With an economic and corporate landscape evolving faster than ever, the due diligence process in an M&A transaction requires a thoughtful and strategic approach to ensure deal success. It’s crucial for buyers and sellers to have a clear understanding of its key components:

• Financial Due Diligence – A deep analysis of the target’s financial statements to assess cash flows, profitability drivers, recurring and non-recurring expenses, key performance indicators (KPIs), and working capital management. It also ensures the accuracy of the reported revenues, expenses and profits to help identify potential risks and determine the target’s true financial health and value.
• Operational Due Diligence – A detailed review of the target’s operations including supply chain dynamics, company-specific processes, chain of command, and day-to-day activities. The goal is to assess the business efficiency, risks and scalability, while finding areas where buyers can add value.  
• Commercial Due Diligence – Analyzes the company’s market position, competition, customers, revenues streams, value proposition, and overall business model. It’s a crucial step for buyers to understand if the target aligns with their long-term strategic goals and to forecast post-acquisition performance.
• Legal Due Diligence – Involves reviewing contracts, agreements, regulatory compliance, litigation history, potential employment and labor issues, and evaluating intellectual property. The goal is to mitigate future liabilities and ensure a smooth and legally sound transaction.

Changing Landscape of Due Diligence

Having the majority of this information covered early in the Confidential Information Memorandum (CIM) may help mitigate future roadblocks, but even with a thorough preparation, due diligence can be unpredictable. In fact, buyers are spending more time than ever on due diligence since the pandemic.

Source : https://www.srsacquiom.com/our-insights/due-diligence-process-ma-advisor/

The shift is primarily driven by increasingly complex transactions in terms of operations, technology, regulatory environment, and economic uncertainty. More extensive research and validation period is often required, leading to a longer process. With time being a primary “deal killer” in M&A, it’s more important than ever to adhere to a proven process to drive an efficient deal execution.

Intangible Factors Affecting the Due Diligence Process

Beyond the complexity, there are other aspects that can impact the process: 

• Emotional Component – Many baby boomers are looking to transition out of their family or founder-led businesses which can add an emotional layer to the transaction. Due diligence can feel intrusive, which could lead to sellers pushing back on important disclosures required to complete the transaction. In these cases, an M&A advisor can help maintain objectivity between the parties and reduce the emotional friction during negotiations.  
• Impact on Day-to-day Operations – Due diligence requires a significant time commitment and resources. If the owner or executives shift too much focus away from the business, it can lead to a decrease in results and impact the transaction value and deal structure. Support from an M&A advisor can ensures business continuity during the process.
• Coordination of Tasks – There are several parties involved in the due diligence process – lawyers, accountants, bankers, advisors – making the coordination of tasks a challenge. An M&A advisor is there to quarterback the transaction and coordinate an efficient flow of information between all parties.   

When considering the above, it’s clear why having a strong support team – M&A advisor, banker, lawyer, accountant, wealth manager – is crucial for a successful M&A transaction.

Patrik Landry
patrik.landry@confederationgroup.ca

For business owners contemplating the sale of their companies, announcements made on January 31, 2025 from the Department of Finance Canada may significantly influence the timing of their decision. The Government of Canada has announced a deferral in the implementation of an increase to the capital gains inclusion rate, which will now take effect on January 1, 2026, rather than June 25, 2024, as initially planned. This change will raise the inclusion rate on capital gains realized annually above $250,000 from one-half to two-thirds.

The delay allows business owners to take advantage of the lower inclusion rate for another 10-months. Under the current rules, only 50% of the capital gains are taxable, and after the change, the taxable portion will increase to 66.67%, likely resulting in a higher tax burden for those who delay their sale until after the new rules take effect.

This additional window is critical for optimizing both the sale process and tax outcomes. The deferral provides an opportunity to maximize after-tax proceeds by selling before the change occurs on January 1, 2026.

With these new timelines in mind, it’s prudent for business owners to consult with financial advisors, accountants, and tax specialists. The decision to sell a business involves complex financial planning, and understanding the potential tax implications of these changes is crucial to making an informed decision.

The government’s decision to delay the capital gains inclusion rate offers business owners a valuable opportunity to assess their options and potentially minimize their tax liability. The window is short; however, there is time for business owners to sell their business by the end of 2025 which has potential to provide them with significant tax savings compared to a sale after January 1, 2026.

More information on the changes on the deferral in implementation of changes to the capital gains inclusion rate can be found here: https://www.canada.ca/en/department-finance/news/2025/01/government-of-canada-announces-deferral-in-implementation-of-change-to-capital-gains-inclusion-rate.html

Peter MacSwain
peter.macswain@confederationgroup.ca

Despite potential headwinds, the Canadian M&A landscape looks promising in 2025 following several years of disruptions. Factors such as rising interest rates, inflationary pressures and global supply chain disruptors led many businesses to adapt a more cautious approach, prioritizing stability over expansion in prior years. Here are some key reasons for optimism as we enter the New Year.

Rising Private Equity Appetite for Portfolio Companies and Add-On Opportunities

PE firms are expected to play a significant role in the Canadian M&A market in 2025. These firms are increasingly interested in acquiring high-growth businesses to expand their portfolios, particularly in sectors such as technology, healthcare, industrials, and manufacturing. Many PE firms are also focused on add-on acquisitions, where they seek to acquire smaller companies that can complement or enhance the performance of existing portfolio businesses.

For business owners considering a sale, this rising PE appetite presents an opportunity to sell to financially sophisticated buyers who can offer not only attractive valuations but also the potential for continued growth and support post-sale. The ability of PE firms to structure deals flexibly, with varying levels of equity involvement and financing options, provides business owners with a range of options to consider when exiting their business.

Interest Rate Decrease

The Bank of Canada delivered another 50-point basis cut to interest rates on December 11^th, bringing the central bank’s benchmark rate to 3.25% from 5% last year. The expectation is that interest rates will continue to gradually decrease in 2025 landing somewhere between 2% to 3%, boosting market liquidity and stimulating M&A activity.

Lower rates will make financing more accessible for buyers, increasing their purchasing power and potentially boosting valuations for businesses on the market. For business owners, this could translate to not just higher valuations but more competitive deal terms, especially for those in sectors that are poised for growth.

The Rise of Cross-Border Transactions

More U.S. companies are seeking acquisitions in Canada due to a combination of strategic, economic, and operational factors. Canada offers a stable and predictable business environment, close proximity to the U.S., similar legal and regulatory frameworks, and an opportunity to diversify geographically and reduce risks of a sole domestic market.

For business owners, the rise in cross-border transactions presents an opportunity to tap into a larger pool of potential buyers. This can result in more competitive and strategic offers, as U.S. buyers may bring not only financial resources but also expertise and a broader market reach.

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The Canadian M&A landscape in 2025 appears to be poised for growth. However, there are a number of potential obstacles that could hinder the growth’s full potential. How will the reduced immigration targets impact businesses? Will the heavy debt burden of Canadians impact residents’ household spending? Will the amendments to the Competition Act have a greater impact on small and medium sized transactions in Canada that are part of a PE roll-up strategies or have a foreign acquirer? Finally, and the big one, what are the impacts on Canada as Donald Trump begins his second presidency of the United States on January 20, 2025?

Peter MacSwain
peter.macswain@confederationgroup.ca

Selling a business is a significant milestone that requires meticulous preparation to ensure you achieve the best possible outcome. Here are some of the critical areas to address before putting your business on the market:

1. Reputation In The Market, Employee & Customer Satisfaction – Your business’s reputation is a cornerstone of its value. A strong market reputation can be a magnet for potential buyers. Ensure that your business is known for reliability, quality, and ethical practices. Equally important is maintaining high levels of employee and customer satisfaction. Happy employees are productive and loyal, reducing turnover and increasing operational stability. Satisfied customers are more likely to provide repeat business and positive referrals, enhancing your market position.
2. Develop Sticky Customers With Low Concentration – A diversified customer base minimizes risk and makes your business more attractive to buyers. Focus on developing “sticky” customers—those who are loyal and have integrated your products or services into their daily operations. Avoid having a high concentration of revenue from a few customers, as this poses a risk if one or more leave. A balanced and broad customer base signals stability and growth potential.
3. Supply Chain Diversification – Diversifying your supply chain reduces dependency on single suppliers, which can mitigate risks related to supply disruptions. Ensure you have multiple reliable suppliers for critical components or services. This not only secures your operations but also instills confidence in buyers about the continuity of business post-acquisition.
4. Develop a Financial Reporting System That Can Be Relied Upon – Accurate and transparent financial reporting is crucial. Buyers need confidence in the numbers presented. Develop a financial reporting system that provides clear, consistent, and accurate financial data.
5. Knowing Your Value Proposition In The Market – Understanding and articulating your unique value proposition is vital. What sets your business apart from competitors? This could be your product quality, customer service, innovation, or market share. Clearly defining your value proposition will help attract buyers who see the potential for continued success and growth.
6. Implementing Solutions To Common Industry Issues – Addressing and solving common industry challenges can make your business stand out in today’s very competitive environment. Whether it’s through technological innovation, superior service models, or unique operational efficiencies, demonstrating how your business overcomes typical industry hurdles adds significant value and appeal to potential buyers.
7. Develop & Document Repeatable Systems – Creating and documenting repeatable business processes ensures that operations can continue smoothly without your direct involvement. This documentation helps in transferring knowledge and maintaining consistency in quality and performance. It’s an assurance to buyers that the business can sustain its operations and success.
8. Low Owner Reliance With A Strong, Reliable Management Team – A business that heavily relies on its owner can be a red flag for potential buyers. Develop a strong management team capable of running the business independently. Empower your managers with decision-making authority. A reliable management team can significantly increase the attractiveness and value of your business.

Preparing your business for sale requires a strategic approach to enhance its attractiveness and value. By addressing these key areas you can position your business for a successful and lucrative sale.

Partnering with an experienced M&A advisor can provide the expertise and support necessary to navigate the complexities of selling your business and achieving your desired outcome. It’s never too early to reach out and have discussion with an M&A advisor about the important steps to take when preparing for the sale of your business.

Peter MacSwain
peter.macswain@confederationgroup.ca

Confederation M&A is delighted to welcome Brad Ezard as new Partner.

Brad brings an impressive track record in mergers and acquisitions and business operations to Confederation, with previous experience as an M&A lawyer in Washington, DC, and as the Chief Operating Officer of Ottawa’s Keynote Group. At Latham & Watkins LLP, he advised on multimillion-dollar mergers and acquisitions. His practice also extended to private equity investments and public company representation for some of Wall Street’s biggest names.

In addition to his experience as a lawyer and operations executive, Brad led MCA Dental’s early-stage operations and acquisition strategy for the firm, which acquires and manages dental clinics across Canada.

In addition to his corporate work, Brad also sits on the Board of Directors for Bruyère Hospital where he also serves on the Board’s Quality of Care Committee.

Brad joins Confederation M&A as the Ottawa-area mergers and acquisitions market grows.

“We’re excited to welcome Brad to our team,” said Confederation President for Ottawa, Chad Saikaley, “As a mergers and acquisition lawyer and a specialist in corporate restructuring, he comes to us with a unique skill set. Along with the firm’s team of financial experts, he’ll be offering the highest level of service and outcomes for our clients.

“Aside from his business success, Brad’s deep involvement in the community’s charitable causes totally aligns with Confederation’s corporate culture and values,” added Chad.

The evolving landscape of Employee Ownership Trusts (EOTs) and the accompanying tax incentives could paint an intriguing picture for qualifying businesses poised to change hands from 2024 to 2026. To encourage business owners to sell their companies to EOTs, the federal government has announced that the first $10 million in capital gains realized on the sale of a business to an EOT will be tax exempt.

Over the next 10 years, a significant number of Canadian businesses are expected to undergo transitions in ownership as entrepreneurs approach retirement. The anticipation of this sizable shift emphasizes the need for innovative strategies, such as the introduction of EOTs, to ensure seamless succession while preserving the businesses’ core values.

Changes Unveiled: 2024-2026

The timeframe between 2024 to 2026 marks a critical juncture for businesses considering EOTs. This period introduces pivotal changes and improved tax incentives aimed at facilitating a smoother transition.

How do EOTs Work?

An EOT would generally be set up as follows:

1. EOT is formed with the employees of the business being named the beneficiaries of the trust;
2. The trust then negotiates terms and conditions for the purchase of the business’s shares. Debt financing is arranged to allow the EOT to purchase the shares, which the business itself might provide; and
3. EOT provides debt repayments over time using the earnings distributed from the business.

Qualifying for an EOT

To qualify for an EOT, businesses must meet specific criteria, including being a Canadian-controlled private corporation (CCPC) which would require it to meet certain governance and board representation requirements. This strategic alignment ensures that EOTs are established with a genuine commitment to employee ownership, fostering collaboration and shared success.

EOT Advantages

The benefits associated with EOTs are multifaceted. Business owners gain a tax-efficient exit strategy (see below) while maintaining a lasting legacy within the company. Employees, in turn, acquire a direct stake in the business, leading to increased morale, productivity, and loyalty. The synergy created by EOTs aligns the interests of both owners and employees, laying the foundation for sustainable business growth.

Tax Benefits of EOTs in Canada

• The first $10 million in capital gains realized on the sale of a qualifying business would be tax exempt;
• No 21-year deemed disposition rule, where typically a trust is deemed to dispose of its capital property every 21-years;
• Shareholder loan repayment period extended from 1-year to 15-years for any amounts loaned to an EOT from a business to purchase shares of that business; and
• Extending capital gains reserve from 5-years to 10-years, such that the vendor can defer recognizing part of the capital gain for up to 10-years.

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For business owners in Canada considering an exit between 2024 to 2026, EOTs will be a structure that they may want to consider when evaluating options for a transition of their business. Companies with stable cash flow and profits are likely the businesses that will be considering EOTs. The tax exemption on the first $10 million in capital gains, coupled with the other unique advantages of EOTs, have potential for this structure to be an active succession planning option through to 2026.

Peter MacSwain
peter.macswain@confederationgroup.ca

Over 75% of Canada’s business owners plan to exit their business within the next decade and about 1 in 10 business owners have a formal business succession plan in place. Succession planning has always been important, but in today’s market, it is critical given the number of businesses that will change hands in the near future.

Business owners with a succession plan in place will set themselves apart from those that do not.

A well-structured succession plan can bolster buyer confidence, provide operational stability, and ensure a smooth transition for all parties involved in the transaction – all of which increase the salability and value of the business.

From an M&A perspective, below are some of the key areas to focus on in advance of a potential sale of a business:

• Financial Transparency – Maintaining accurate, current financial records is critical to instilling buyer confidence and reducing due diligence challenges.
• Current Leadership – Assess the current leadership structure and address any gaps that need to be filled. If active in the business as an owner-operator, identify whether there are potential successors in the business who could step in to take over your responsibilities.
• Create Talent Pipeline – A robust team of qualified individuals is imperative in today’s market where many businesses are facing labor shortages.
• Establish Operational Efficiency – Creating and executing a plan to streamline operations will make a business more attractive to a buyer. Efficient operations translate into higher valuations.
• Diversify Revenue Stream – Diversifying revenue-generating sources can minimize risk and enhance the business’s appeal. A large single customer or a narrow range of products/services can limit the buyer pool and decrease the likelihood of a sale.
• Customer Relationships – A loyal customer base can play a very important role during negotiations. Having “sticky customers” with contacts in place will increase the value of a business.
• Legal – Where possible, any ongoing litigation or legal issues should be addressed well in advance of taking a business to the market. If there are ongoing matters in business, disclose them upfront when taking your business to market.
• Professional Advisors – Engagement with an experienced corporate lawyer, accountant, M&A advisor, and wealth advisor should be established before considering the sale of a business. Experienced advisors will help make sure you structure the sale of your business in a tax-efficient manner and anticipate potential roadblocks.
• Market Position – Building a strong market presence can lead to a competitive advantage and give a business an upper hand when selling.

These are just some of the areas, that if addressed in the years prior to the sale of a business, can have significant impacts on the outcome of the transaction. Given the volume of businesses anticipated to change hands in the coming years, taking the time now to diligently address these strategic initiatives can help secure the future success of the business and maximize its value when the time comes to sell.

Peter MacSwain
peter.macswain@confederationgroup.ca

What is Working Capital?

Working capital is the difference between current assets and current liabilities. It represents the capital required to run the day-to-day operations of a business and meet short-term obligations, such as payroll, rent, utilities, inventory purchases, etc.

Working capital is considered to be a component of business value and is therefore included in the sale of a business.

Why is it Included in the Sale of a Business?

There are sellers who believe accounts receivable, inventory, deposits, etc. belong to them, and therefore the buyer should pay for these assets on top of the purchase price. However, amongst other factors, these assets are the reason that the business is able to generate revenue through providing services, selling products, and providing value to its customers. The value of these assets is reflected in the earnings of the business which drives business value and at the end of the day, the sales price of a business.

What Amount of Working Capital is Included in the Sale of a Business?

A working capital target will be included in a letter of intent (LOI). The LOI should include a clearly defined approach for how working capital will be treated in the purchase and sale agreement.

Working capital requirements vary significantly from industry to industry and business to business and can fluctuate throughout the year for each business. One approach to determine the target is to look at the trailing 12 months (TTM) of balance sheets. This provides a glimpse of where working capital lands throughout the year and offers insight into seasonal fluctuations. Having sound financial information is critical to provide backup as to where the working capital target lands.

Some sellers make the argument that their working capital is higher than it needs to be and that the buyer should compensate them for this. A working capital analysis to dive deeper is required to understand the mechanics of working capital in anticipation of a discussion with a potential buyer. A case can be made when there is clear evidence showing that working capital is higher than it needs to be. However, without clear evidence, it may be difficult to convince the buyer and their lender to take the seller’s word that working capital is higher than it needs to be. As a seller, it’s very important to manage working capital diligently leading up to the sale of the business.

Working Capital on Closing Date vs. Target Working Capital

The difference between the actual working capital on the closing date and the target working capital will lead to a purchase price adjustment. The mechanics of the adjustment should be clearly defined in the purchase and sale agreement. If actual working capital is less than the target, then there would be a purchase price adjustment in the buyer’s favor. If actual working capital is greater than the target, then there would be a purchase price adjustment in the seller’s favor.

Resolving Working Capital Disputes

Disputes regarding working capital are not uncommon. Clear documentation and well-drafted purchase and sale agreements are key. Disputes may be resolved through negotiation, mediation, or by following predetermined mechanisms detailed in the purchase and sale agreement.

Working capital is an important piece of every M&A transaction. Developing a working capital target and having a clear understanding of the components of working capital in an LOI and purchase and sale agreement are essential to every transaction.

For business owners considering a sale in the upcoming years, proactive year-round management of working capital is a major factor that will help pave the way to a smooth transition of your business.

Peter MacSwain
peter.macswain@confederationgroup.ca