A wave of retirements among business owners over the next few years could pose a significant risk for the Canadian economy as the country undergoes the biggest transfer of economic control in its history, according to a new report from CIBC World Markets.
CIBC says half of all small- and medium-sized enterprises (SMEs) in Canada are set to retire over the next decade, including 310,000 that plan to transfer control of their companies within the next five years.
“The economic implications of the accelerated pace at which firms are changing hands should not be underestimated,” CIBC deputy chief economist Benjamin Tal said in the report.
An estimated $1.9-trillion in business assets are poised to change hands in five years—the biggest transfer of Canadian business control on record, CIBC said; and by 2022, this number will balloon to at least $3.7-trillion as 550,000 owners exit their businesses.
“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,” the CIBC World Market report said.
The report also noted that companies that will see a change ownership in the next five years currently employ close to two million people and account for at least 15 per cent of gross domestic product. That means planning for ownership succession is no longer just a micro issue that impacts the businesses involved, but increasingly a macroeconomic issue capable of affecting the growth potential for the whole economy, the report said.
“The sheer number of business owners that will retire in the coming decade is turning this micro issue into a potentially damaging macro problem,” Tal said.
Tal also noted that survey after survey has shown that business owners are ill-prepared for the inevitable ownership transition that is quickly approaching.
Often it’s only dealt with in emergency situations such as the death or illness of an owner or partner or when a new partnership is needed following a cash-flow crisis. “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,” Tal said.
CIBC said that close to 60 per cent of business owners aged 55 to 64 have yet to start discussing 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,” the report said. “Adequate succession planning requires time and is often measured in years, not days or months.”