Making Succession a Success: Perspectives from Canadian Small and Medium‐Sized Enterprises

Abstract

Introduction The emergence of an aging population in Canada and its impact on the economic growth and social policy development such as health care has been a focal point of public policy research. However, one key aspect that has been overlooked is the impact of an aging small- and medium-sized enterprise (SME) sector in Canada. Focus on SMEs is pivotal in assessing the effects of succession planning. Seventy-five percent of all businesses in Canada employ fewer than five employees, and almost 60 percent of employed Canadians work for a small- or medium-sized business. In addition, the SME sector contributes approximately 45 percent of Canada's economic output and is the catalyst of innovative products and services. Clearly, there is a need for in-depth examination into the aging of SME owners and their preparedness for business succession. To assess the risks and opportunities for Canada's economy, the Canadian Federation of Independent Business (CFIB) carried out an extensive survey on SME succession. (Further details on CFIB's research on SME succession are outlined in the report Can Breed Success [www.cfib.ca]). The survey was completed by 4,311 CFIB members during the period from May 1 to 26, 2004. The survey 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 unique to the CFIB survey, questions were asked to those owners who recently acquired a business through succession. Major survey findings are as discussed as follows. Business Exit Timeline Forty-one percent of SME owners intend to exit ownership or transfer control of their businesses within five years, with this figure jumping to 71 percent when extended to the next 10 years (Figure 1). Retirement is the number one reason for business owners who are planning to exit their business, as indicated by 82 percent of respondents. However, 11 percent of respondents indicated that they plan to move to another venture. Although small, this fact is particularly important as they represent the natural churning of businesses whereby resources are shifted to more productive purposes. Succession Planning Only one-third (35 percent) of SMEs have a plan to sell, transfer, or wind down their business in the future (Figure 2). Among these, it is more likely to be an unwritten, informal plan (28 percent) as opposed to a formal one (7 percent). The earlier one expects to exit the business, the more likely that he or she will have a succession plan. Although this finding is intuitive, the issue is the degree at which owners are planning. Among those respondents planning to exit within 10 years, 41 percent have a succession plan, while only 48 percent of those planning to exit within five years have a succession plan. Succession Plan Development The development of a succession plan often requires the input and services of various professionals such as accountants and lawyers; internal stakeholders in the business, such as key managers and employees; as well as family members and the successor(s) if already chosen. The most common types of professional assistance used in developing a succession plan are accountants and lawyers. Use of other professional services is significantly lower. What Is Being Planned? The most commonly cited components of a succession plan are considered to deal with technical and include the legal transfer of business ownership, tax implications of disposing the business, the financing of the successor, and the division of future profits after the transition. However, seldom cited are soft issues such as identifying long-term personal and family goals, the communication of each stakeholder's vision for the business (employees, family, successor) and their anticipated role in the business after succession, as well as the processes foreseen for selecting and training their successor. …