Fill your shoes: Small-business succession

Failure to groom a successor hurts more than just your business.

Big business long ago solved the mysteries of succession planning, if not always successfully. It’s often the CEO’s job to groom a successor while corporate minions plan for their boss’s comfy exit. Small-business owners aren’t as lucky. They have to do everything themselves, yet more than 60% of businesses with less than 100 employees do not have any kind of succession plan in place.

That failure to think ahead is detrimental not only to business owners themselves but also to the economy. Small enterprise accounts for 98% of all businesses in Canada and generates more than 40% of the country’s GDP. But nearly half of this country’s small-business owners plan to retire before 2020–and 500,000 are set to leave within the next five years. So there could soon be a lot of rudderless businesses–and employees. “For the most part, small-business owners are too busy doing business, too busy taking care of crises, thinking about marketing and human resources, and the last thing they think of is themselves,” says financial planner Barry McNulty, co-author of The Canadian Small Business Owner’s Guide to Financial Independence. “These people are hard-working, but everything they’ve done in life up to this point has not prepared them for the next phase.”

That next phase is retirement from the business, if not the working world altogether. McNulty says many entrepreneurs are banking on their current business to fund their sunset years and don’t even have RRSPs to fall back on if that plan fails. Yet there is a reluctance to bring possible successors onboard, sometimes because they’re not affordable, and sometimes because business owners worry they’ll jump ship early and form a competitor. In some cases, says Gus Gillespie, president of Gillespie Consulting, a strategic advisory firm in Toronto, it’s difficult emotionally for owners to express exactly what they hope will happen to their companies. It’s not as if there aren’t enough available options. Owners can sell their company, hand it off to a family member, stay on as a hired gun, or let someone else run the show. “Until you get the person in control to the point where he is very clear about what he wants to accomplish, until he says it, it’s not on the table,” says Gillespie. “It’s always easier to talk about operational things.”

There’s also a tendency to leap to a sudden decision, rather than doing the succession analysis that larger companies pay people to do. A small-business owner needs to replicate what corporations have in-house, with a team of advisers: a lawyer, an accountant, a financial planner and a valuator who can accurately determine what a company is really worth. Valuing small companies is often tricky. Unlike larger ones, there aren’t likely to be any similar public corporations or mergers and acquisition figures to compare against, says Susan Glass, a partner with KPMG Advisory Services in Toronto. “It’s a much more judgmental process, because you have a lot less to go on in terms of market data and market benchmarks,” she adds. Instead, valuators such as Glass rely on business owners to give them a five-year history of financial statements, plus current-year income-tax information, key contracts, revenue projections, budgets, organizational charts and a summary of employee compensation. That information is combined with a risk analysis, which looks at such issues as dependence on a key customer, supplier, owner or manager, industry volatility and sensitivity to currency fluctuations, interest rates and business-specific trends.

Of course, all that planning assumes someone will be around to buy the business, which is not a given, especially if labour shortage predictions come true over the next decade. It’s a little late for Canadians to breed more homegrown entrepreneurs, but more likely scenarios include pushing small-business ownership as a career option and increasing immigration. “There’s no simple answer,” says Catherine Swift, president and CEO of the Canadian Federation of Independent Business (CFIB). “We’re certainly not going to be able to attract enough immigrants who can move in, buy a business and make a go of it, even though that’s undoubtedly a partial solution.” The CFIB is also pushing for tax reforms, such as doubling the $500,000 capital gains lifetime exemption to make buying–and selling–a business more appealing.

Gillespie says owners need to be thinking about succession planning at least a year before they have to take action. But McNulty believes 10 years may be necessary if someone hasn’t done much transition planning. Failure to plan can hurt not only a business, but also its customers, suppliers and the two million people whose jobs are on the line. As McNulty points out, “Your business is much more than a place you keep out of the cold from nine to five.”