Who buys Canadian businesses
Five kinds of buyer purchase owner operated businesses in Canada. Each one finances a deal its own way and looks for a different business.
Five kinds of buyer purchase owner operated businesses in Canada. Individuals and search funds buy one business to run, while private equity firms add to companies they already own. Strategic acquirers come from the same industry, and family offices buy to hold. Size decides who looks: individuals dominate below $500,000 of earnings, and private equity screens from $1 million.
Size decides who is looking
Size decides which buyers will look at a business, ahead of its industry or location. The steps are sharp, because crossing one brings in a different pool of buyers.
| Adjusted earnings | Who is looking |
|---|---|
| Below $500,000 | Mostly individuals, with some small strategic buyers |
| $500,000 to $1 million | Individuals and strategic buyers, joined by search funds |
| $1 million to $2 million | Private equity begins to screen, and search funds are most active |
| Above $2 million | A considerably wider pool, with family offices joining private equity and strategic buyers |
| Above $5 million | Institutional buyers arrive |
That is why $900,000 and $1.1 million of earnings are further apart than the numbers suggest. The second reaches a set of buyers who pass over the first, and the free valuation prices that step in: above $1 million of earnings, InvestDeal’s engine adds 0.3 to the multiple.
Individuals
Individuals are the largest group by number and the only buyers for most businesses under $500,000 of earnings. Many are managers or professionals buying a business to run. Others are newcomers to Canada buying an established income, or former owners buying again. In dentistry many buyers are dentists buying a first practice with a bank loan, as selling a dental practice describes.
They are buying a job and a living, and they price it that way: what the business pays them after the loan is what they compare to a salary. They pay with savings and a bank term loan, sometimes a government backed small business loan or one from the Business Development Bank of Canada. Very often part of the price is paid to you over time, which vendor financing explains.
They are also the buyers most dependent on you personally. An individual can still buy a business that depends on its owner, because they intend to become that owner, and they will price it as a job.
Search funds
A search fund is a person, usually with a business school background, backed by a small group of investors to buy a single business and run it. The model has been common in the United States for decades and is increasingly active in Canada.
They want a business with $1 million to $5 million of earnings in a stable industry, steady in its results and simple enough for a capable newcomer to learn. They pay reasonable multiples and finance with bank debt and their investors’ equity, usually asking for some vendor financing on top. Their diligence is thorough because their investors require it.
The searcher becomes the operator, so the business needs to be runnable by someone new. A management team is a strong point; an owner who is the business is a weak one.
Private equity
Private equity funds buy businesses to grow them and sell them again in five to seven years. For an owner operated business the usual route is as an add on: the fund already owns a larger company in your industry and is buying you to attach to it. Heating and plumbing are a clear Canadian example: Right Time Group, a consolidator backed by private equity, counted 20 acquisitions by 2023. Collision repair and insurance brokerage have consolidators of their own, described in the guides to auto repair shops and insurance brokerages.
They screen from about $1 million of earnings and pay more for businesses above $2 million with a management team that stays. They pay well and close reliably, after a diligence process with lawyers and accountants that runs at its own pace. They often want you to keep a minority stake, called a rollover, and stay on, an arrangement some owners welcome and others decline.
Strategic acquirers
A strategic acquirer is a company already in your industry or next to it. Competitors are the obvious ones, and suppliers or customers sometimes buy too, as does a firm in the next city that wants your market. A buyer from the United States who acquires control of a Canadian business files under the Investment Canada Act unless an exemption applies, as selling a software or IT company explains.
They are usually the buyers who can pay the most, because they can serve your customers on their own cost base and pay for savings only they can make. They also call for the most care, because a competitor who learns you are for sale keeps that knowledge even if it walks away. The non-disclosure agreement and staged disclosure exist largely for this buyer.
Family offices
A family office is the investment arm of a wealthy family, and it buys businesses to hold for the long term. Family offices are rarer than the other buyers and look for businesses above $2 million of earnings with a long record. They tend to keep management in place and take their time, and their offers tend to be fair.
What each one is likely to offer
| Buyer | Tends to |
|---|---|
| Individual | Pay the least, usually with vendor financing, and keep you on briefly |
| Search fund | Pay fairly after thorough diligence, for a business a newcomer can run |
| Private equity | Pay well above $2M of earnings and offer a rollover, provided management stays |
| Strategic | Pay the most and decide quickly, with the highest confidentiality risk |
| Family office | Pay fairly and hold for the long term, keeping management |
Why more than one matters
The buyers who pay the most are the ones who know others are looking. A strategic acquirer approached quietly, while a search fund and a private equity fund study the same profile, pays more than it would offer as the only buyer at the door. A buyer who writes to you unprompted is counting on being alone, which is why an unsolicited offer for your business deserves a test against others.
That is the argument for approaching buyers yourself, and for approaching several kinds at once. What the profile says about you decides which of them answer, and the preparation decides what they offer when they do.
Questions owners ask
- Which type of buyer pays the most for a business?
- A strategic acquirer usually pays the most, because it can serve your customers on its own cost base and pay for savings only it can make. Private equity pays well for businesses above about $1 million of earnings with a management team. Individuals pay the least, and they are the only buyers for most businesses under $500,000 of earnings.
- What is a search fund?
- A search fund is a small group of investors backing one person to buy a single business and run it, typically one with $1 million to $5 million of earnings. The searcher becomes the operator, so they want a business someone new can run, and they usually finance the deal with bank debt and a portion of vendor financing.
- How do individual buyers finance a business purchase in Canada?
- Most individual buyers use a bank term loan, sometimes a government backed small business loan or one from the Business Development Bank of Canada, plus their own savings. A portion of the price is often paid to the seller over time. That part, vendor financing, is normal in Canadian deals under about $2 million.