Even for business, trends can be a misleading distortion of reality.
Recently, things like succession, heirs and legacy were just exciting episodes about Logan, Kendall, Shiv, and Roman maneuvering the fate of Waystar RoyCo. Despite the popular juiciness and weekly drama, there wasn’t a shred of similarity to the fate, the future, the strategizing, legacy and other critical aspects of business owners agonizing and deciding when “it’s time” for the real-life succession or selling options or reluctantly or enthusiastically stepping aside.
“Every business, at some point, will transition from its current ownership to new leadership, or closure,” explains Edmonton’s savvy and respected John Liston, Certified Exit Planning Advisor (CEPA) and a founding partner with Newcastle West Partners. “The most successful transitions are those prepared well in advance, allowing sufficient time for tax planning, organizational restructuring and readiness of both the business and its owner.”
He references The 7 Habits of Highly Effective People research, which identified two critical habits: being proactive and beginning with the end in mind.
According to recent Canadian Federation of Independent Business (CFIB) stats and trends, more than 78 per cent of business owners plan to exit their businesses within the next decade. While this suggests that succession planning is increasingly on the radar, many owners still find it difficult to prioritize, as their focus remains on the day-to-day demands of running the business.
For various reasons, the trend of needing a succession plan – or selling off the business – is catching on. Succession planning has become a business art and science, but there is a growing trend to forfeit conventional legacy and find just the right buyer.
“The message of needing a succession plan is certainly a trend, more so than it was five years ago,” says in Lynne Fisher, national team leader of ExitSMART™ with MNP. “There are several reasons for this increased awareness. Businesses across various sectors have been undergoing significant changes, such as the consolidation seen in sectors like dentistry, pharmacy and optometry. These changes have highlighted the need for business owners to plan for their exit strategy and ensure their businesses can continue to thrive under new ownership.”
In business, as in life in general, the generational, aging Boomer factor has made succession strategizing more of an issue than ever before.
“Succession planning is becoming increasingly critical for small and medium-sized businesses due to Canada’s aging population and the continued retirement of Baby Boomers,” says Emily Peden, Alberta policy analyst with CFIB. “With 75 per cent of business owners citing retirement as the primary reason for exiting their business, the need for a smooth and secure transfer of assets is crucial.
“Many owners rely on the sale of their business as a key source of retirement income, so any challenges in the sale process can have serious implications for them and their family’s financial security.”
Peden notes that, compared to 2018 when only eight per cent of small businesses had a formalized succession plan, there has been only a slight increase to nine per cent as of CFIB’s most recent data collection.
Procrastination is a business trend when it comes to succession. The most frequent excuses are:
- No time. Owners are often too busy managing day-to-day operations to focus on succession.
- Fear of losing control and owners reluctant to relinquish control, fearing they will lose their purpose or that the business will suffer without them.
- Complex tax issues because succession planning can involve complicated tax considerations.
- An unclear successor, with many owners struggling to identify a successor, especially if family members or partners are involved.
- Insufficient retirement savings, with some owners delaying succession because they have not saved enough for retirement.
There is expert consensus. Procrastination only increases exposure to risks, and inaction is a costly choice. Analysts and financial advisors are cautioning business owners.
“Many small business owners procrastinate or avoid creating a formal succession plan due to the time and financial commitment it requires,” Peden points out.
CFIB members report that 43 per cent hired accountants, 24 per cent hired lawyers and 13 per cent used financial planners to assist with succession planning, all services that come with significant costs.
“In fact, 20 per cent of small business owners identified the expense as a barrier to developing a plan. It is one of the many factors which has led over a third of business owners to handle the succession planning process themselves, investing considerable time in learning tasks typically handled by professionals.”
Liston points out that a well-developed and effective succession plan involves a strategic process aimed at identifying and nurturing future leadership within the organization, “Identifying key positions and pinpointing roles critical to the organization’s success. Assessing current talent and evaluating employees’ skills, potential and readiness to take on future leadership responsibilities. Also, building a leadership pipeline and developing programs to groom high-potential employees for leadership roles.”
He emphasizes the importance of outlining a clear plan that defines the timeline, responsibilities and resources necessary for a smooth transition, executing the plan and implementing the strategy by providing training, mentoring and support for successors and the organization’s long-term goals.
The conventional succession strategy of legacy, handing the business down to heirs, planning for and grooming the next generation of leadership is still a vital business basic, but gung-ho entrepreneurs are changing the landscape and offering an irresistible alternative to succession.
Liston adds that, “Entrepreneurs have always been natural problem-solvers, and the trend of connecting buyers and sellers in the business world is nothing new. The generational reality is that, as Baby Boomers age, there is growing urgency around business transitions.”
A recent CFIB report estimates that 76 per cent of Canadian business owners plan to exit their businesses within the next decade, with over $2 trillion worth of business assets set to change hands.
“This could lead to a situation where there are more sellers than buyers,” he says, “driving down the value of businesses due to supply and demand imbalances. It would be unfortunate if owners, after years of hard work, are unable to fully capitalize on the value they have created simply because of a lack of proactive succession planning.”
Another increasingly popular alternative succession option, particularly for owners who have no heirs but are partial to legacy, is ESOPs, the employee share ownership plan through which companies offer employees a stake in the business. ESOPs are commonly used across Canada in a wide variety of industries ranging from small and medium-sized privately owned businesses to large publicly traded firms. ESOPs can range from sales to key management teams to larger employee groups, with key managers often acquiring a more substantial ownership stake.
“With careful structuring, aligning ownership transitions with business direction and establishing appropriate tax and legal frameworks, selling to employees can be an extremely effective strategy for owners aiming to transition versus succession of their businesses over time,” Lynne Fisher adds.
As mergers and acquisitions are popular strategies for big business, succession, ESOPs and selling to entrepreneurs are important options for small and medium businesses; but ultimately it is about more than the bottom line.
“As a society we need proper transition of Canadian businesses,” Liston emphasizes. “We need to help our current generation of builders, caretakers and philanthropists to transition their businesses to those who will demonstrate the same mindset of being caretakers of our communities.”
