More than three-quarters of small business owners plan to exit their businesses within the next 10 years, according to a new report by the Canadian Federation of Independent Business (CFIB).
The report said more than $2 trillion in business assets could be in play over the next decade as 76% of small business owners intend to exit their business activities.
Most business owners (75%) cite retirement as the reason for leaving their business, while a smaller number plan to leave because of stress, to step back from their responsibilities as an owner, or to move to another business venture, the report found.
When it comes to how owners intend to exit their businesses, the most common approach is to sell to an unrelated buyer (49%), while 24% will sell to a family member and 23% to their employees.
The CFIB and other business advocates had long called for tax changes to remove a disincentive to business owners passing on businesses to children.
In 2021, the federal government passed Bill C-208, which allowed business owners selling shares of their business to their child to take advantage of the lifetime capital gains exemption on the proceeds of the sale. Before the change in law, the proceeds of disposition on a sale of a business to a child were taxed as a dividend.
However, C-208 was a private member’s bill that didn’t have the Liberal government’s endorsement. In the 2022 federal budget, the government said it would look at modifying the rules “to protect the integrity of the tax system while continuing to facilitate genuine intergenerational business transfers.”
In the report, the CFIB called on the government to “honour the spirit” of Bill C-208 in any amendments it proposes. It also said the government should simplify the LCGE and increase the amount to $1.2 million.
The report said only one in 10 business owners (9%) have a formal business succession plan.
“It’s essential for business owners to have a well-planned exit strategy. With over $2 trillion set to be in play in the next 10 years and only a fraction of business owners having a formal succession plan, the risks of improper planning can be big,” said Corinne Pohlmann, senior vice-president of national affairs at the CFIB, in a release.
To develop a succession plan, 43% of business owners use accountants, one-quarter (24%) work with lawyers, and about two in five (39%) develop a plan on their own, the report said.
The most important factor for a vast majority of owners looking to sell their business is ensuring their current employees are protected, followed closely by getting the highest possible price and selecting the right buyer who will carry forward their way of doing business.
That said, the most common obstacle for owners as they plan their succession is finding a suitable buyer, followed by business valuation and reliance on the owner for day-to-day operations.
What’s more, the report found that most entrepreneurs are interested in starting a business from scratch rather than purchasing an existing one. In fact, 49% of current business owners started their business from scratch, according to the report.
The Covid-19 pandemic and the challenges it brought also affected owners and their businesses, with 56% of owners saying their business is still making less than normal revenues, 64% still holding pandemic debt, and 77% still under pandemic stress. Almost four in 10 (39%) business owners have modified their exit date because of the pandemic: about 17% have accelerated their timeline, while 22% have delayed it by at least one year.
“Not having a formalized succession plan could result in lost jobs, bankruptcies or loss of stability for the business,” said Laure-Anna Bomal, research analyst at CFIB and one of the authors of the report.