Letting go of something you’ve been devoted to for years is hard, especially when it comes to a business you’ve built from the ground up. As the many entrepreneurs in the baby boom generation approach retirement age, the transfer of small business assets potentially worth trillions of dollars looms. But there’s a problem: Only about half of small- and medium-sized enterprises have a succession plan in place, according to a report from the Canadian Federation of Independent Business (CFIB), Passing on the business to the next generation.
“Not only do half of small business owners not have a plan, only about 9% have a formal, written plan,” says Queenie Wong, Senior Research Analyst at CFIB. “It’s a huge problem because there’s going to be a massive turnover of business ownership in the next decade — with potentially a trillion dollars of assets at risk.” Small businesses form the backbone of the Canadian economy. In 2011, small businesses accounted for 30% of the country’s private sector GDP and employed more than five million people, according to Industry Canada’s Key small business statistics, July 2012. Retirement is the most common reason owners exit their businesses, but that doesn’t mean it’s easy to hand over the reins.
“Your business is your baby. You’ve seen it grow up and you want to see it continue to grow and develop,” says Sheila Hannon, Executive Vice-President at Systems Plus, a manufacturer and distributor of analytical testing and quality control supplies based in Baden, Ontario. “You never lose the passion for it.”
Hannon’s husband Garry Ruttan founded the company in 1984. Since then, Systems Plus has grown from one to nearly 50 employees serving customers across Canada and the U.S. Hannon has worked on a plan with her husband to transition the company slowly. A few years ago, they created a management team to help run the day-to-day operations.
“Now people are realizing it’s wise to plan ahead and figure out how the business can operate with less involvement on your part,” says Hannon, who is also on the board of directors for the Centre for Family Business, an organization that supports family business in Waterloo Region.
Transition tips for passing the torch
Here are a few points for small-business owners to consider:
- It’s never too early to get started. Find out from your family members, advisors or key colleagues whether they’d like to be involved in the next generation of the business. Taking that first step is critical. “Don’t put succession planning aside; it’s more important than many business owners think,” says Wong.
- Think about your goals and objectives. What’s your vision for the next generation of the company? Think about how you’d like to get there by writing down goals and objectives for the succession plan. Knowing your overarching goals will help guide the process.
- Bring in professionals to help. It’s important that you not build a succession plan in isolation. Bringing in professionals to consult on your options can help ensure you consider different avenues and have appropriate tax and legal information you need. It’s also important to have an accurate business valuation completed so you know what your company is worth, especially if you’re relying on your business as a form of retirement savings. “It’s helpful for owners to see the whole range of options available because no two businesses are the same, and no two transitions will be the same,” says Hannon.
- Create a succession plan. Identify possible successors and roles for family members, if that’s applicable. Determine if anyone needs additional support or training. Consider whether the successor has adequate funding to take over the business, and what your level of involvement will be after the transfer. Create a formal written plan that outlines the roles and responsibilities of everyone involved, and set target dates and timeframes.
- Build a transition plan. Consider the options for transferring the business – through purchase, a gift or combination of the two. Establish a timeline for the transition.
- Revisit the plan occasionally. Even a formal, written succession plan needs to be revisited from time to time to ensure it aligns with your personal circumstances.
The CFIB has produced Building a succession plan, a guide to help business owners with this planning exercise. “It’s never too early to get started,” says Wong. “Make time for succession planning now — it’s worth it in the end.”