What it costs to sell a business in Canada

1. The short answer

Selling a private Canadian company usually costs between 4% and 12% of the sale price in professional fees, before any tax. The percentage falls as the price rises. A $1.5 million sale often lands near the top of that band, and a $25 million sale near the bottom, because the largest single fee is charged on a sliding scale while the legal and accounting work grows much more slowly than the price.

That band covers 4 things: the fee of whoever sells the company, the lawyer who papers the deal, the accountant who prepares and defends the numbers, and the smaller costs of running a process. Tax is separate, it is usually larger than all 4 put together, and it is the one line an owner can still change 2 years out.

The rest of this guide takes each line in turn, with the scales the fees are actually calculated on, and ends with 3 worked examples at 3 deal sizes so you can see the addition rather than trust a percentage.

2. The success fee on a smaller sale

On sales under about $5 million the company is usually sold by a business broker, and the broker is paid a success fee: a percentage of the price, payable at closing and not before. The common range is 8% to 12%, and 10% is the figure most often quoted.

• There is almost always a minimum. Brokers set a floor, commonly somewhere between $10,000 and $50,000, because a small deal takes nearly as much work as a large one. On a sale below roughly $250,000 the minimum, rather than the percentage, is what you pay.
• The percentage is on the whole price, not the profit. This catches people out. A 10% fee on a $2 million sale is $200,000 whether the company cost you nothing to build or everything you had.
• Ask what the price includes. Whether the fee is calculated on enterprise value, on the headline price, or on the price including debt repaid at closing can move the fee by tens of thousands of dollars. Get the definition in the engagement letter.

The guide to brokers and M&A advisors covers which of the 2 suits which company. The short version is that the fee structures differ because the jobs differ.

3. The success fee on a larger one

Above roughly $5 million the work is usually done by an M&A advisory firm, and the success fee is normally set on a declining scale rather than a flat percentage. The scale most firms start from is the Double Lehman:

• 10% of the first $1 million of price
• 8% of the second $1 million
• 6% of the third $1 million
• 4% of the fourth $1 million
• 2% of everything above $4 million

Because each band is smaller than the last, the effective percentage falls as the price rises. On an $8 million sale the scale above produces $360,000, which is 4.5% of the price. On a $25 million sale the same scale produces $700,000, which is 2.8%. That is the whole reason a larger company pays a smaller percentage: not a discount, just arithmetic.

Scales vary. Some firms run a modified version with a higher floor, some negotiate a flat percentage, and some add a rising rate above a target price so the advisor is paid more for beating it. That last one is worth asking for, because it is the only clause in the whole engagement that pays the advisor to argue with the buyer on your behalf.

4. Retainers, work fees and the tail

The success fee is not usually the only fee. On a larger process there are 3 more, and none of them depends on the deal closing.

• A monthly retainer. Commonly $10,000 to $25,000 a month on lower middle market deals, sometimes $5,000 or less on smaller ones. It pays for the advisor’s time while the process runs. Ask whether it is credited against the success fee at closing. Often it is, and if nobody asks, often it is not.
• A work fee, sometimes called a preparation fee. A single amount, commonly $25,000 to $75,000, charged up front for building the materials, the financial model and the buyer list. It is the cost of getting to market at all.
• The tail. A clause saying that if you sell to anyone the advisor introduced, within some period after the engagement ends, the success fee is still owed. 12 to 24 months is normal and it is reasonable. What is not reasonable is a tail that covers every buyer in the market rather than the ones actually introduced. Read this clause twice.

Retainers and work fees are the reason two engagements quoting the same success fee can cost very different amounts. Add them up across the expected length of the process, which is usually 6 to 12 months, before comparing.

5. Legal

Your lawyer drafts or negotiates the purchase agreement, the disclosure schedules, the representations and warranties, and whatever escrow or earn out the parties agree. On a straightforward private company sale in Canada this commonly runs $15,000 to $40,000. On a larger or more complicated deal it runs well into 6 figures.

What moves it, in rough order of how much:

• Share sale or asset sale. An asset sale has to move each contract, lease, permit and employee individually, and each one is billable. The difference between the 2 shows up in the legal bill as clearly as it does in the tax bill.
• How clean the company is. A tidy minute book and a clear share register cost nothing to review. A missing resolution from 2009 gets found in diligence and fixed at hourly rates, under time pressure, which is the most expensive way to fix anything.
• How hard the buyer negotiates. The representations and warranties are where the hours go. A buyer who wants a long indemnity and a large holdback will generate more legal time on both sides.

6. Accounting, and the quality of earnings review

Two separate costs get confused here. The first is your own accountant, preparing clean statements, the tax structuring, and the answers to diligence questions. The second is a quality of earnings review, which is a forensic examination of whether the profit you report is the profit a buyer will actually inherit.

• Your accountant. Commonly $10,000 to $40,000 across a sale, depending on how much of the tidying was already done. Owners whose books were always clean pay the bottom of that range and often less.
• The buyer’s quality of earnings review. The buyer pays for this one. It still costs you, in the sense that whatever it finds comes off the price.
• Your own quality of earnings review, if you commission one. This is optional and it is not cheap, commonly $35,000 and up. The argument for it is that you find the problems before the buyer does, at a moment when you can still fix them rather than concede on price. On a larger deal it frequently pays for itself. On a $1.5 million sale it usually does not.

Legal and accounting fees connected with a sale are generally deductible or added to the adjusted cost base depending on what the work was for, which changes what they really cost you after tax. The CRA sets out the treatment, and it is a question for your accountant on your specific invoices rather than a rule to apply yourself.

7. Tax, the largest line of all

For most owners the tax on the sale is larger than every professional fee combined, and it is the only line on this page that can still be changed years in advance rather than negotiated in the week of closing.

The single biggest item is the lifetime capital gains exemption, which lets an individual shelter up to $1,250,000 of capital gain on the sale of qualifying small business corporation shares. It applies to a share sale, not an asset sale, and it has tests that run over the 24 months before the sale. That 24 month clock is why the structure has to be settled long before a buyer appears. The share sale and asset sale guide sets out the 3 tests and what fails them.

The practical point for a cost comparison is this. Two owners selling identical companies for identical prices can end up with materially different amounts of money, and the difference is usually decided by work done 2 years earlier, not by which advisor charged 1% less. Fee shopping is worth doing. It is worth much less than getting the structure right.

8. Three worked examples

These are illustrations, not quotations and not measurements of any real transaction. Each one uses the mid point of the ranges above so the arithmetic is visible and you can rerun it with the numbers you are actually quoted. Tax is excluded, for the reason in section 7: it depends on the structure rather than on the price.

• A $1.5 million sale, sold by a broker. Success fee at 10% is $150,000. Legal $20,000. Accounting $15,000. Total about $185,000, which is roughly 12% of the price.
• An $8 million sale, sold by an advisory firm. Success fee on the Double Lehman scale is $360,000. A work fee of $50,000 and 8 months of retainer at $12,500, some or all of it credited at closing. Legal $90,000. Accounting $50,000. Total roughly $550,000 to $650,000, which is about 7% to 8%.
• A $25 million sale. Success fee on the same scale is $700,000. Work fee and retainers of about $200,000. Legal $250,000. Accounting and a sell side quality of earnings review, $175,000. Total roughly $1.3 million, which is about 5%.

The pattern is the one described at the top. The absolute cost rises with the price and the percentage falls, because the success fee scale declines and the legal and accounting work does not triple when the price does.

9. What is negotiable and what is not

• Usually negotiable. Whether the retainer is credited against the success fee. The length of the tail and whether it covers introduced buyers only. The work fee. A rising success fee rate above a target price. The definition of the price the fee is calculated on.
• Rarely negotiable. The headline success fee percentage on a smaller sale, because it is close to the cost of doing the work. The minimum fee. Your lawyer’s hourly rate.
• Not worth negotiating. Anything that makes the people selling your company less motivated to get a high price. The fee is a few percent. The price is all of it.

One general warning. A fee quoted well below the market is usually a signal about how much attention the sale will get, or about how long the tail is, or about what the retainer does. Read the engagement letter, not the percentage.

10. Where we fit

Sell My Company is a finder, and proudly Canadian. Owners of Canadian companies with $1 million or more in revenue tell us 4 things, and we introduce them to 1 vetted Canadian M&A advisory firm that has closed deals at their size in their sector. 1 introduction, never a list, and free to you at every stage, because the advisory firm pays our fee.

We do not set anyone’s fees and we do not negotiate them for you. What the introduction does is put you in front of a firm that works at your size, which is the thing that decides whether the scale in section 3 is the right scale for your company at all. If you are years away from selling, take the scorecard instead. The lines on this page that can still be changed are the ones you change early.