Buying an SME or starting from scratch: which risk should you take in Quebec in 2024?

The wave of baby boomer retirements in Quebec presents a historic opportunity for aspiring entrepreneurs. Every day, profitable businesses with established clienteles and functioning operations seek a successor. Faced with this market, the question is no longer just “what business to create?” but “is it wiser to buy?” The common answer pits the security of an existing model against the freedom of a blank slate. You will be told that buying is less risky due to predictable revenues, while starting one offers total flexibility to build your own culture.

Yet, this vision is incomplete, even dangerous. It ignores a fundamental reality: business succession (repreneuriat) is not a simple transaction; it is a strategic financial game. The real challenge is not choosing between the risk of the unknown (the startup) and the presumed security (the buyout), but mastering the financial rules of business transfer. For a savvy buyer, the risk does not lie in the daily operations of the company, but in the structure of the deal itself: the valuation, the financial setup, and the contractual clauses that will define your success or failure.

This article therefore goes beyond the classic dilemma. We will break down the financial and legal levers that allow you to transform a potential buyout into a strategic move. It is not about whether to buy, but understanding *how* to buy intelligently in Quebec to maximize value and minimize the real threats to your capital.

To guide you in this strategic approach, this article addresses the core points of the buyout process, from financial analysis to post-acquisition management. Explore the sections below to master every step of the deal.

Why is EBITDA the only number that truly matters in a buyout?

In the negotiation of an SME, revenue is a vanity metric, net profit is an opinion, but EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a fact. More precisely, normalized EBITDA is the only metric that reveals the company’s true cash-generating capacity. It strips away accounting decisions and the owner’s personal expenses to show only the raw performance of operations. It is on this basis, and not on optimistic projections, that the real value of your target is calculated.

This figure is the foundation of any valuation. A multiple is applied to the normalized EBITDA to determine the purchase price. This multiple varies drastically depending on the sector, dependence on the owner, and revenue stability. For example, essential services command a multiple of 5-8x EBITDA while retail caps at 3-5x in Quebec. Ignoring this mechanic means risking paying for the seller’s lifestyle rather than the company’s potential.

Normalization consists of “cleaning” the financial statements of non-recurring items or items not related to operations. This is a crucial step of due diligence. Among the most frequent adjustments are:

• The owner’s salary: It is often higher or lower than the market. It must be adjusted to the cost of a competent external manager.
• Luxury vehicles: Payments and fees related to an shareholder’s personal vehicle, paid for by the company, must be removed.
• Personal expenses: Travel, excessive representation costs, or professional fees for personal projects should be excluded.
• Non-recurring charges: A costly lawsuit, a major restructuring, or an exceptional asset sale do not reflect future performance and must be neutralized.

Mastering the calculation of normalized EBITDA gives you a decisive advantage at the negotiating table. It is your primary tool for countering a sentimental evaluation and paying the right price for future cash flows, not past successes.

How to convince the BDC to finance your buyout without betting your house?

Traditional financial institutions are increasingly cautious when it comes to financing intangible assets, which make up the bulk of many SMEs’ value. Financing a buyout, therefore, rarely relies on a simple commercial loan secured by your personal assets. A more sophisticated approach is necessary to convince partners like the Business Development Bank of Canada (BDC), especially in a context where the percentage of new loans going to SMEs has dropped from 16% to 8.6% since 2011, illustrating increased lender caution.

For the BDC, your personal down payment is a prerequisite, but it is not enough. The institution wants to see a smart financial structure that demonstrates your understanding of risks and your ability to mitigate them. This means your business plan must be more than a wish list; it must be a financial roadmap. It must not only justify the company’s valuation (based on normalized EBITDA, of course) but also present realistic cash flow projections that prove the company’s ability to repay debt, even in a pessimistic scenario.

The key is to present a file where the risk is shared. Including a significant vendor take-back (VTB) loan (where the seller finances part of the transaction) is an extremely strong signal. It shows the BDC that the person who knows the company best has confidence in its longevity and your ability to lead it. Similarly, mobilizing patient capital from other Quebec funds (FTQ, Fondaction) demonstrates that your project has been validated by several experts.

In short, do not present your house as the only collateral. Present a strategic plan where the deal structure itself becomes the primary guarantee. Your financial clarity, not your home’s value, will be your best argument.

Non-compete clause or vendor take-back: what to prioritize in the purchase agreement?

The purchase agreement is not just a legal formality; it is a risk management tool. Two of the most strategic but often misunderstood clauses are the non-compete clause and the vendor take-back (VTB). It is not a matter of choosing one or the other, but of balancing them based on one essential criterion: the seller’s age and future intentions. Your goal is to neutralize a future threat (competition) while securing a present ally (the seller’s interest in your success).

The table below summarizes the strategic trade-off between these two mechanisms. The choice will depend on your analysis of the seller’s profile: a young entrepreneur selling to move on to something else is not the same as a 65-year-old founder truly looking forward to retirement.

If you are buying out a 45-year-old entrepreneur, the non-compete clause is your top priority. It must be restrictive but reasonable in terms of duration (typically 3-5 years) and geographical territory to be upheld by the courts. Without it, you risk seeing the seller leave with their clients and expertise a few months later. In this scenario, the VTB becomes a complementary tool to facilitate financing.

Conversely, when facing a 65-year-old seller whose desire for retirement is sincere, the risk of direct competition is low. The non-compete clause becomes a formality. here, the vendor take-back loan becomes the primary strategic tool. By agreeing that a significant portion of the purchase price (e.g., 20-30%) be paid over several years, you transform the seller into a financial partner. Their own gain will depend on your success, ensuring a smoother transition and an alignment of interests. This is the best insurance you can have against bad surprises.

The mistake of wanting to change everything in the first month that scares off key employees

One of the costliest mistakes for a buyer is the “new sheriff” syndrome. Arriving with the desire to revolutionize everything from day one is the surest way to alienate key employees, who represent a major intangible asset of the company. These employees hold the organization’s memory, client relationships, and operational know-how. Their departure can drain the company’s value much faster than a bad financial year. The first phase of the takeover is not a phase of action, but a strategic listening phase.

Your priority is not to impose your vision, but to understand the existing culture and identify the pillars on which it rests. The first 100 days should be dedicated to reassuring, observing, and asking the right questions. The goal is twofold: defuse fears and collect valuable information that you will never find in financial statements. A structured approach is essential to prevent this phase from becoming mere hallway conversations.

Implementing a “floor tour” with each employee one-on-one is a powerful tactic. This is not a performance audit, but a consultation. Changes will come, but they will be perceived as responses to problems raised by the team, rather than the whims of the new owner. This is an essential political maneuver to gain buy-in before taking any major decisions.

When to cut the cord: how long to keep the former owner as a consultant?

The transition period with the seller is one of the most delicate phases of business succession. Keeping them on board can be an invaluable source of knowledge but can also become a drag on your takeover of power. The key is not the length of their presence, but the clarity of the contractual framework that defines their role. The former boss should not remain a “ghost advisor”; they must become a consultant with a mandate, deliverables, and an end date.

A good transition is a major success factor. According to a thorough study, the 5-year survival rate of businesses reaches 87.5% when the transfer is accompanied by structured methods like those of the CTEQ. This proves that passing the torch cannot be improvised. Your goal is to extract maximum value from the seller’s experience while progressively asserting your own leadership.

The healthiest approach is a degressive consultation structure, formalized in the sales contract. For example:

• Months 1-3: High Involvement. The seller is present full or part-time to ensure the transition of key client and supplier relationships and to train the buyer on specific operational cycles.
• Months 4-6: Availability on Demand. The seller moves to an “a la carte” consultant role. They are no longer in the office daily but remain reachable for specific questions. Their intervention is billed by the hour or day.
• Months 7-12: Strategic Consultation. Contact is limited to a few planned meetings (e.g., once a month) to discuss longer-term strategic points.

This framework has a double advantage. Financially, it transforms a potentially vague expense into a defined and degressive cost. Psychologically, it sends a clear message to employees, clients, and the seller themselves: the transfer of power is real and progressive. As the spirit of business succession emphasizes, it’s about ensuring harmonious continuity.

The seller ensures the transmission of their business (SME) while the buyer takes it over to ensure its longevity through value creation in harmony with the history of the business (SME) and existing economic, social, demographic, territorial, sectoral, fiscal, financial, and managerial trends.

– CTEQ, Definition of Repreneuriat

How to borrow to invest without putting a noose around your neck?

The business transfer market in Quebec is booming. The phenomenon is not anecdotal; it is massive: we are talking about 24,000 businesses transferred in 2024 compared to 15,000 in 2023, a 60% increase. In this context, the ability to structure smart financing is what separates opportunists from the future over-indebted. The strategy is not to minimize borrowing, but to mobilize the *right* type of capital: patient capital.

Unlike a classic bank loan that requires fixed repayments from day one, patient capital comes from players whose investment horizon is long-term. These funds understand that the priority of a business in transition is not to immediately service debt, but to invest in its growth and modernization. They offer more flexible conditions, such as moratoriums on principal repayment, subordinated loans (repaid after other debts), or even minority equity stakes.

Putting a noose around your neck means depending on a single, rigid source of financing. The wise approach is to build a diversified funding round, combining your down payment, a vendor take-back from the seller, a traditional commercial loan, and, most importantly, patient capital. Quebec has a particularly rich financing ecosystem for SMEs.

• Fondaction: Known for its sustainable development approach and long-term investment horizon.
• Fonds de solidarité FTQ: A major player in development capital for Quebec SMEs, often in partnership with other financiers.
• Investissement Québec (IQ): Offers a wide range of solutions, including equity and quasi-equity, acting as a lever to attract other lenders.
• SADC and CAE: Local funds anchored in regions, offering flexible conditions to support territorial economic development.
• BDC Capital: The investment arm of the BDC, specializing in venture capital and subordinated financing for high-potential projects.

Approaching these institutions with a solid plan shows that you are not just a borrower, but a strategic partner who understands how to orchestrate growth. This is how you use debt as a lever, not a burden.

Interest, dividends, or capital gains: which income is taxed the least for you?

Once the company is acquired, a strategic question arises: how to extract value for yourself in the most fiscally efficient way? Thinking only in terms of salary is a limited vision. As a shareholder-manager, you have a choice between several forms of compensation, each with a radically different tax treatment in Quebec. The trade-off between salary, ordinary dividends, and eligible dividends is a calculation to be made every year with your accountant to optimize your net income.

Salary has the advantage of being simple and generating RRSP contributions, but it is heavily taxed and subject to social contributions (RRQ, EI, QPIP). Dividends, on the other hand, are distributions of profits after company tax. Their taxation is complex (gross-up and tax credit mechanism), but they can prove more advantageous at certain income brackets, particularly eligible dividends paid by a company with a higher tax rate.

The following table illustrates the approximate net income after taxes for an individual in Quebec in 2024, depending on the extraction method. It highlights the potential advantage of eligible dividends at higher income levels.

But the real tax optimization for a buyer lies elsewhere: in capital gains. This is the profit you will make the day you resell the shares of your company. In Canada, only 50% of this gain is taxable, which already represents a colossal advantage. But the primary lever is the Lifetime Capital Gains Exemption (LCGE).

The capital gains exemption can reach nearly $1M for the sale of eligible small business shares.

– Canada Revenue Agency, 2024 Tax Bulletin

This exemption, which nears one million dollars in 2024, allows you to receive a substantial portion of the fruit of your labor tax-free. Your long-term strategy must therefore aim to maximize the value of your shares with a view to a future resale, as this is where the most spectacular and least taxed gain is located.

Law 25 in Quebec: the 3 compliance requirements that 60% of SMEs still do not meet

By buying an SME, you are not just buying assets and clients; you are also inheriting its liabilities, including its compliance gaps. One of the most significant hidden risks in Quebec today is non-compliance with Law 25 on the protection of personal information. Many SMEs, especially those run by boomers with little awareness of these issues, are far from meeting the requirements. Ignoring this point during due diligence can expose you to severe penalties and a loss of client trust as soon as you arrive.

The scale of business transfers, representing $26 billion in assets transferred and affecting 120,000 employees annually in Quebec, makes this compliance issue systemic. Your acquisition audit must imperatively include an assessment of the company’s maturity regarding Law 25. Three points of failure are particularly common and must be verified:

1. Absence of a Privacy Officer: The law requires that a person be officially designated (by default, it is the highest-ranking officer). Many SMEs have never formalized this appointment or published the person’s title and contact information on their website.
2. No inventory of personal information: Do you know what client, employee, or supplier data the company collects? Where is it stored (CRM, Excel files, paper invoices)? How long is it kept? Without this inventory, any risk management is impossible.
3. Non-existence of a privacy incident register: The law requires keeping a register of all incidents, even those that do not present a risk of serious injury. An SME that has no process to detect, assess, and record an incident (e.g., an email sent to the wrong recipient) is in direct violation.

Discovering these gaps is not a reason to cancel the deal. It is a negotiation argument. The cost of compliance (legal fees, software purchases, employee training) must be estimated and potentially deducted from the purchase price. This is a perfect example of how a risk identified upstream can be transformed into a financial lever to your advantage.

Every SME is a complex ecosystem of finances, human relations, and legal obligations. To accurately evaluate your next acquisition and structure the deal that will maximize your return on investment, analysis by experts in business transfer is the decisive step.