Canadian entrepreneurs looking to retire may be selling themselves short when selling their businesses, according to a recent study by Business Development Bank of Canada (BDC).
The report, entitled The Coming Wave of Business Transitions in Canada, suggests entrepreneurs looking to retire within the next five years — which amounts to 41% of all entrepreneurs — might be gearing down their business activities earlier than is necessary. The study found that 71% of these entrepreneurs are hesitant to take risks that might improve business performance, and 52% have little interest in expanding their businesses. Both tendencies are key factors that may lead entrepreneurs to sell below market value.
"As a homeowner putting a house up for sale, entrepreneurs want to realize the highest possible return on selling their business, most often their biggest retirement asset," says Pierre Cléroux, chief economist at BDC. "Our study points out that by not properly preparing and improving company performance, some entrepreneurs are leaving money on the table."
While the study looked at small and medium-sized enterprises (the latter having 20 employees or more), it found that only 3% of owners of medium-sized businesses tend to liquidate their businesses, compared with 22% of all respondents.
Business owners with more employees demonstrated a greater eagerness to grow their businesses and appear more prepared to maximize business value, the report says. And owners with 20 or more employees adopted a more pragmatic approach when considering how long it will take to transfer their businesses.
Because almost 60% of Canadian owners of small and medium-sized businesses are 50 years and older, the upcoming wave of retirement is likely to cause a deluge of business transitions.
"Our findings do not augur well for overall business investment in Canada," Cléroux adds. "However, some strategies can boost sale price and minimize transitioning hurdles. We are entering a period when sellers will most probably outnumber potential buyers."
BDC offers five tips financial advisors can share with their business-owner clients:
- Continue to reinvest in the business.
- Keep pursuing growth.
- Ensure financial reports are detailed and accurate.
- When searching for buyers, look for quality, not quantity — and seek help in the process.
- Cast a wide net when offering your business for sale.
The survey was conducted by the New York-based Nielsen Co., which asked 2,500 Canadian entrepreneurs about their succession intentions.
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