Half of owners of small-, medium-sized business to retire in next decade

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 CIBC World Markets.

CIBC said half of all small- and medium-sized businesses 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 issued Tuesday.

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 mushroom to at least $3.7 trillion as 550,000 owners exit their businesses. B.C. has the largest share of business owners planning to exit within five years, with Alberta and Quebec having the least.

“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.

It 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.

Survey after survey has shown that business owners are ill-prepared for the inevitable ownership transition that is quickly approaching.

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.

Peter Merrick, an exit planning consultant in Toronto, said interest in succession planning has been heating up but the real crunch will come over the next seven years.

“There’s a tidal wave coming,” he said in an interview. “It’s going to be really fast paced when the people born in 1959 get ready for retirement because that’s the height of the boom.”

Merrick said the key for business people is to act quickly because a flood of businesses on the market will reduce prices. That will prompt company founders to either work longer with the vast majority eventually closing their doors and walking away.

“There’s lots of opportunities but the thing is it’s going to be a buyer’s market so if someone is contemplating getting out, it’s like musical chairs — you want to choose your chair early because later on there’s going to be a lot of people,” said Merrick, author of “ASK: Advisors Seeking Knowledge,” an industry trade book available for sale in a couple of weeks.

While some entrepreneurs turn over their businesses to family or key employees, many prefer to sever ties entirely by selling to strategic, financial or private equity buyers.

Merrick said private equity firms with several trillion dollars are searching the world for opportunities to buy a private business before it becomes available to the public. With so many companies available, the selling prices tend to be cheap, averaging about four times earnings.

Several Canadian companies are looking to take advantage of the lack of succession planning to lure companies into their fold. Home renovation retailer Rona (TSX:RON) has aggressively targeted independent operators over the years to fuel its growth.

Pharmacy chain Jean Coutu (TSX:PJC.A) also tries to buy out independent pharmacy owners, many of whom are ready to retire.

Karl Moore of McGill University’s Desautels Faculty of Management said he’s met several university alumni in their 30s or 40s who are on the hunt for good acquisitions.

“I think there’s huge opportunities for younger people who have the chutzpah to do this,” he said.

But Merrick said a fundamental issue for the broader economy is that baby boomers who created the businesses have a different mindset than the generations that have followed.

“A lot of the younger people don’t want to work like their parents worked to build these business. They want flex time, they want to enjoy life. They don’t believe in selling their souls to this. They are very short-term sighted.”

So a large potential source of buyers are immigrants. But, he said the federal government changed its investor immigration program to remove the ability of wealthy people to buy businesses in exchange for residency.

Merrick said that’s a mistake. Canada should instead make a concerted effort to welcome business people willing to buy and operate Canadian businesses.