own tax benefit. The buyer may benefit from a purchase of shares where the seller is prepared to compromise on the purchase price and is amenable to holdbacks or other mechanisms that reduce the risk of the buyer assuming hidden liabilities. The purchase of shares can also simplify a transaction where it helps the buyer to avoid having to transfer and renegotiate contracts held by the target company.

The forms and terms of payment dictate when, how, and under what conditions the purchase price is (or is not) paid. Apart from cash on closing, the buyer can use holdbacks, promissory notes, share exchanges, earn-outs or other payment structures to satisfy the purchase price. To the extent possible, the buyer should focus on devising a “value-based pricing strategy”, whereby the purchase price is paid as value is realized from the acquisition. This can help in bridging the price expectations gap between the buyer and the seller, while mitigating the risk to the buyer.

A management contract usually is entered into where the seller’s continuing involvement in the operations of the business is necessary in order to help transition the acquired company. Buyers should be aware that, in many cases, management contracts do not generate the anticipated results over the longer term, particularly where the seller receives a substantial amount of cash at closing, and leaves them with little incentive beyond that point. In any event, many sellers find it difficult to make the transition from being their own boss to an employee of the buyer. Therefore, the buyer is well advised to work on ensuring a quick transition.

Where it is important that the seller remain involved in the company for a prolonged period of time (say 3 or more years), the buyer might consider acquiring less than 100% of the target company (say 60%), and allowing the seller to retain a minority interest, with a call option on the remaining shares that takes effect at some future date. This can help in aligning the interests of the buyer and the seller in terms of long-term shareholder value maximization. However, it can create other issues in terms of the buyer’s accountability to the minority shareholder and their rights. A well constructed shareholders agreement is critical in this regard.

Poor Integration

Poor integration frequently is cited as one of the most common reasons that acquisitions fail. In many cases, buyers do not adequately plan for issues that arise subsequent to the transaction date, particularly those stemming from different cultures, management styles and other employee-related matters. In some cases, the buyer is so intent on ensuring that the customers and employees of the acquired company are content that they neglect to consider the impact of the transaction on their existing operations. The results can be catastrophic.

Buyers should assess the level of “transition risk” at an early stage of the acquisition process. Transition risk is the risk of losing key employees and key customers of the target company following the transaction. Where the buyer perceives that transition risk is high, it should re-evaluate the business case for the transaction, no matter how attractive the price or terms may appear to be.

Where the buyer does proceed with the transaction, it should ensure that a sound integration plan is in place beforehand, complete with milestones, assigned responsibilities and a good communication plan. Further, those employees who are in charge of the integration should be given the authority to modify the plan as needed, in order to deal with issues and opportunities that undoubtedly will arise.

Next Steps

Corporate acquisitions can be an effective means of creating shareholder value, so long as they are conducted in a disciplined manner and the major downfalls are recognized and avoided.

This document is not intended to create an attorney-client relationship. You should not act or rely on any information in this document without first seeking legal advice. This material is intended for general information purposes only and does not constitute legal advice. If you have any specific questions on any legal matter, you should consult a professional legal services provider.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Contact the Author?
Click here to email the Author
In Association with
In Partnership with
Other Canada Advice Centres
Competition and Antitrust
Mergers and Acquisitions
Labour and Employment
More Advice Centers
Useful Resources
CBVs are experts in their field. The following articles and papers have been written by CBVs, several articles have been featured in various national publications.
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions