Business Succession: Navigating the Exodus of Small Business Owners and Ushering in the Next Generation

Canada’s population is aging, but Canada’s population of small business owners is aging faster. In 2020, Canadians 50 years or older made up 38% of the population (up from 31% in 2004) and owned 62% of small and medium-sized businesses (up from 47% in 2004).

The federal government has estimated that 75% of small business owners plan to retire in the next decade, which could lead to over $2 trillion in business assets changing hands. Depending on how and if these businesses change hands, there will be rippling effects on the economy, including the shape and makeup of the Canadian business ecosystem. 

This also comes at a time when the country has 100,000 fewer entrepreneurs than it did 20 years ago, even though the population has grown by more than 10 million over the same period.

If Canada wants to see its small business ecosystem flourish and grow, now is the time to start thinking about the impending wave of small business owner exits and how this will impact the Canadian economy.  

Now is the Time for Small Business Owners to Consider their Exit

For three-quarters of small business owners looking to exit their business, the tides have recently turned in their favour, as now is an opportune time to explore selling their business. In the tech-fuelled bull market of the late 2010s and early 2020s, venture capital was hungry for startups hyper-focused on growth at all costs. Typical small businesses, like anything from a local tailor to a family-owned plumbing service, were viewed as leftover remnants of the old economy. Since then, investors have grown weary of speculative bets on massive growth and cash flow businesses with good fundamental metrics are looking interesting again. With stability and profitability on their side, the average small business can now attract a fair valuation that may encourage a boom in acquisitions in the coming years. 

When it comes time to sell, small business owners can explore a variety of exit strategies. The first areas of exploration will usually be either a private equity acquisition or an independent sale. From a financial perspective, either of these options can give the small business owner a payout sum that often forms the basis of their retirement funds. 

Private Equity Acquisition

In certain industries, private equity firms are commonly looking to consolidate several small businesses and build efficiencies at scale. This exit route will favour businesses that are fairly standardized within well-established industries. These businesses could include anything from manufacturing to independent restaurants to veterinary clinics. It’s fairly easy for private equity to acquire these sorts of businesses and operate them as part of an existing network. For the right kind of business with strong operating metrics, this can be a lucrative exit strategy. However, it does require owners to acknowledge that the business will be fundamentally different after their exit. Businesses that have a unique identity or special place in their community may have to face the reality that the business will become a small part of a very large profit-driven enterprise. 

Independent Sale

For business owners looking to maintain their uniqueness or those who could never realistically form part of a private equity firm’s broader business network, it is more realistic to assume the business will be sold to another independent operator. The challenge for an independent sale as part of succession planning is that it depends upon the right buyer appearing at the right time. Unlike private equity firms, whose business is to be constantly looking out for acquisitions, there could be countless factors that would drive an independent purchaser to acquire a business. Entrepreneurs often search for a purchaser who will share their vision and maintain their core values after the sale, but that, again, limits the pool of potential acquirers and may become a tricky point for lawyers to negotiate. Valuation and purchase price to an independent purchaser are hard to quantify and may be driven by sentimental factors rather than the cold but predictable economics of private equity. 

Family or Employee Succession

Alternatively, small business owners may have the option of family or employee succession. This is the most traditional way small businesses have survived across generations. Despite demographic data showing that young people are less likely to be interested in taking on a family business, it remains a viable and often idyllic plan for many entrepreneurs. Family businesses can depend upon a new generation to modernize their operations while staying true to their core values. 

In the absence of interested family members, employees can feel like family in a small business environment, and the law has recently evolved to accommodate new ways of passing a business on to employees once the owner steps down. In 2023, the federal government approved the creation of Employee Ownership Trusts as a tax-efficient way to sell a business to employees without burdening employees with the upfront acquisition costs. Effectively, the employees gradually purchase their stake in the business over time through a trust. While it may take some time for the idea to catch on, it has an immediate appeal to business owners who want to see their businesses continue to thrive under talented employees. For the employees, a share ownership plan is a valuable retention incentive as they gradually earn equity and become owners of the business. 

Whether it’s a private equity sale or an employee ownership trust, without implementing any of the above exit strategies, small business owners may be left with no option except to shutter their businesses altogether when they step down. Apart from the evident negative economic consequences, closing small businesses has a detrimental impact as neighbourhoods lose the unique character provided by local entrepreneurs. Other independent entrepreneurs may feel a ripple effect as shopping districts and consumer preferences become more homogenous. There is truly an existential risk for small businesses if succession planning is not carefully considered in the years to come. 

With all of these factors taken into consideration, it is particularly crucial for any business with sustainable economics and, ideally, the capacity for future growth to capitalize on the current economic environment that is turning in their favour.

Laying the Groundwork for the Next Generation of Entrepreneurs

As we look toward the future of Canada’s small business ecosystem, now is the time to lay the groundwork to set the next generation of small business owners up for success. However, the share of younger people seeking to “be their own boss” has fallen to 2%, down from 3.3% in 1998. The startup frenzy of the past few years may have encouraged some entrepreneurs to embrace the ups and downs of a new venture. However, the realities of rampant inflation and a higher cost of living have made entrepreneurship seem like an unaffordable and risky gamble for young aspiring entrepreneurs. 

At the same time, starting and operating a small business with limited capital has never been easier for a single person or a small team. There is still an incredible amount of opportunity for young entrepreneurs to either start a business or acquire an existing business. With tech-enabled solutions for everything from incorporation to payroll and accounting, entrepreneurs can scale businesses with less upfront capital than ever before. This is one more reason why entering entrepreneurship through succession or acquisition holds a lot of promise at this time. A long-standing small business with stable cash flows can often be transformed into something more tech-enabled and efficient without a great deal of cost or technical expertise. For businesses that have not fully embraced technology, there is an opportunity for entrepreneurs to acquire and optimize those businesses using fairly simple tools that can be run from a laptop or smartphone. 

Planning for the Future

Now, the problem lies in the planning. Only one in 10 business owners (9%) have prepared a formal business succession plan. Furthermore, about two in five business owners (39%) rely solely on themselves to develop a succession plan rather than engaging an accountant, lawyer, or qualified business advisor. Small business owners typically cherish their independence, but successfully exiting a business is rarely accomplished alone. Through carefully reviewing their options and collaborating with experienced advisors, entrepreneurs can identify the correct exit strategy and embrace this opportune moment to explore their options for the future of their business.