Transfer poses risks to Canadian economy via reduced productivity, job losses, premature sales and increased bankruptcy rates

TORONTO, Nov. 13, 2012 /CNW/ - The owners of Canada's small- and medium-sized businesses are set to retire in record numbers and this will see $1.9 trillion in business assets change hands in the next five years alone which could pose significant risk for the Canadian economy, finds a new report from CIBC World Markets. 

The report notes that 310,000 business owners, close to 30 per cent of small- and medium-sized businesses in Canada, will exit ownership or transfer control of their companies within five years. Within the next ten years one-half, or 550,000, of owners will exit their business.

"The economic implications of the accelerated pace at which firms are changing hands should not be underestimated," says CIBC Deputy Chief Economist Benjamin Tal. "The demographic realities of Canada in general, and the small and medium-sized enterprises in particular, suggest that succession planning is increasingly becoming a critical issue. In the coming five years, an estimated $1.9 trillion in business assets are poised to change hands — the largest turnover of economic control on record. And by 2022, this number will mushroom to no less than $3.7 trillion.

"Given this magnitude, a faulty or badly executed succession planning process could have a ripple effect throughout the Canadian economy via reduced productivity, job losses, premature sales and increased bankruptcy rates. This potential cost is significant. The firms that will change ownership in the coming five years currently employ close to two million people and account for no less than 15 per cent of GDP."

Mr. Tal notes that these numbers highlight that succession planning is no longer just a micro issue that impacts the businesses involved, but also, increasingly, a macroeconomic issue, capable of affecting the growth potential of the economy as a whole.

"As long as the number of businesses that face transition issues is small relative to the size of the economy, the lack of succession planning is mostly a micro issue impacting the business itself with little consequence to the economy as a whole. But the changing demographic landscape of Canada suggests that this is no longer the case. The sheer number of business owners that will retire in the coming decade is turning this micro issue into a potentially damaging macro problem."

The challenge, says Mr. Tal, is getting the country's small- and medium-sized business owners to turn their attention to this growing issue. Survey after survey has shown that business owners are ill-prepared for the inevitable ownership transition that is quickly approaching. No less than 250,000 business owners, or one-fifth of all businesses with employees, are now aged 55 and over. And their number has risen by four per cent a year over the past decade. That's more than double the rate seen in the 1990s. By the end of the decade, close to 350,000 business owners will be over the age of 55.

While succession planning is the norm for large corporations, for small and mid-sized companies it is often an overwhelming issue that is too often dealt with only in emergency situations such as the death or illness of an owner/partner or when a new partnership is needed following a cash flow crisis.

The reasons why succession planning is not addressed include limited resources, a struggle to maintain or improve profitability along with some softer factors such as lack of common vision among partners, lack of an effective communication framework and difficulty dealing with conflicts between interested parties.

"More often than not, the inability to agree on a well-defined succession plan is an indicator of even deeper problems such as the lack of a clear business plan," adds Mr. Tal. "And the cost to the business is not trivial. In addition to putting the business at risk by alienating potential successors and buyers, it can lead to a loss of focus by owners, causing inefficiencies and profit loss. Owners may fail to realize the full value of their firm, and it may be difficult to obtain long-term financing, further damaging the growth potential of the firm."

While the issue of a lack of succession planning is not new, Canadian firms have yet to put serious focus on addressing the issue. Close to 60 per cent of business owners aged 55 to 64 have yet to start discussing their exit plans with their family or business partners. "At this stage of the game, a small businesses' principle strength — the reliance on the human capital of the owner in almost every aspect of the business — is also becoming its primary weakness. Adequate succession planning requires time and is often measured in years, not days or months."

The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/IF-20121113.pdf

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SOURCE: CIBC