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
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
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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For further information:
Benjamin Tal, Deputy Chief Economist, CIBC World Markets Inc. at (416) 956-3698, firstname.lastname@example.org or Kevin dove, Communications and Public Affairs at 416-980-48358, email@example.com.