Home September 2018 Lack of Preparedness Threatens Canadian Economy

Lack of Preparedness Threatens Canadian Economy

Small percentage of business owners have a succession plan in place

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When restaurant owner Marco Abdi died three years ago, his wife Filomena was thrust into a position she was not prepared to be in – taking over the family’s successful business.

Marco Abdi was the brains and the personality behind the popular La Brezza establishment which has been an iconic food destination in Bridgeland for three decades.

When he was gone, Filomena was lost regarding the family business. No succession planning was ever discussed around the dining room table.

“I didn’t even know where Marco’s bank was,” she says. “I didn’t have any clue about any of it…. Basically I would suggest if you have a family-run business you kind of let your partner know where everything is, where you need to look for stuff and maybe discuss what that person’s wishes are.

“The best thing is to discuss it. Have some sort of strategic plan. If you wish the business to be carried on, then you need to be able to discuss that and just make a plan because if there’s no plan in place it’s really difficult.”

And that’s exactly what Filomena discovered when she inherited the role of taking over the family business. The unexpected and unplanned for succession of leadership was quite stressful. At times, she wondered if she could do it justice and lead the restaurant into the next phase of its future. Or should she simply let go and move on.

“It was a nightmare when I first took over. It was really tough. I walked into the restaurant not knowing anything. I never had anything to do with the restaurant. I had my own career. It would have been nice to know a little bit more about it,” says Filomena, who three years later is on solid ground and the business is doing well. “I just learned as I went.”

While she hopes other business owners will learn from her experience, reality tells another story.

A CFIB report, Passing on the Business to the Next Generation, found that 51 per cent of current business owners surveyed did not have a succession plan. Only nine per cent had a formal written plan and 40 per cent had an informal plan.

Amber Ruddy, Alberta director for the Canadian Federation of Independent Business, says this reality is very troubling because most small business owners are depending on the sale of their business for retirement.

“We are noticing trends. So, for example, with the baby boomers retiring there will be about a trillion dollars in assets exchanging hands,” she says.

“And if you don’t have a plan in place that could prolong your retirement. We saw this during the last recession. Some business owners had to delay retirement by five or six years because they didn’t have somebody in place to take over the business.”

People simply aren’t thinking about their retirement while they’re busy taking care of their business. They don’t want to alert nor have their employees concerned that there could be some changes. So, people think it’s enough to simply have an idea in their head. But in a family business they have to ask those questions. Do the children even want to take over the business? An example is the agribusiness where parents just assume their children are going to be their successors. However, those conversations to confirm that have never taken place.

James McCreath, portfolio manager at BMO Nesbitt Burns, says people could always do a better job in succession planning.

The number one priority is doing this well ahead of time. Thinking about it six months out or a year out and trying to execute it can be a bit treacherous.

“There’s so many things that one has to consider. That can include risk management, insurance planning associated with the sale, tax planning. In some cases when the business does business in other countries, cross-border planning,” says McCreath.

“So, a more appropriate time frame to get prepared for succession planning is probably closer to three to five years out.”

It’s also important that family members are appropriately involved in the process. This isn’t something you want to spring on the family at Christmas dinner. Family members could be involved very intimately and directly in share ownership or working in the day-to-day operations of the business.

“There are many professionals that obviously are well versed in navigating all of these nuances and I think it’s essential that families involve these professionals that see these issues or concerns on a frequent basis,” says McCreath.

Because there are so many small and medium-sized businesses in Western Canada, often a business owner defaults to a family member or a manager who is already involved in the business, trying to figure out who should be acquiring the business. Sometimes they can be selling themselves short by not opening up to a broader audience of potential inquirers.

The 2016 Global Family Business Survey, by PwC, found that 31 per cent of business owners cited succession planning within the company as a key challenge over the next five years.

It also discovered that only 18 per cent of Canadian family businesses have developed a comprehensive succession plan that has been both documented and communicated.

Compared with 2014, Canadian family businesses are now more likely to say they would pass on ownership of the business to the next generation but will bring in professional management – 27 per cent compared to 11 per cent.

And 38 per cent expect to pass on management to the next generation.

All these are important considerations taking into account what’s happening to the Canadian population.

“The implications of the aging demographic trend in Canada, and other developed countries, has been well documented when it comes to pension, health care and other social policy issues,” says the CFIB report Passing on the Business to the Next Generation.

“The phenomenon of thousands of business owners planning to retire and transfer ownership of their businesses will have a major impact on Canada’s economy as a whole. While a massive transfer of business ownership and assets is inevitable, Canada is not quite ready for the change.”

The biggest challenge SME owners face when it comes to succession planning is finding the right successor or buyer. It was cited by 56 per cent of survey respondents in the CFIB report. The next biggest barrier (54 per cent) is being able to measure the value of the business followed by financing the successor (48 per cent).

Why is this such an important issue? Three-quarters of all businesses in Canada employ fewer than five employees and more than half of employed Canadians work for a small or medium-sized business. The SME sector contributes about half of the Canadian economy.

A comprehensive succession plan will help ensure the future financial stability and value of any business.

Any uncertainty in succession planning could have a huge impact on the country’s economy. The CFIB says SMEs represent a significant portion of the Canadian economy which cannot afford to have billions in business assets on the line.

Take Filomena Abdi for example. If she had decided to throw in the towel and not follow in her husband’s footsteps, several jobs would have been gone. Suppliers of restaurant food and supplies would have lost a customer.

Multiply that scenario by thousands of other business owners in the same predicament and you can see how critical this issue has become.

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