According to a study by Canadian Federation of Independent Business, 40% of small business owners plan to leave their companies within five years, and 70% within the next ten years. Three-quarters of those leaving are planning to retire. The potential impact on the economy is tremendous, with some two million Canadian jobs affected over the next five years. Unfortunately, more than 2/3 of these business owners do not have a succession plan in place, and most of those that do are informal and unwritten.
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A report released today by the Canadian Federation of Independent Business (CFIB) found that 4 out of 10 small- and medium-sized business owners (SMEs) intend to exit their businesses within 5 years, with this number jumping to 7 in 10 when extended over 10 years. ; Three quarters of those intending to leave cited retirement as the reason. ; Catherine Swift, CFIB’s President and CEO stated that as many as 2 million Canadian jobs could be impacted over the next five years, many of which could be lost, if action is not taken to facilitate the transfer of ownership of thousands of Canadian businesses as aging entrepreneurs look to retire.
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To assess the risks and opportunities for Canada’s economy, CFIB carried out an extensive survey regarding SME succession that garnered over 4,300 responses. It focused on several key issues including: when do owners expect to exit their business; how are they preparing for succession—if at all; and what barriers do they face in implementing their succession plans. To obtain another perspective, one unique to the CFIB survey, questions were also asked of those owners who recently acquired a business through succession.
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Swift pointed to the 2005 Federal Budget documents, which show Canada is expected to experience one of the largest increases in the ratio of the elderly to the working age-population among G-7 countries in the coming years. ; “While much has been written and discussed about the pending retirement of Canada’s baby-boomers, one key aspect has been overlooked – the effects and impacts of an aging small- and medium-sized enterprise (SME) sector on the Canadian economy and standard of living,” she said.
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“The most significant instrument to mitigate against these risks is the succession plan,” said Swift. ; “Therefore it is incumbent on all stakeholders to ensure that the urgency of planning is made clear and that the process of succession planning is made as easy as possible for business owners.”
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However, CFIB’s survey found that generally, only one third (35 per cent) of SME owners are currently planning for their future succession, and that among those who have a succession plan, the majority are informal, unwritten plans, which have not necessarily been shared with the intended successor.
While the study found the reasons for not having a formal succession plan are often either the belief that there is still time, or reluctance to tackle the personal issues that surround succession such as choosing an heir, Swift pointed out that there are several key institutional barriers to succession planning as well.
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“The government acknowledges the demographic challenge facing Canada, but it is deeply troubling that we have federal spending commitments that extend out seven to ten years and no succession measures to ensure that the next generation of businesses exists to fund health care, pensions and the social safety net,” added Swift.
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Swift asserted that the current government emphasis on start-ups must be complimented by appropriate support for transition of SMEs from one entrepreneur to the next. To do this, the tools that facilitate transition, should be at the forefront of economic and social policy including modernizing tax measures surrounding investing in small firms, as well as those relating to the proceeds from selling a business, personal savings, and the $500,000 lifetime capital gains exemption, which small business owners count on to finance their retirement.
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Swift said financial institutions also have a role to play, as the most commonly identified barrier to succession, according to recent successors (44 per cent), is the financing of the purchase or transfer. Only 29 per cent of successors obtained business loans from any financial institution or bank; twenty-one per cent obtained personal loans from lenders. Half of successors actually invested their own personal equity to purchase their businesses, while approximately 30 per cent obtained financing from the previous owner. ; Very few obtained funding from venture capital, government sponsored programs, or the Business Development Bank of Canada.
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Next to successor financing, the study found the valuation of the business was the most significant barrier, as cited by 39 per cent of successors. Swift said the difficulty in valuing a business is in itself a barrier to obtaining adequate financing and in assessing future profitability. This difficulty is related with problems accessing cost effective professional advice, which 19 per cent of recent SME successors indicated was a significant barrier to their succession.
On a positive note, Swift pointed out that, post-succession, the majority of the small business owners surveyed indicated that they are performing extremely well on a number of fronts. Over half the successors increased the total employment of the business since the transition, only 11 per cent decreased employment. ; Moreover, the majority of these successor-run businesses have experienced increased profits (68 per cent), increased market share (60 per cent), and a greater number of products and services offered to customers (67 per cent). “Clearly,” said Swift, “there are significant economic benefits of successful transitions beyond the maintenance of current employment and output.”
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Swift concluded by pointing out that it is well documented that the SME sector is the driving force of economic growth, innovation and job creation in Canada. ; Over the past 35 years the SME sector has grown significantly and currently represents close to half the Canadian economy. ; “It is these same entrepreneurs who grew the economy who are now looking to retire,” she said. ; “If these transitions are handled incorrectly it could leave a huge hole. ; However, if handled properly, there are great opportunities to be realized for the founders, the next generation of entrepreneurs, their employees and for the Canadian economy as a whole.”
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