Why is “I'll just run it five more years” costing Canadian business owners millions?

Many owners, told their company is worth 4x EBITDA, reason: “Why sell for that? I can run this for another five years, make more money, then shut the doors. Four times earnings collected over five years equals twenty times earnings — why take four when I could take twenty?” On the surface this seems sound. In reality, it contains several compounding errors that almost always destroy value. A concrete example illustrates why.

The example: Margaret Chen, 62, sole owner of a precision machining company in Toronto with ~$18M revenue, $2.2M EBITDA and 47 employees, offered $8.8M (4x EBITDA). Her logic: “Run it five more years at $2.2M/year and extract $11M, plus keep my salary — why take less?” Here is why that reasoning fails.

Error #1: EBITDA is not cash in your pocket
EBITDA is earnings BEFORE interest, taxes, depreciation and amortization — not take-home cash. From $2.2M EBITDA, Margaret must subtract working capital requirements (manufacturing typically needs 15–20% of revenue — roughly $2.7–$3.6M tied up), maintenance capex ($200,000–$400,000/year), debt service and corporate taxes (Ontario active business income above the $500,000 small business limit is taxed at ~26.5%). Realistically she might extract $1.0–$1.2M annually after operating requirements — not $2.2M.

Error #2: The tax treatment is dramatically different
Scenario A — Sell today: a qualifying share sale gives access to the LCGE ($1.25M for qualified small business corporation shares as of June 25, 2024, indexation resuming 2026; the inclusion rate remains 50% after the proposed 66.7% increase was cancelled March 21, 2025). Net proceeds are roughly $6.94M.
Scenario B — Run five more years: extracting ~$1.1M annually as salary/dividends, Margaret faces full marginal rates (Ontario combined rates reach 53.53% over ~$253,414). Over five years she nets ~$2.86M — less than half of Scenario A, in nominal terms.

Error #3: Time value of money
A dollar today beats a dollar in five years. Selling today and investing $6.94M conservatively at 5% yields ~$8.86M after five years — without lifting a finger. The $2.86M extracted in Scenario B has a present value of only ~$2.5M discounted at 5%. The gap: $6.94M today vs. ~$2.5M present value for “run it longer.”

Error #4: Five years of stable earnings is a big assumption
Scenario B assumes constant $2.2M EBITDA for five years. Real threats: customer concentration (losing one of three top customers at 40% of revenue could devastate earnings), key-person risk (a 58-year-old foreman with 25 years' experience), competitive/offshore pressure, owner health (Margaret is 62) and economic cycles (a recession could cut manufacturing orders 20–40%). The buyer paying 4x today is effectively insuring Margaret against all these risks.

Error #5: The dividend “tax shelter” misconception
Canada's dividend gross-up and tax credit system is designed so the combined corporate-plus-personal tax burden is roughly equivalent whether income is taken as salary or dividends — the system “integrates” to prevent arbitrage. Worse, once passive investment income inside a CCPC exceeds $50,000 annually, the small business deduction begins to phase out, raising the corporate rate on active business income. The dividend strategy optimizes around the edges of a structurally inferior outcome.

Error #6: Opportunity cost of the owner's time
Five more years of ownership means five more years of personal involvement at peak earning age — trading health, other interests and the stress of running a 47-employee company. Valuing Margaret's time at even $300,000/year adds $1.5M in opportunity cost over five years that her calculation ignores.

Why do buyers pay multiples?
The buyer isn't foolish. They pay 4x EBITDA for: future earnings (years 6, 7, 8 and beyond Margaret won't collect), synergies (improvements she cannot capture), growth potential (capital she may lack), and risk tolerance (they can absorb setbacks that would devastate a sole owner dependent on the business for retirement).

What is the right question to ask?
Instead of “Why would I sell for 4x?” the better question is: “What would I have to believe about the future to make running this business five more years the better choice?” The answer requires perfectly stable earnings, no health issues, no key-person departures, no competitive threats, no downturns, and a willingness to work another five years at an intensity most 62-year-olds don't want. That is a lot to bet on. The math says sell.

Key facts: the “run it five more years” fallacy

Surface logic: 4x EBITDA over 5 years = 20x — but this ignores six compounding errors
Error 1: EBITDA ≠ cash; working capital, capex, debt and corporate tax reduce take-home dramatically
Error 2: a share sale accesses the LCGE; ongoing income is taxed at full marginal rates (up to 53.53% in Ontario)
Error 3: net sale proceeds invested at 5% can exceed the discounted value of years of extracted income
Error 4: stable five-year earnings assume away customer, key-person, competitive, health and cyclical risk
Error 5: dividend “sheltering” is neutralized by tax integration and the passive-income SBD phase-out above $50,000
Error 6: five more years of owner time carries a real opportunity cost
LCGE: $1.25M (June 25, 2024); inclusion rate held at 50%

Disclaimer: For informational purposes only; not tax, legal or financial advice. All examples are illustrative and simplified; actual results vary. Consult qualified tax and legal professionals before making business transition decisions.