Succession planning pays off for small businesses
By AdvocateDaily.com Staff
A recent report commissioned by the Canadian Federation of Independent Businesses (CFIB) found that just eight per cent of small and medium enterprise (SME) owners had a formal succession plan in place.
Around 40 per cent of the 2,500 respondents to the CFIB survey had an informal plan in place but more than half of the business owners had no plan at all for the life of the company after their departure.
That was despite evidence that 47 per cent of owners intended to leave their businesses within five years, and almost three-quarters wanted to be out within a decade. In addition, around 62 per cent intended to rely on the proceeds of an eventual sale to partially fund their retirement.
Horst, partner with Shibley Righton LLP, says it’s never too early to start planning a succession, but adds that he’s not surprised by the results of the survey.
“When I ask my clients if they’ve thought about a succession plan, the answer is usually no, because they’re not ready to retire,” he says. “But that’s not really a good answer, because you have to think about the possibility that something happens before then. You don’t want to be forced into a sale without a plan.”
Horst says implementing a succession plan can be a tough sell for owners who would rather get on with the day-to-day running of the business, a task that is frequently all-encompassing.
“They are reluctant to spend their energy on anything else,” he says.
However, he says the investment of time and money it takes to put together a formal plan is worth it, and has no shortage of scare stories to boost his argument.
“The worst circumstance is when someone falls ill or dies suddenly, and the business has to be sold on short notice. If no thought has been given to who might take over, the chances are you’re going to end up with a lower price than if you’d planned in advance,” Horst says.
Things may feel less urgent in a family business where the assumption is someone in the younger generation will take over, but Horst says the new boss may need a period of transition.
“If a family member isn’t ready to take over, then you might have to look to third parties or maybe one of the other executives,” he says. “But without a formal plan in place, it’s more difficult to discuss the transfer.”
According to the CFIB report, the organization expects a wave of Baby Boomer retirements to trigger a busy period of transfers in the coming years.
“While it is encouraging that a good proportion of business owners intend to pass their business on to a new generation, the lack of formal planning gives rise to significant risks for Canada’s competitiveness and prosperity,” research analyst Marvin Cruz wrote. “With potentially over $1.5 trillion in assets changing hands during the next 10 years, Canada cannot afford to have so many SME owners unprepared to make that transition.”