Canada: The Golden Rules When Selling A Business

Over the years, I have helped many business owners and executives to sell their company. In each case, I have tried to educate my clients on the do's and don'ts that, when followed, significantly increase the likelihood of securing a good deal, thereby allowing my clients to realize their financial and personal goals. I refer to these guidelines as "Howard's Golden Rules".

1. Make the Company an Attractive Acquisition Target

Before soliciting prospective buyers, the seller should undertake initiatives to make their company an attractive acquisition target. Buyers are wary of "transition risk", being the risk that major customers and key employees will leave the business shortly after it has been acquired. Therefore, the seller needs to ensure that they have a strong and committed management team in place (beyond the business owner). Ideally, owners should make themselves redundant to the business. Over-reliance on the business owner makes it difficult to sell the business on attractive terms. Consequently, many business owners become "stuckholders", who are unable to sell their business without their continued long term involvement (and deferred payment terms). Likewise, the company should work to create "customer stickiness" through unique product or service offerings, customer service, long term contracts or other means, so as to increase the buyer's perception of revenue stability.

2. Timing is Everything

It's not possible to determine the optimal time to sell a business, but there are various indicators as to whether timing is good or bad. In general, businesses sell for higher values when they have demonstrated growth over the past few years in both revenues and cash flow, and there is reason to expect that growth to continue. Proof is worth more than promises, so a business with a poor track record will often be acquired on a contingent payment basis, which means that the seller still retains the risk. Growing businesses also tend to fetch higher valuation multiples and attract more buyer interest, which is fundamental to creating a strong negotiating position.

3. Understand the Components of Value

There are three underlying components to value, being: (i) the cash flow that a business is expected to generate; (ii) the valuation multiple (or rate of return) applied to that cash flow; and (iii) the underlying assets of the business. Cash flows and valuation multiples are inter-related. The product of these two factors determines the "enterprise value" of the business. Deducting outstanding debt from enterprise value results in the equity value (i.e. share value) of the business. But don't forget about the balance sheet. It's not just about the price that's paid for the business, but also the underlying net assets (e.g. working capital and retained earnings) that must be delivered to the buyer in support of that price. The key in this regard is to get a high price for the shares (equity value) on the least amount of underlying net assets, thereby maximizing "intangible value" – which is the essence of shareholder value creation.

4. Understand Each Buyer's Motivations

In many cases, the seller is anxious to show what a great company they have built, so they focus on providing a lot of information to prospective buyers. But it's important to recognize that the sale of a business is a two-way street. Every buyer is unique. The seller needs to understand the interests and motivations of each buyer, and how their company will fit into the buyer's long term strategy. This insight will help the seller in negotiations. It's also important to look for clues as to buyer synergies, which will influence the price that a buyer is willing to pay. In most cases, the best buyer is what I refer to as a "platform buyer", being one that looks to leverage the target company's product and service offerings, customers and employees. Platform buyers tend to focus on revenue growth, and are more willing to pay for synergies, as opposed to buyers that emphasize cost-cutting following the transaction.

5. Stay in Control of the Process

Buyers act out of their own self-interest in order to minimize the price they pay and to get the best terms from their perspective. Therefore, many buyers will attempt to derail the sale process in order to avoid being part of an auction. Common tactics include delaying responses to questions from the seller's intermediary, declaring their position of being unwilling to participate in an auction, and trying to get the inside scoop on other offers. It's important that the seller maintain control of the sale process in order to effectively negotiate a good deal. This means having some flexibility to accommodate reasonable buyer requests, but ultimately coordinating the receipt of offers from buyers around the same time frame in order for the seller to maximize their negotiating position.

6. Create a Strong Negotiating Position

Selling a business ultimately comes down to negotiations. The seller's negotiating position is a function of the number and quality of alternatives available to them. You can't negotiate effectively unless you understand the potential downside of losing a prospective buyer that decides to walk away. The seller's negotiating position is strengthened when they understand the buyer's motivations and potential synergies, as noted above. It's also important for the seller to maintain credibility, which can be compromised when the seller suddenly changes their demands or provides inaccurate information to the buyer. For example, many sellers present prospective buyers with forecasts and projections that are overly optimistic. When this undue optimism is found to be unsupportable during the due diligence period, the seller's credibility is compromised and their negotiating position is weakened.

7. Deal Structuring is Key

Sellers tend to emphasize the highest price. But the terms of the deal are equally important. The terms of the deal dictate when, how and under what conditions the purchase price is (or is not) paid. In this regard, the seller should recognize that any dollar not received at the closing of the transaction represents a dollar at risk. They must be satisfied that the upside potential is worth the risk. It's also important to recognize that there are three parties to every deal – the buyer, the seller and the government. There are many ways that transactions can be structured so as to legitimately reduce or defer the government's take. This includes consideration of whether the shares or assets of the business are sold, the structure of contingency payments, and remuneration paid to the seller pursuant to a management contract after closing.

8. Secure a Comprehensive Letter of Intent

The letter of intent (LOI) is a pivotal document in any transaction. While the LOI is non-binding, it establishes the parameters of the deal and sets the stage for negotiating the purchase agreement. Once the seller an LOI, it grants the buyer a period of exclusivity to conduct final due diligence and close the deal. During that time, the buyer has the advantage in negotiations, as it becomes difficult for the seller to switch horses. The seller generally has the negotiating advantage up to the execution of the LOI. Therefore, it's critical for the seller to ensure that the LOI is specific with respect to the purchase price, the terms of payment and other important elements of the deal. Anything not covered in the LOI is subject to negotiation during the exclusivity period, where the buyer has the upper hand. If the seller can't negotiate a favourable LOI, they will not be able to negotiate a favourable purchase agreement.

9. No Surprises in Due Diligence

Sellers should not underestimate the time and effort that will be required from them, and their management team, during the due diligence phase. Most buyers conduct a detailed due diligence investigation on every aspect of the target company. It's important that there are no surprises during the due diligence phase that give the buyer the opportunity to renegotiate the price or terms of the deal (which is when the buyer has the upper hand). Any significant issues involving the company (e.g. legal claims, environmental concerns, customer issues, etc.) should be addressed prior to the time that the seller executes the letter of intent.

10. Stay Focused on the Business

The sale of any business is a comprehensive undertaking. Part of my job as an investment banker is to relieve as much of the work as possible from my client so that they can stay focused on running their business. Ensuring that the business runs smoothly and reports satisfactory financial results during the sale process and through the closing date is critical. This is because most buyers carefully scrutinize a company's most recent financial results when establishing their offer price. Furthermore, any deterioration in the financial results or the operations of the business (e.g. lost customers) during the due diligence period can result in renegotiations of the price and terms, and possibly even jeopardize the deal itself.

The sale of a business is fraught with potential pitfalls and challenges. However, if the process is well managed, the seller can maximize shareholder value, both from the perspective of a good price and attractive deal terms. Remembering Howard's Golden Rules can be helpful in that regard.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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.

In association with
Related Video
Up-coming Events Search
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
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

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