Welcome back to The Legacy Brief.

Heirly's monthly dispatch on the North American business acquisition market. Data-backed, and worth your time. Here is what we are watching this month.

The Market Pulse

87% of deals above $5 million drew at least three offers last quarter, and 33% drew ten or more. That is from the quarterly survey of business brokers and advisors published on August 25 by the International Business Brokers Association and M&A Source, and by every measure of demand it describes the strongest market for selling a business in years.

The same survey found the time it takes to close a sale in the $2 million to $5 million range rose from nine months to 11.5. It does not say why. It does report that between 60% and 90% of sellers, depending on size, arrived at market with less than a year of preparation, or none at all.

Something is happening between the offer and the closing, and in three weeks a new rule will make it visible.

The Small Business Administration issued a new lending manual on August 14 that takes effect October 1. Deals involving a change of ownership now sit in their own appendix, and where it conflicts with the rest of the manual, it governs.

Three things matter for a first-time buyer. The business must cover its debt payments 1.25 times over, up from 1.15, measured on the last fiscal year or an average of the last two. Projections used to be an accepted basis for that test and no longer are. And where the purchase price reaches $3 million, the lender must obtain an independent quality of earnings report.

That third one is aimed at the seller's numbers. The report must document every add-back and adjustment to reported earnings, including owner compensation above or below market, related-party transactions, non-recurring items and deferred maintenance. It reconstructs cash receipts against bank statements and tax returns. It cannot be prepared by or for the seller. And the lender must use its earnings figure in the coverage test, so if the resulting number does not support the price, the loan amount comes down.

Not everything tightened. A seller who exits fully may now stay on as a consultant for up to 24 months, double the previous limit.

The direction is unmistakable. The burden of proof has moved to the seller. That manual governs lenders in the United States only. What it signals travels further.

In Canada, the pressure arrives from a different direction. Counter-tariffs on $27.6 billion of United States goods take effect on September 8, matching the measures imposed on Canadian goods in late August. Owners in affected sectors should know the federal response included a $7.5 billion support package, and that the tariff remission framework remains open.

What We Are Watching

The cost of borrowing may be about to move in the wrong direction for buyers.

Federal Reserve chair Kevin Warsh told the Jackson Hole symposium on August 28 that recent readings did not show underlying inflation improving. A stronger than expected August jobs report followed on September 4. By that afternoon, market pricing put the odds of an increase at the September 16 meeting at 58%.

The Bank of Canada held at 2.25% on September 2 and pointed to upside risk on inflation rather than downside risk on growth.

For most of the past year the assumption behind acquisition financing was that money would get cheaper. An owner who starts a process now arrives at the negotiating table in spring, and the buyer across from them may be borrowing at a higher rate than today rather than a lower one.

The Question

This month we asked M&A advisors: what should an owner do when it is the lender, not the buyer, who decides what the business earns?

"Build the case on last year's numbers, not next year's."

A lender lends against what a business has done, not what it expects to do. New lending rules in the United States now say so outright, removing projections as a basis for the coverage test, but the logic is not jurisdictional. The work of improving a business has to be finished and reported before a process starts, rather than argued for during it.

"Whoever you hire to prepare the numbers is not who will review them."

Sellers often assume the work their own accountant produces will carry the deal. Advisers describe this as the most common surprise for first-time sellers. In the United States it is now a formal requirement above $3 million that the review may not be prepared by or for the seller. Preparation still pays. It is preparation for someone else's review rather than a substitute for it.

"Deal with the add-backs before someone else does."

Owner compensation above or below market, related-party transactions, non-recurring items, deferred maintenance: every adjustment to reported earnings gets tested, and the figure that survives is the one the lender uses. An add-back that will not hold up is better found early than late.

A Note From Toyin

One finding in this quarter's Market Pulse survey stayed with me. Almost every owner who went to market did so because they had reached the end of something, and almost none had spent a year getting ready for it.

I do not read that as carelessness. Running a business well and preparing to sell it are two different jobs, and the first one rarely leaves time for the second.

But the questions are getting harder, and they are being asked earlier. If there is a year in your mind when you would like this finished, the work starts well before it.