The economic case for getting business succession right

Canada’s economy is deeply rooted in entrepreneurship, with family-owned and privately held businesses leading the way in job creation and economic diversification over decades. Now, Canada stands at a critical juncture: the successful transfer of ownership and leadership of small and medium-sized businesses to the next generation.  

In the next 10 years, three in four business owners intend to exit their businesses, according to the Canadian Federation of Independent Business (CFIB). This adds up to a massive transfer of over $2-trillion in business assets, and represents a pivotal moment for the nation’s economic resilience, innovation and growth.  

If mishandled, the transition period could force business closures, eliminate jobs and key services in the community, and lead to a weakened economy. Conversely, successful transitions to a new, energized generation of business owners could unlock unparalleled opportunities to support long-term prosperity for Canadians. 

A changing business landscape 

Canada is arriving at this moment amid economic headwinds, including the recent threat of trade tariffs across the border. More generally, our small and medium-sized enterprises (SMEs) have faced significant challenges in the 2020s, from supply chain disruptions, inflation and increased borrowing costs, to growing competition from large global and e-commerce platforms.

However, even before the COVID-19 pandemic, Canadian SMEs struggled to scale. We saw fewer high-growth firms in the face of a sluggish economy, labour shortages and underinvestment. The results are plain to see. Before 2001, Canada and the U.S. had enjoyed similar productivity growth for four decades, according to Statistics Canada. For the last 20 years, however, the U.S. moderately decelerated to 2 per cent per year while Canada’s productivity growth rate fell further to just 0.9 per cent per year.   

The big impact of small business 

Small businesses employ nearly 70 per cent of the private sector workforce and are responsible for almost half (43 per cent) of all job gains, according to the Canadian Chamber of Commerce’s Business Data Lab.  

Finding new owners to nurture and grow these businesses is our best route to driving economic growth and rising productivity over the next decade and beyond. Currently, many small businesses aren’t making the necessary investments in technology to improve productivity and lower costs. This could change with a younger generation of owners, who are more at ease with technology and are willing to make long-term investments with long-term paybacks to upgrade systems, experiment with digital tools and automate processes.  

If we fail to transition our SMEs into the right hands, we could see increased business closures across the country and the erosion of family wealth built up by owners over years. The timeline to get Canada’s innovation record and productivity rate back on track would extend even longer.  

A tale of two sales 

Canada’s business owners know well what’s at stake, for themselves and their local communities. One owner in Windsor, Ont., who built up a company over 30 years, made it clear during the sale process that his priority was to keep his firm’s 250 jobs in the community.   

When we asked him why that was his main priority, he explained that the health of Windsor’s local economy depended on businesses like his. 

A business of a similar size in Atlantic Canada is facing a very different outcome, after a transfer didn’t go according to plan. A potential buyer withdrew an offer when conditions in the sector changed. Now, the owner is facing health issues. The future of the business is unclear. If the right buyer can’t be found, it may fold altogether, putting jobs and a part of the local economy at risk. 

 Their concern now is that experienced and ambitious employees may leave for other opportunities, and the necessary capital investments may fall behind during this wait-and-see period. Imagine that happening not just to this one business, but on a national level to thousands of businesses.  

A new era of ownership 

The national task of transferring three-quarters of our SMEs to new hands needs to get underway now. This is especially true because some businesses may be more challenging to sell than others.  

There is growing concern that only 9 per cent of Canadian businesses have a formalized succession plan in place. Recent CFIB research shows that the successor tends to do better (e.g., grows profits, adds employees) when the transfer occurs under a formal succession plan.  

Nearly 80 per cent of owners would prefer transitioning to a family member, according to KPMG. However, the majority ultimately sell to an unrelated buyer (49 per cent), while 24 per cent sell to family or an employee (23 per cent). Casting a wide net for the right successor is important for the long-term success of our SME sector. Deloitte found that only 30 per cent of family businesses survive into the second generation, 12 per cent survive into the third generation, and only about 3 per cent operate into the fourth generation and beyond. 

Canada has 100,000 fewer entrepreneurs today than it did 20 years ago, but the tide may turn back in favour of small business ownership. Young people today are entering an uneven job market and could get excited about the opportunity to buy an existing business. We need to increase awareness about the potential upsides to this career path: an established business sets the new owner up for success with immediate cash flow, customer base, brand recognition and trained employees. While there is a higher upfront price tag, falling interest rates and a more progressive tax system could work in the new owner’s favour.  

The future ownership of Canada’s SMEs needs to be central to our economic planning. Stranded assets and failed business sales aren’t just a seller’s problem. They represent a failed opportunity for the entire economy. If instead, we can successfully pass these businesses to the next generation of owners and entrepreneurs, we’ll be able to ensure the creation of well-paying jobs, address lagging productivity and boost our standard of living.