Mergers and Acquisitions: How Economic Uncertainty is Redefining Business Valuations

Author: Laurie Propeck

Introduction

Economic uncertainty—whether driven by market volatility, geopolitical tensions, or persistent inflation—continues to significantly influence valuation processes in business purchase and sale transactions. In Quebec, SMEs are operating in an environment marked by volatility and a general slowdown in growth.

In 2025, Quebec is experiencing a broader national trend of moderate growth, with Canada’s GDP projected to increase by only 1.8%. While inflation has slightly eased, the lingering effects of past interest rate hikes continue to restrain investment and erode market confidence. These conditions are having a direct impact on mergers and acquisitions (M&A) activity, with valuations remaining cautious, or even declining in sectors that are particularly sensitive to economic cycles.

In this context, it is critical for business leaders to understand how economic uncertainty can affect negotiations, valuation methods, and transaction structures. M&A lawyers play a key role in supporting both buyers and sellers, helping them navigate legal, financial, and operational risks, and structure deals that are both secure and strategic in an unpredictable market.

1. The Impact of Economic Uncertainty on Valuations

Business valuations are directly affected by macroeconomic conditions, especially during periods of slow growth, residual inflation, and elevated interest rates. According to PwC Canada, these factors are contributing to a decline in deal activity, particularly in cyclical sectors such as real estate, energy, and consumer goods. Buyers are becoming more selective, focusing on strategic targets that offer long-term value.

In a more demanding market, sellers are often required to lower their valuation expectations and adjust their positioning. This may include operational restructuring or other efforts to enhance the company’s attractiveness to potential acquirers.

Rather than relying solely on historical metrics, experts recommend thorough and proactive transaction preparation on both the buy-side and sell-side to secure fair deal terms in a volatile environment.

2. Strategic Representation for Buyers and Sellers

Whether you are a buyer or a seller, legal counsel and transactional consultants is essential to structure a deal that is both efficient and resilient.

• For sellers, managing price expectations is often the main challenge. Thorough preparation— including pre-closing reorganizations—can enhance the company’s financial presentation and optimize its tax structure. A 2024 KPMG study indicates that 90% of Canadian CEOs of large companies and nearly 75% of SMEs plan to complete acquisitions over the next three years. This trend underscores the importance of being well-prepared for a sale in order to maximize value.
• For buyers, legal advisors and transactional consultants help structure and craft an offer that minimizes risks while capturing opportunities. This may involve price adjustment clauses based on future indicators or contractual protections tied to changes in the economic climate.

3. Due Diligence: Managing Risk

Due diligence remains a cornerstone of any successful transaction. In times of economic uncertainty, its importance only increases.

• For buyers, it helps identify hidden risks such as financial stability, contractual obligations, regulatory compliance, or cash flow projections. A 2024 Deloitte survey reveals that 43.2% of professionals anticipate increased due diligence requirements due to economic uncertainty, and nearly 30% view the macroeconomic environment as a key driver of this heightened scrutiny.
• For sellers, anticipating and preparing for the due diligence process can help correct deficiencies, improve transparency, and reduce the risk of adverse renegotiations. A proactive approach builds buyer confidence and improves the likelihood of a successful, favorable closing.

4. Pre-Closing Reorganizations: Adapting to Sell Better

In uncertain economic conditions, pre-closing reorganizations can be essential to optimize sale conditions and increase perceived value. These efforts may include:

• Streamlining operations;
• Strengthening the balance sheet;
• Clarifying ownership structures; and
• Reducing liabilities or isolating non-core activities.

Such reorganizations might involve debt restructuring, subsidiary consolidation, or divisional realignment to refocus the business on its core activities. These steps present a clearer, more stable company profile to prospective buyers.

According to a 2024 BCG study, companies with well-defined organizational structures and established processes are significantly more likely to complete successful transactions. Implementing strong governance and M&A-specific practices enhances risk management and long-term value creation in volatile markets.

5. Price Adjustment Clauses and Deferred Payments: Structuring for Uncertainty

Economic instability often leads to more complex price negotiations. To address valuation gaps between buyers and sellers, several contractual mechanisms are commonly employed:

• Price adjustment clauses, tied to the company’s future performance or unforeseen economic events;
• Earn-out structures, which allow the buyer to mitigate financial risks while offering the seller conditional compensation linked to future performance.

These tools help align the interests of both parties while taking the unpredictability of the broader economic environment into account.

Conclusion

Economic uncertainty is fundamentally reshaping how businesses are valued and how M&A transactions are negotiated. In this context, adopting a sound legal strategy—based on rigorous analysis, thorough preparation, and contractual flexibility—is more critical than ever.

Our team of lawyers specializing in mergers and acquisitions, as well as business reorganizations, are strategic partners who can help you anticipate risk, structure robust agreements, and unlock value, even in an unpredictable market.

If you are in the process of buying or selling a business, don’t hesitate to contact us to discuss the strategies that will help secure your transaction in a constantly evolving economic landscape.