Key terms for selling a business

Acquisition of a smaller business by a private equity fund or strategic buyer, integrated into an existing platform company in their portfolio.

Tax cost of a property (shares, assets) used to calculate the capital gain at sale. Capital gain = sale price minus ACB. A higher ACB means a smaller gain and less tax to pay.

Valuation method that calculates a business's value by taking its total assets at fair market value, minus its liabilities. Used mainly for asset-heavy businesses or holding companies.

Valuation method based on the net value of the business's assets, adjusted to fair market value, minus liabilities.

Process of removing non-qualifying assets (excess cash, passive investments, non-operating real estate) from a corporation so it can qualify as a QSBC and its shareholders can claim the Lifetime Capital Gains Exemption.

Value of a business's assets as recorded on the balance sheet, minus its liabilities. Represents the historical cost of the assets, rarely their actual market value.

Acquisition strategy where an investment fund or strategic buyer acquires several businesses in the same sector to create a larger, more highly valued entity.

Portion of the purchase price the buyer funds with their own equity, as opposed to bank debt or a vendor take-back.

Tax status of a private corporation controlled by Canadian residents. This status can open access to several tax advantages, including in certain qualifying share sales.

Amounts invested in acquiring or improving long-term assets — equipment, machinery, vehicles, technology — needed to maintain or grow the business.

Profit realized on the sale of a property (shares, assets, or other capital property) at a price above its tax cost. Only a portion of the gain is generally included in taxable income, depending on the rules in force on the sale date.

Percentage of a capital gain added to taxable income. In Canada, the rate has historically been 50%. The federal government proposed in 2024 to raise it to 66.7% for gains above $250,000 (individuals) and for all corporate gains, but that change has been suspended.

Valuation method that estimates a business's value by dividing its normalized earnings by a capitalization rate reflecting risk and expected return.

Transaction in which an owner sells a division, product line, or subsidiary while keeping the rest of the business.

Contractual provision giving one party the right to terminate or renegotiate a contract when ownership of the business changes hands.

Risk that arises when a disproportionate share of revenue comes from a small number of customers. Above 20 to 30% with a single customer, buyers generally apply a discount to the price.

Final step of a transaction where ownership of the business is officially transferred to the buyer, funds are released, and all legal documents are signed.

Valuation method that estimates a business's value by analyzing the prices paid for similar businesses in recent transactions. Also called the 'comparables method' or 'market approach'.

Sale strategy where the business is presented to several potential buyers simultaneously to create competitive dynamics and maximize price. The opposite of an exclusive negotiation with a single buyer.

Detailed document prepared by the broker to present the business for sale to qualified prospective buyers. It contains the financial, operational, and strategic information needed to evaluate the acquisition opportunity.

Additional amount paid to secure a majority stake (51%+) in a business. A buyer who holds control can drive all strategic decisions, which justifies a price above the proportional value of the shares.

Second broker who brings a qualified buyer into a transaction led by the listing broker, with fees shared between the two.

Strategy of voluntarily triggering a deemed capital gain to use the Lifetime Capital Gains Exemption now, before a future sale. Locks in the tax saving and guards against potential legislative changes.

A financial indicator that measures the proportion of debt relative to a business's equity or total assets. In a transaction context, it shapes how the acquisition can be financed.

The total annual principal and interest payments required to repay acquisition debt. If the business can't cover debt service, the transaction won't close — no matter the agreed-upon price.

The accounting allocation of an asset's cost over its useful life. A non-cash expense added back to net income to calculate EBITDA — the profitability measure used in business valuation.

A reduction applied to the value of a private business to reflect the fact that its shares can't be sold quickly on an organized market, unlike publicly listed securities.

The rate used to convert future cash flows into present value. It reflects the risk level of the investment: the higher the risk, the higher the rate, and the lower the present value.

A valuation method that estimates a business's value by calculating the present value of its projected future cash flows, adjusted for risk and the time value of money.

The voluntary sale of a business unit, division, or asset by a company, usually to refocus operations or free up capital.

An amount paid by a corporation to its shareholders out of accumulated earnings. Before a sale, inter-corporate dividends help purify the company; after the sale, they help extract the transaction proceeds.

In-depth investigation conducted by a potential buyer to verify the financial, legal, operational, and tax information of the business before finalizing the transaction.

A portion of the sale price contingent on hitting performance targets (revenue, EBITDA, customer retention) after closing. A mechanism that bridges the gap between the seller's and the buyer's price expectations.

Earnings before interest, taxes, depreciation and amortization. A key indicator for measuring a business's operating profitability and for framing conversations about its value.

The process of adjusting EBITDA to reflect the business's real, recurring profitability, excluding non-recurring expenses, owner personal perks, and accounting anomalies.

The total value of a business including equity and net debt. It's the price the buyer pays for the entire operation, before deducting debt.

A tax planning technique that freezes the value of an owner's shares at their current value and transfers future growth to the next generation or to a family trust, allowing the capital gain to be crystallized at a chosen moment.

The period during which the seller commits to negotiating exclusively with a single buyer, generally after signing a letter of intent. Typically 60 to 90 days.

The plan an owner sets up to leave their business in an orderly way — whether through a third-party sale, a family transfer, a management buyout, or another path.

The most probable price at which a business would change hands between a willing, informed buyer and seller, each acting without constraint.

The sale or transmission of a business to a member of the owner's family. Combines tax, emotional, and operational dynamics distinct from a third-party sale.

A legal structure used to hold shares for the benefit of family members, used in estate planning to multiply the Lifetime Capital Gains Exemption on the sale of a business.

An investor — private equity fund, search fund, or investor group — who acquires a business primarily for the financial return it can generate, rather than for operational synergies.

A projection tool that simulates a business's future cash flows and tests different acquisition scenarios. It's the model — not EBITDA alone — that determines the actual price a buyer is willing to pay.

The amount of cash generated by the business after covering its capital expenditures and working capital needs. It's the money actually available to repay debt, pay dividends, or reinvest.

The phase of the sale process where the broker presents the business to qualified potential buyers. Includes CIM preparation, prospect identification, first contacts, and management of expressions of interest.

The value of a business treated as an ongoing operating entity, including goodwill and the potential for future earnings.

The intangible value of a business that exceeds the value of its net tangible assets. Represents the customer base, reputation, processes, relationships, and competitive advantages not recorded on the balance sheet.

The percentage of revenue that remains after subtracting the cost of goods sold. A key indicator of a business's pricing power and production efficiency, closely scrutinized by buyers.

A portion of the sale price held back by the buyer or placed in escrow after closing to cover possible claims tied to representations and warranties.

A corporation whose main role is to hold shares of an operating company. In a business sale, it allows personal taxation to be deferred by receiving the sale proceeds as a tax-free inter-corporate dividend.

A sale structure that combines elements of a share sale and an asset sale in the same transaction. Allows the seller and the buyer to each optimize their tax position by splitting the price between the two mechanisms.

Valuation method based on a business's ability to generate future income, including discounted cash flow and capitalization of earnings.

Financial statement that presents a business's revenue, expenses, and net income over a given period. It's the first document a buyer examines when analyzing an acquisition.

Preliminary, non-binding expression by a prospective buyer of their interest in acquiring a business, accompanied by a price range and general terms.

A natural person who acquires a business to run it themselves, as opposed to a corporate buyer or an investment fund.

Asset without physical form — goodwill, brand, patents, customer relationships — often representing most of a business's value.

Set of intangible assets protected by law — patents, trademarks, copyrights, trade secrets — that can significantly increase a business's value at sale.

Annualized return a buyer projects on their investment. It's the main decision criterion for financial buyers — if the IRR doesn't meet their target at the asking price, the offer will be revised downward.

Fundamental value of a business calculated from its ability to generate future cash flows, independent of market conditions or what a specific buyer might be willing to pay.

Document that formalizes a buyer's serious interest and the broad outlines of an offer — price, structure, conditions, and timeline — before due diligence.

Acquisition strategy where the buyer finances a significant portion of the price (often 60% to 80%) with debt, secured by the assets and cash flows of the acquired business.

Tax mechanism that allows, under certain conditions, a reduction of the taxable portion of a capital gain realized on the sale of qualified shares of a Canadian-controlled private corporation, up to the applicable lifetime limit.

Amount a business's assets would fetch if sold individually, without a going concern. Almost always the lowest-value scenario.

Acquisition of a business by an outside manager or management team who take operational control. A common scenario when no internal successor is available.

Transaction in which the existing executives or key employees buy the business from the owner. A form of internal succession that preserves operational continuity.

Valuation method based on prices paid for comparable businesses in recent transactions or on public market multiples.

Contractual commitment by which the seller agrees not to operate a competing business or solicit customers and employees of the sold business, for a defined duration and within a defined territory.

Legal contract signed by a prospective buyer before receiving sensitive information about the business for sale. Protects the seller against disclosure, misuse, or unauthorized sharing of confidential information.

Contractual commitment by which the seller agrees not to solicit the sold business's employees or customers for a defined period after closing.

Non-exclusive listing that lets the seller work with several brokers at once, with only the broker who brings the successful buyer earning a fee.

Situation where a business's operations, customer relationships, or know-how rest primarily on its owner. It's the single factor that most often lowers the value of Quebec SMEs at sale.

Adjusted financial statements that project a business's future performance based on certain assumptions. In a sale context, they demonstrate the real potential of the business after normalization.

Final, binding legal contract that formalizes the sale of the business. Defines the price, structure, representations and warranties, closing conditions, and remedies in case of breach.

Formal document by which a buyer proposes to acquire a business on specific price, structure, and timeline terms. Can be conditional or firm.

Allocation of the total transaction price across the different asset categories (equipment, inventory, goodwill, non-compete clause, etc.) in an asset sale, each carrying a distinct tax treatment for the seller.

Prospective buyer whose financial capacity, sector relevance, and seriousness of intent have been verified before they receive confidential information about the business for sale.

In-depth analysis commissioned by the buyer to verify the quality, recurrence, and reliability of a business's reported earnings. It's the most rigorous financial examination you'll face during a sale.

Restructuring of a business's capital where the owner sells a majority stake to a financial partner while keeping a minority position. Lets you cash out a significant portion of the value while staying involved.

Tax triggered when a depreciable asset is sold for more than its undepreciated capital cost (UCC). The difference is taxed as ordinary income, not as a capital gain — a frequent tax surprise in asset sales.

Predictable revenue that repeats regularly, whether through contract, subscription, or buying habit. The more recurring the revenue, the higher the valuation multiple.

Formal statements by the seller in the purchase and sale agreement about the state of the business — accuracy of financial statements, absence of hidden liabilities, validity of contracts. Their falsity exposes the seller to liability after closing.

Contractual right granted to an existing shareholder or partner to acquire shares offered to a third party, on the same terms, before the sale can be completed.

EBITDA plus the owner's salary and personal expenses run through the business. It's the standard profitability measure for small businesses where the owner plays a central operating role.

Contract between the owner and a business broker that authorizes the broker to represent the seller and run the sale process. Defines duration, scope, compensation, and the obligations of both parties.

The two legal structures for selling a business. A share sale transfers ownership of the entire corporation; an asset sale transfers specific assets, rights, or contracts. Each structure carries very different tax, legal, and operational consequences.

Contract between the co-owners of a corporation governing their rights and obligations — restrictions on share transfers, rights of first refusal, shotgun clauses, drag-along and tag-along rights. Not to be confused with the purchase and sale agreement.

The difference between total assets and total liabilities on a business's balance sheet. In a transaction context, shareholders' equity determines what the seller actually receives after net debt is deducted.

Mechanism in a shareholders' agreement that lets one partner offer to buy out the other at a set price — the other must either accept, or buy out the first partner at the same price.

The reference framework that defines the type of value being sought in a business valuation, and that directly influences the result.

A company already active in the same or a complementary sector that acquires another business to capture operational synergies, expand its customer base, or accelerate growth.

A form of debt that sits between senior bank debt and equity in the capital structure, offering a higher return in exchange for a lower repayment priority.

A compensation model where the broker is paid only if the sale closes. The fee corresponds to a percentage of the final sale price. If the transaction fails, the seller pays nothing.

A structured, multi-year process of preparing the ownership transition of a business — whether to family, the management team, or an outside buyer.

The additional amount a strategic buyer is willing to pay because the combination of the two businesses creates value greater than the sum of the parts.

A provision of the listing agreement that protects the broker after the engagement expires. If a transaction closes with a buyer identified or introduced during the engagement, the broker still collects their fee even after the agreement has ended.

Tax mechanism (Section 85 of the Income Tax Act) that allows assets to be transferred to a corporation without triggering immediate tax. Used before a sale to restructure ownership, notably when transferring shares to a holding company.

A short marketing document (1-2 pages) describing a business for sale without revealing its identity. Used to generate interest from potential buyers while protecting the seller's confidentiality.

An estimate of a business's value beyond the explicit projection period (typically 5 to 7 years) in a DCF model. Captures the share of value that comes from the business's ongoing activity after the modelled window.

A professional who facilitates the sale of a business by acting as an intermediary between the seller and potential buyers. Includes business brokers, M&A advisors, and middle-market M&A firms.

Period following closing during which the seller stays involved to ensure the transfer of knowledge, customer relationships, and management to the new owner. Typically lasts 3 to 12 months.

A ratio used to estimate the value of a business by multiplying a financial indicator (usually EBITDA) by a factor that varies with industry, size, and risk.

A formal document produced by an accredited valuator that establishes the value of a business according to recognized standards. In Canada, there are three levels of report: calculation, estimate, and comprehensive.

Due diligence run by the seller before going to market, allowing issues to be identified and corrected proactively.

A portion of the sale price the buyer pays to the seller over a defined period after closing, rather than in full on the day of the transaction. The seller temporarily acts as a lender.

A secure online platform where the seller shares confidential business documents with potential buyers during due diligence.

The average rate of return required by all providers of capital in a business (debt and equity), weighted by their respective share of the financing structure.

The difference between current assets (cash, accounts receivable, inventory) and current liabilities (accounts payable, short-term debt). Measures a business's ability to finance day-to-day operations.

A contractual mechanism that adjusts the final sale price based on the gap between actual working capital at closing and the target agreed between the parties.