Whether you are preparing to sell your business or to take over someone else’s, the same question always ends up front and centre: what is it really worth? The answer fits in one sentence: a business is worth what a serious buyer is prepared to pay. But that answer, true as it is, takes years of preparation.
Here is how that value is calculated, what makes it move and how it turns into a price.
A business transaction engages the Business Corporations Act, the Civil Code of Québec for the sale itself, and filings with the Registraire des entreprises du Québec.
Value is what a buyer is prepared to pay
This well-known formula is accurate, but incomplete. A buyer does not pay for your history: they pay for the company’s future profitability and for their confidence that it will materialize.
That is why two businesses with comparable revenues can sell at very different prices. The one whose books are in order, whose contracts are in writing and whose team runs without its owner inspires confidence, and that confidence commands a premium. Valuation is therefore not an exercise reserved for the day of the sale: it informs decisions years in advance.
Three main valuation approaches
Valuators mainly use three methods, often in parallel:
- multiples of normalized EBITDA: the most common approach for SMEs. A multiple that varies with the industry, the size of the business and the level of risk is applied to the adjusted earnings;
- asset value: relevant when value rests mainly on equipment, buildings or inventory;
- discounted cash flow: future cash flows are projected and brought back into today’s dollars. This method is better suited to businesses with highly predictable revenues.
For most SME transactions in Québec, the first approach serves as the starting point for discussions.
Normalized EBITDA: the true picture of profitability
Before applying a multiple, earnings must be “normalized”, that is, adjusted to reflect what the business actually generates for a future owner.
The most frequent adjustments:
- bringing the owner’s salary back to market value, whether it is too high or too low;
- removing personal expenses run through the business, such as the vehicle or certain travel;
- excluding non-recurring revenues and expenses: an exceptional grant, a litigation settlement, a one-time contract.
A credible normalized EBITDA, backed by well-kept financial statements, is one of a seller’s best negotiating arguments.
What drives the multiple up (or down)
At equal profitability, certain factors increase the multiple a buyer will agree to pay:
- recurring revenues: maintenance contracts, subscriptions, renewable agreements;
- a diversified client base, where no single client accounts for an outsized share of sales;
- an autonomous team: the business does not depend on its owner;
- documented processes and sustained growth.
Conversely, owner dependence, client concentration, poorly kept books or ongoing litigation drag the multiple down, when they do not scare the buyer away altogether.
From value to price: it all comes down to the terms
The value established by a valuator is not the final price. Between the two lies a negotiation, and above all payment terms that change the equation:
- the balance of sale, through which the seller finances part of the price themselves;
- the earn-out, a portion of the price conditional on the future results of the business;
- the transition period, during which the seller supports the buyer.
A high price with demanding conditions can be worth less, in the end, than a more modest price paid in cash. How the price is paid matters as much as the amount itself.
Key takeaways
Normalized EBITDA
It is the earnings adjusted to reflect true profitability: owner’s salary brought back to market, personal expenses removed, non-recurring items excluded.
It forms the basis of the most common valuation method for SMEs.
What drives the multiple up
Recurring revenues, a diversified client base, an autonomous team, documented processes and sustained growth.
Owner dependence and client concentration produce the opposite effect.
Value vs. price
Value is an opinion supported by recognized methods.
Price is the outcome of a negotiation, shaped by the terms: balance of sale, earn-out, seller transition.
Why consult before setting (or accepting) a price?
A serious valuation rests on two complementary areas of expertise. The Chartered Business Valuator (CBV) establishes a rigorous, documented value that you can defend before a buyer, a lender or the tax authorities.
The lawyer, for their part, structures the transaction that brings that number to life: share or asset sale, representations and warranties, balance of sale, non-compete covenants, transition terms. A good price poorly framed is still a bad contract.
At Meka Avocat, we support sellers and buyers at every stage: preparing the business, coordinating with valuators and tax specialists, negotiating and drafting the agreements that genuinely protect your interests.
Frequently asked questions
How is a small or mid-sized business valued in Quebec?
Most often through a multiple of normalized EBITDA, supported by an asset-based or discounted cash flow approach depending on the sector. No method produces a single figure: they frame a negotiating range.
What is normalized EBITDA?
Earnings before interest, taxes, depreciation and amortization, adjusted for items that will not repeat for the buyer: owner compensation above market, personal expenses, rent paid to a related company, and non-recurring income or charges.
What pushes the multiple up?
Recurring revenue, a diversified client base, a team that runs without the owner, written and transferable contracts, and clean corporate records. Conversely, dependence on one client or on the founder pushes it down.
Are value and price the same thing?
No. Value is an estimate; price is the result of a negotiation that includes the terms: cash at closing, balance of sale price, earn-out, holdbacks and warranties. Two offers at the same headline price can be worth very different amounts.
Thinking of selling your business or taking one over?
A consultation lets you take stock of your situation, identify what influences the value of the business and plan the next steps of the transaction. Book an appointment with our team to discuss it concretely.
Value only means something once tested against what a buyer will find in due diligence, and against what remains after tax, a question covered in selling your business without handing half of it to the tax authorities. Between partners, it also sets the price behind a shotgun clause, and our support in selling a business.
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Lawyer, member of the Barreau du Québec since 2014, founder of MEKA AVOCAT. This text sets out general legal information: it describes rules that apply broadly, not the answer to one particular case, and does not replace advice on your situation.
