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WHAT CANADIAN BUSINESS OWNERS SHOULD EXPECT WHEN SELLING IN 2026

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What Canadian Business Owners Should Expect When Selling in 2026: Deal Structure Benchmarks

A data-driven guide for owners of privately held companies with revenue under $50 million

If you're considering selling your Canadian business in 2026, understanding market-standard deal structures isn't just helpful, it's essential for protecting your interests and setting realistic expectations. This analysis draws on transaction data from the SRS Acquiom 2025 M&A Deal Terms Study: Lower Middle-Market Deals, which examines private-target M&A transactions with closing payments of $50 million or less.

Important context: The SRS Acquiom study is based on U.S. transaction data. While Canadian M&A practices share many characteristics with U.S. deals, there can be jurisdictional differences. This data provides valuable benchmarks for understanding lower middle-market deal dynamics, though Canadian sellers should work with advisors familiar with both Canadian market practices and cross-border considerations.

Lower Middle-Market Deals: A Significant Segment

According to the SRS Acquiom 2025 M&A Deal Terms Study, lower middle-market (LMM) deals, those with closing payments of $50 million or less, continue to make up more than 40% of total deal volume. This segment remains critically important to the overall M&A market.

Forms of Consideration: What You'll Likely Receive

The way buyers pay for acquisitions varies significantly, and the mix has shifted in recent years. Based on 2024 transaction data for lower middle-market deals:

Cash Remains Dominant, But with Qualifications

The SRS Acquiom data shows that 62% of LMM deals in 2024 were structured as all-cash transactions, with an additional 11% being cash with a management rollover component. However, LMM transactions saw a nearly 3% decrease in all-cash deals compared to the prior year, while the broader market experienced a nearly 5% increase in all-cash transactions.

The smallest LMM deals ($25 million or less) actually bucked this trend, seeing a slight increase in all-cash deals year over year—a potentially positive signal for Canadian business owners in this range.

Buyer Equity: More Common in Smaller Deals

If you're selling to a strategic buyer or a PE-backed company, you may be asked to accept equity as part of your consideration. The data reveals that buyer equity is used for at least part of the consideration mix about 22% more often on LMM deals compared to all deals. In 2024, 20% of LMM transactions were cash/stock combinations, and 8% were all-stock deals.

The increased use of equity in 2024 was likely driven further by PE portfolio company buyers, who were more active in the LMM space.

Earnouts: Higher Prevalence in Smaller Transactions

Earnouts—payments contingent on achieving post-closing performance targets—are a reality that Canadian sellers must prepare for. The data shows that LMM deals are more likely to include an earnout than larger transactions.

Key 2024 earnout statistics for lower middle-market transactions (excluding life sciences):

  • 27% of all LMM deals included an earnout (down from 39% in 2023)
  • For the smallest deals (up to $25 million): 21% included earnouts
  • Median earnout potential as a percentage of closing payment: 38% for all LMM deals and 45% for the smallest deals
  • 63% of earnouts used revenue-based metrics; only 9% used earnings/EBITDA metrics
  • 15% of LMM earnouts were uncapped (21% for smallest deals)
  • No earnout performance periods exceeded four years

The report notes that the significantly lower use of earnings or EBITDA metrics in LMM deals is "less likely to be a result of seller negotiations and more a concession to accommodate the target's level of financial sophistication."

Escrows and Holdbacks: Expect to Leave Money on the Table

Perhaps the most significant finding for Canadian sellers: every LMM deal that closed in 2024 (and 2023) included an escrow or holdback. This is not negotiable—it's standard practice.

Escrow Sizes by Deal Value

The percentage of proceeds held in escrow decreases as deal size increases:

  • Deals ≤$25M: Average 13.3% of transaction value (median 11.7%)
  • Deals $25M–$50M: Average 9.3% of transaction value (median 9.2%)
  • All LMM deals: Median traditional indemnification escrow is 10% of transaction value

Types of Escrows

LMM deals typically involve multiple escrow arrangements:

  • 66% of LMM deals with a Working Capital Purchase Price Adjustment include a separate PPA escrow
  • 33% of LMM deals include a special indemnification escrow (slightly elevated versus all deals at 29%)
  • 58% of LMM deals have bundled escrows (compared to 52% of all deals)
  • 30% of LMM sellers had to agree to a holdback (versus 19% across all 2024 deals)

The report emphasizes that holdbacks (held by the buyer post-closing) "can provide additional leverage to buyers when navigating indemnification claims."

Indemnification and Survival Periods

How long can a buyer come back to you with claims? In LMM deals, the median survival period is 15 months—slightly longer than the 12-month median across all deals. The average for LMM deals in 2024 was 14.3 months.

Notably, LMM deals are less likely to include a "walk-away" (no survival of the seller's general representations and warranties). In 2024, 94% of LMM deals without Reps and Warranties Insurance (RWI) maintained survival provisions, compared to only 67% when RWI was present.

Reps and Warranties Insurance: Less Common for Smaller Deals

Reps and Warranties Insurance (RWI) can shift risk away from sellers, but it's significantly less prevalent in smaller transactions. According to the 2024 data:

  • Deals up to $25M: Only 10% included RWI
  • Deals $25M–$50M: 34% included RWI
  • All deals: 42% included RWI

The report explains that "LMM deals are less likely to use RWI; premiums for coverage on smaller deals are often prohibitive." Additionally, LMM deals tend to have more issues identified during due diligence, which can impact insurability.

Working Capital Purchase Price Adjustments

Working capital adjustments are nearly universal in private M&A, and LMM deals are no exception. The data shows:

  • 90% of LMM deals include a working capital PPA
  • 84% of the smallest LMM deals ($25 million or less) include a PPA
  • Median PPA escrow size: 1.25% of transaction value (versus 0.98% for all deals)
  • Only 24% of LMM deals use a specified calculation methodology (versus 35% of all deals)

The report notes that "PPAs on LMM deals are no less complicated, even if the nominal adjustment amounts are typically small."

Post-Closing Expense Funds

Most deals require sellers to set aside funds for defending post-closing claims. For 2024 LMM transactions:

  • Deals ≤$25M: 92% included an expense fund (median $50,000, average $79,000)
  • Deals $25M–$50M: 95% included an expense fund (median $100,000, average $151,000)

The report emphasizes that "LMM deals can have just as complicated and lengthy claims as jumbo-sized deals, prompting buyers to seek protections accordingly."

Who's Buying: Buyer Mix in 2024

Understanding who's acquiring LMM companies can help set expectations for deal terms:

  • 55% of LMM deals had a strategic buyer (U.S. Public or U.S. Private, non-P.E.-backed)
  • 26% involved PE-backed private buyers (portfolio companies)
  • 25% involved Private Equity firms directly
  • 11% had U.S. Public company buyers
  • 9% had non-U.S.-based buyers—notably fewer than in larger deals

Key Takeaways for Canadian Sellers in 2026

  1. Expect cash, but potentially not all cash. While ~62% of deals are all-cash, be prepared for equity components, particularly with strategic acquirers.
  2. Plan for escrows. 100% of LMM deals included escrows or holdbacks. Budget for 10-13% of proceeds to be held back initially.
  3. Earnouts are common. Roughly one in four LMM deals includes an earnout. If offered one, revenue metrics are more common and may be preferable to EBITDA-based targets.
  4. RWI is unlikely for smaller deals. If your transaction is under $25M, only 10% of comparable deals include RWI—plan to provide traditional seller indemnification.
  5. Longer survival periods. LMM sellers face 15-month median survival periods versus 12 months for larger deals.
  6. Complexity doesn't scale down. The SRS Acquiom report concludes that "LMM deals can be just as, if not more, complicated as larger deals."

Conclusion

Understanding these benchmarks before entering negotiations puts you in a stronger position. While every transaction is unique, the data clearly shows that smaller deals often carry more—not fewer—complexities for sellers. Working with experienced M&A advisors who understand both the data and the Canadian market context will help you navigate these structures effectively.

About the Data Source

This analysis draws exclusively from the SRS Acquiom 2025 M&A Deal Terms Study Special Report: Lower Middle-Market Deals.

https://www.srsacquiom.com/our-insights/

Disclaimer: This article is provided for informational purposes only and does not constitute legal, financial, or professional advice. The statistics cited are from U.S. transactions and may not precisely reflect Canadian market conditions. Business owners should consult with qualified advisors regarding their specific circumstances.