2 Million Jobs In Play As Small Business Succession Issue Looms
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Canadian Small Business in State of Flux
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.
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.
Pointing 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,” Swift said.
“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.”
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.
“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.
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.
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.
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.”
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.”
@ June 13, 2005