The coming succession crisis for small business-owners

BY Ainslie Pierrynowski (AIMS On Campus Student Fellow) 

“Despite considerable population growth until the past decade,” states this AIMS report, “the Atlantic region’s percentage share of Canada’s population has fallen continuously for more than half a century.” In fact, the report projects that if migration statistics and birth rates remain consistent, over the next forty years Atlantic Canada’s share of the Canadian population will fall to 4.9% by 2046. This figure represents less than half of what Atlantic Canada’s proportion of the Canadian population was when Newfoundland and Labrador joined Confederation. The reion’s pattern of population decline entails significant economic consequences.

For instance, the size of the labour force is expected shrink, as regional out-migration continues and Atlantic Canada’s baby boomers reach retirement age. One key economic sector, however, faces specific challenges due to these demographic trends: Atlantic Canada’s small (less than 100 employees) and medium-sized (100-499 employees) enterprises, or SMEs. In particular, 60% of SME-owners are over 60 years old. 70% of baby boomers who own SMEs will turn 70 by 2020. And 90% of SME-owners report that they do not have a succession plan for their business after they retire. Further, if succession fails though for even a third of SMEs, states financial adviser Fred Dodd, the resulting impact on workers and local economies could be “catastrophic.” After all, in the Atlantic region, SMEs account for approximately a quarter of each province’s GDP.

Additionally, SMEs employ about three quarters of the private sector labour force in each of the Atlantic provinces. Thus, despite their vital importance to the region’s economy, many Atlantic Canada SMEs may soon close their doors—due in part to population decline.

Yet, these demographic trends need not determine Atlantic Canada’s economic future. For instance, the emergence of business incubators and community development organizations—with a track record of success stories—shows that the region can produce the infrastructure needed to support new businesses. When it comes to transferring ownership of existing businesses, however, similar supports are lacking—and sorely needed. Depending on the nature of their firm, SME-owners building a succession plan might need to consult up to 20 different professionals, from accountants to lawyers on to insurance agents, bankers, and investment advisers. Little coordination exists between each of these professional group, partly, this article posits, because each of these experts are quietly competing to be the primary contact for retiring SME-owners.

However, this disjointed approach can give rise to conflicting advice and plans, slow down the ownership transfer process, contribute to miscommunication, and, ultimately, render succession planning less efficient and less appealing for SME-owners.

To help mitigate this problem, professionals who serve retiring SME-owners should take a hint from the growing number of business incubators and accelerators in Atlantic Canada. These programs bring together multiple advisers from a wide range of fields under the same umbrella, to assist prospective or new entrepreneurs in growing a small business over a set period of time. Such initiatives are often funded by private sponsors.

Alternatively, clients might give the business incubator or accelerator shares of their companies as payment, or clients might initially pay a reduced fee and then pay the remainder of the costs after completing the program. Similar programs, tailored to SME-owners who seek to retire while ensuring the future of their businesses, could benefit both clients and the professionals who serve them. That is, the efficiencies and coordination created by hosting a variety of experts under the same roof, as well as flexible payment options similar to those of business incubators and accelerators (which are especially significant, considering that many SME-owners overvalue what their businesses are worth), could attract a larger number of SME-owners to these professionals’ services, while allowing these experts to reap the resulting higher profits.

Nonetheless, this approach would not wholly allay retiring SME-owners’ succession-related challenges. Even when SME-owners try to develop a succession plan, the region’s ageing population and shrinking labour force makes recruiting new owners difficult. One potential way to help resolve this problem involves tapping into the region’s existing political consensus around promoting immigration in order to bolster the labour force. In fact, some provinces already have immigration streams designed to facilitate the process for individuals seeking to start or buy businesses. In addition to these existing programs, other provinces should consider adopting a service like Prince Edward Island’s online listing for buying and selling local businesses (prominently featured on the webpage for the province’s entrepreneur immigration streams). Such programs make it easier for new and prospective immigrant entrepreneurs to find existing SMEs with retiring owners and with business models, products, or other features that suit one’s skills and interests.

Moreover, for some newcomers who do not initially arrive in the region seeking to become entrepreneurs, private or co-operative organizations aimed at helping immigrants and refugees who develop an interest in business to become owners of established SMEs (similar to this UNHCR business incubator program) can help to provide retiring SME-owners with a succession plan and help new immigrants to find a source of revenue while becoming more engaged in the local economy and society.

In addition to these measures, retiring SME-owners should reach out to young people. Specifically, retiring SME-owners have an incentive to invest in young, prospective entrepreneurs who could manage businesses after the current owners retire. By partnering with existing co-operative education and entrepreneurship programs, or by establishing their own mentorship programs, SMEs and small business associations can provide young people with business management skills and, potentially, an inside connection to the business, its owner, and its employees. In other words, such initiatives on the part of SMEs and business associations would give young people both the means and the motivation to remain in the region and take on ownership of the business when their mentor retires.

Confronting the economic effects of an ageing population is a challenges with which we have long grappled, at the local, provincial, and federal level. As a matter of fact, a recent report of the Special Senate Committee on Ageing declared that, “The aging population will change the way we do things. We can allow this change to happen by passively reacting to change. Or we can anticipate it and meet the challenges by design.” Indeed, Atlantic Canada’s SMEs—and the region as a whole—are not consigned to a dismal fate due to current population trends. Rather, by taking concrete steps toward an alternate destiny, Atlantic Canada’s employers and policymakers can prevent this dim projection of the future from becoming a reality.

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