At BDC, we finance thousands of business transitions every year. We work with companies of all sizes in every business sector.
This high level of activity gives us a clear, comprehensive picture of the business transition market in Canada.
Our Economic Research team also conducts regular research to understand the dynamics of Canadian business transitions.
For example, before the pandemic, our studies showed that 50% of business owners were planning to sell their businesses within the next five years. With more than one million SMEs in Canada, this means 500,000 companies could change hand by 2025.
Clearly, there are business opportunities for entrepreneurs who want to expand through acquisitions. But how do we go about this the right way in the current circumstances?
My intention for this blog post is to offer insights on how the pandemic is affecting the business transition market in Canada and to share advice on how to mitigate the risks of an acquisition in today’s market.
The impact of the pandemic on business transitions in Canada
We do not yet know the pandemic’s long‑term impact on business sales and purchases, but the number of transactions clearly slowed down in 2020. The crisis also affected business sales prices.
Here are some anecdotal examples of what we have seen in the market since March.
Some transactions have been cancelled
A merger and acquisition transaction between two small construction companies was cancelled. The target is in good shape because its market has been spared, but the buyer has struggled financially as a result of lockdown. The buyer therefore withdrew to focus on its own operations.
Some transactions have been put on hold
The border closure appears to have had an impact on transactions. It has not stopped acquisitions but it is delaying them.
For example, we have a client who was negotiating a major acquisition in the United States. This company’s staff had to isolate for two weeks after visiting the target company’s facilities. So it couldn’t go there on any given day. The post‑acquisition integration and culture transfer also had to be revisited and reworked, which delayed the transaction by a few months.
Some transactions have been accelerated
We have a manufacturing client that took advantage of the crisis to buy out a small competitor that was trying to copy its model and take away market share. The competitor was not financially strong enough to survive the decline in volume brought on by the pandemic.
We are also seeing a lot of sellers who want to sell at the pre‑COVID price, while buyers want to take advantage of a lower price resulting from the pandemic. This dynamic tends to stall the progress of negotiations, thereby reducing the total number of transactions. But the pandemic isn’t making anyone younger, and entrepreneurs who are interested in retiring remain so.
How to navigate the current landscape?
Don’t let the pandemic stop you. Entrepreneurs with sales plans should not put them on hold. The same goes for those who want to buy—yes, you have to do your homework, but there are still great opportunities. As always, pandemic or not, it is best to buy a business to which you, as the buyer, bring added value in order to make it grow and become better than it already is.
More than ever, acquisitions of businesses with clear synergies must be prioritized. The pursuit of critical mass is key. Two small companies will be stronger together if they can share the increase in necessary expenses for, say, IT security, system implementation or the structuring of an official human resources department.
We therefore consider the current climate to be favourable to strategic acquisitions.
Consider a financing package that takes uncertainty into account
Uncertainty is the greatest enemy of business transitions. When you buy a business, you are buying its future cash flows. If you go into debt to do so, you have uncertain income and cash flows on the one hand, but fixed cash outflows for debt payments on the other.