Small, mid-size firms outperforming the Canadian economy: CIBC World Markets
More than 260,000 new businesses to launch by 2013 TORONTO, Oct. 6 /CNW/ - CIBC (CM: TSX; NYSE) - Small and mid-sized businesses outperformed the overall economy in the past year as Canadians opened their own businesses at a fevered pace last year, a trend that will continue to grow as the economy recovers in 2009, notes a new report from CIBC World Markets. "We expect that over the coming five years, the average annual growth in the number of small and mid-size businesses will exceed two per cent, leading to the creation of no less than 260,000 new businesses by 2013," says Benjamin Tal Senior Economist at CIBC World Markets in his latest Small Business Report. Since the beginning of the decade, more than 300,000 small and mid-size enterprises (SMEs) were launched, including 33,000 in 2007 alone, says Mr. Tal, who found that their performance has been impressive. "Small businesses were quick to capitalize on the acceleration in economic activity between 2005 and 2007, outpacing the overall economy by a full percentage point," says Mr. Tal. And while slowing market conditions are impacting SMEs, he says the sector is "for the first time in more than two decades" outperforming the rest of the economy during a downturn. "This is significant given that historically, SMEs led the overall economy into periods of slowdowns and, in the process, suffered disproportionate hardship compared to larger firms. By next year, as the economy begins to recover, SMEs in aggregate appear to be well positioned to resume their traditional role as the pioneers of the economic cycle." The well-documented breakneck pace of consumer spending last year is one reason why small businesses have overcome weaker economic conditions, notes Mr. Tal. However, another key driver has been the strong housing market, which has given birth to 700,000 jobs since 2000. "With SMEs employing close to 70 per cent of workers in the construction and real estate sectors, the benefit is obvious," says Mr. Tal, adding that the "levelling off in housing activity in Canada will hurt the momentum in overall SME activity, but the level of activity will remain at historic highs." The booming economy of Alberta produced the greatest percentage jump in new SMEs in Canada last year. He notes that Ontario produced the second largest climb "probably reflecting the growing reliance of the province on the service industry as well as outsourcing activity as large corporations try to cut costs." In Manitoba and Saskatchewan, the economic momentum has yet to be felt by SMEs as the sector actually shrunk last year. However, Mr. Tal expects that trend to reverse itself, and ultimately lead those provinces to record some of the largest gains in SME activity in the years ahead. By city, the fastest rate of small business formation in 2007 was in Sherbrooke, followed by Edmonton, Calgary and Toronto. Mr. Tal notes that all of the growth in the SME sector in 2007 was in large urban centres, which saw a strong 3.8 per cent increase in the number of businesses formed. The number of SMEs in rural areas fell by more than two per cent. The contribution that SMEs make to the Canadian job market is sizeable and continuing to grow, says Mr. Tal. "During the year ending March 2008, firms with less than 100 employees created 130,000 new jobs accounting for almost 39 per cent of jobs created in the economy. This is notably higher than the 28 per cent contribution seen in early 2007." Mr. Tal's analysis also identifies significant demographic changes ahead that pose challenges and benefits for the future of SMEs in Canada. Among them is the advancing age of entrepreneurs. "Within the coming 15 years, more than half of the country's current small business owners are expected to retire," says. Mr. Tal. And by 2013, "an estimated $1.3 trillion in business assets is poised to change hands - the largest turnover of economic control in generations. Accordingly, faulty succession planning could have significant economic costs resulting from reduced productivity, job losses, premature sales and increased bankruptcy rates." He adds that another key challenge will be a shrinking labour market that will make it increasingly difficult for SMEs to find qualified labour. A trend likely to benefit SMEs is the increasing consumer demand for personalized products. "By their nature, small scale operations are flexible enough to support the increased demand for personalized services given their ability to focus on niche markets," says Mr. Tal. The growing call to think and act on a global scale will also likely affect SME business plans. "Increasingly, firms are identifying foreign markets and foreign sources of supply as important parts of their strategies for growth and success," he adds. Heightening the export orientation of the small business sector will be the Internet and an increasing number of immigrant entrepreneurs with potential business connections to their countries of origin. But with global business activity comes the need for SME owners to be knowledgeable in trade and tax regulations, and foreign exchange risk, says. Mr. Tal. His report also examined small and mid-sized businesses that have consistently outperformed their peers in revenue growth and identified six common key characteristics. They are:- Having prior work experience in the industry; - Using professional advisors such as accountants and bankers; - Having business partners; - Having a export market orientation - Using modern technology; and - Having a post-secondary education.The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/sbr-20081006.pdf CIBC World Markets is the wholesale and corporate banking arm of CIBC, providing a range of integrated credit and capital markets products, investment banking, and merchant banking to clients in key financial markets in North America and around the world. We provide innovative capital solutions and advisory expertise across a wide range of industries as well as top-ranked research for our corporate, government and institutional clients.