Managing partner at boutique M&A consultancy firm highlights new dynamics in the market for SMEs that might benefit business owner clients
The $2 trillion business exit ‘tsunami’ might spook some small and medium enterprise (SME) owners and their financial advisors. After working for decades, building a successful business and growing valuations to a point where they could comfortably retire on the sale of their business, these owners are finding everyone in their cohort appearing to do the same thing. Canadian baby boomer SME owners are selling their businesses and retiring, raising questions about whether a flood of small business assets might result in an oversupplied market for certain sectors, depressing valuations at a time when these business owners need to monetize what they’ve worked so long to build.
Zach Schenker argues that despite this flood of SME exits, demand for small businesses is actually beginning to outpace supply. Schenker is a Managing Partner at The Fairing Group, a boutique M&A advisory service specializing in purchase deals for SMEs. He noted that despite the dramatic scale of business exits set to take place across North America, there is a newfound appetite among buyers even for businesses once deemed too small for a private equity purchase.
“We're seeing a significant shift. For a long time, the conventional wisdom was that private capital allocators should avoid businesses with less than $5 to $10 million in EBITDA, reasons being, those businesses were often too owner-centric or lacked the infrastructure to scale,” Schenker explains. “But private capital allocation has grown dramatically over the past decade. It has resultingly flowed downstream into the lower middle-market space through traditional private equity firms and family offices, and now into a large and growing ecosystem of search funds and independent sponsors. What was once a niche strategy has now transformed into an asset class of its own.”
Search funds set out to raise the promise of capital from high net worth individuals or family offices, with the goal of finding, purchasing, and operating a business. They operate similarly to private equity investors, but with an understanding of future capital backing rather than immediate capital commitment.
These buyers, Schenker explains, are very interested in SMEs in and below that $5-10 million EBITDA range. Because they work with comparatively smaller investors than large-scale private equity firms, and seek out more niche and targeted opportunities, search funds want to buy the kind of SMEs that Canadian owners are exiting. Search funds are growing, too. Schenker notes that the total number of search funds have grown at a 40 per cent compound annual growth rate for much of the past decade. More anecdotally, he says that a significant proportion of the graduating class at Harvard Business School this year are now starting their own search funds.
Search funds aren’t the only buyers operating in smaller business spaces. Schenker notes that private equity’s appetite for business has these larger firms going further and further down the EBITDA ladder. Many firms, he says, are lowering thresholds simply because of how competitive the markets for higher earning companies has become. The result, for small business owners, has been a broad rise in valuations, just in time for some owners’ retirement.
Multiples vary based on industry, type of business, and myriad other dynamics. Generally speaking, though, Schenker notes that businesses that might have sold purely on asset value or 1x annual EBITDA are now selling for at least 3x EBITDA.
There is appetite for almost any business among these new buyers, Schenker notes. He says it’s rare in 2025 to find an industry where there isn’t some pocket of private equity that’s specializing in the space. However, there are more valuable business types. Niche businesses, he says, with fewer competitors and better insulation from new market entrants can be seen as a more appealing opportunity for the buyer to expand margins. Recurring revenue is also seen as the gold standard for valuations as it provides the buyer assurance that they will be making money from day one.
For business owners looking to sell to this new class of buyers, the quality of their record keeping can determine their success. Being able to demonstrate recurring revenue and sales backlogs over several years will give a buyer greater confidence. Schenker notes that his firm, in working with business owner clients, will seek to establish and refine these processes as a crucial first step to securing the best possible deal terms.
Just because there is a new growing class of buyers, doesn’t mean every business will suddenly trade at significant multiples. Schenker notes that there are certain risk factors that could spook either search funds or private equity. If a business is too focused on very few customers, or if there is a lack of customer loyalty, then there could be reasons for a buyer to offer at a lower multiple. Over-reliance on the owner, too, for both customer and staff retention may prove challenging for a sale.
But what does all this mean for financial advisors? For those professionals managing the personal finances of an SME owner, Schenker believes that visibility into the market for their business is crucial. Moreover, as advisors work with SME owner clients to build retirement plans, they can introduce the nuances, time commitments, and complexity of this process in a way that adds value and creates a better outcome.
“There needs to be a plan in place years before an owner is looking to exit. You can rush the process, but you're probably going to leave significant money on the table,” Schenker says. “Two or three years out, advisors should be guiding clients on how to prepare the business across all dimensions: financial, operational, and organizational, to support a clean and value-maximizing transaction. That includes cleaning up passive investments to make sure their clients qualify for the lifetime capital gains exemption and improving the fundamentals that drive valuation. Record keeping, systems and controls, and customer diversification are all important drivers.”
