Approaching “baby boomer” retirements will result in a huge transfer of business ownership over the next five to 10 years, but only a small percentage of owners have a formal written succession plan, the Canadian Federation of Independent Business says.
In a report released Wednesday, the CFIB suggests 47% of business owners with a small or mid-size enterprise (SME) intend to exit their businesses within the next five years, and 72% plan to exit within a decade.
However, the CFIB report said only 8% of owners surveyed had a formal, written succession plan. About 51% didn’t have any plan, and 41% had an informal plan.
“While it is encouraging that a good proportion of business owners intend to pass their business on to a new generation, the lack of formal planning gives rise to significant risks for Canada’s competitiveness and prosperity,” the CFIB says in a report by research analyst Marvin Cruz.
“With potentially over $1.5 trillion in assets changing hands during the next 10 years, Canada cannot afford to have so many SME owners unprepared to make that transition.”
The CFIB’s conclusions are based on an online survey of 2,507 small-business owners conducted last May and a projection based on Statistics Canada data on incorporated SME assets in 2016.
In four out of five cases, retirement was cited as the reason for the planned departure from a business. Other reasons included a move to another business venture or lack of profit in their current enterprise.
About 62% of survey respondents said they’d rely on the sale of their business as a source of retirement income.
The CFIB said formal succession plans have the advantage of being developed with the input of professional advisors who can help develop a timetable and a process for resolving disputes.
It also identifies a number of barriers to creating a succession plan—such as family members who don’t want to take over the business and entrepreneurs who would prefer to start a new business than buy an existing business.
“Currently, there are very few options in Canada to connect those looking to exit their business with those who may be interested in purchasing a business and may be an area for governments to explore,” the report says.
It also suggests that the government change the tax rules so that transfers of small businesses to family members are treated in a similar manner as to a non-family buyer.
Under current Income Tax Act rules, a gain in the business’s value over the owner’s tenure is treated as a dividend if sold to a family member and as a capital gain if sold to a non-family buyer.
“In effect, these rules can discourage the transfer of a business to a family member because the transaction does not include the right to a lifetime capital gains exemption and is, therefore, more heavily taxed,” the report says.
Because the business sale is the source of retirement income for many owners, the Lifetime Capital Gains Exemption (LCGE) should be expanded to include some assets and increased from $848,252 to $1 million for all SMEs (not just fishers and farmers), the report says.
It also recommends allowing small corporations to defer the tax on capital gains from the transfer of a business to the owner’s children.
Read the full CFIB report here.