- Dan Matthews

What succession planning is and why it matters

Succession planning is how business leaders answer the question of how their business continues without key players, like owners and high performance or essential skill set employees. For small business in rural areas, this often translates to: how does my business continue after I retire – especially if my family is uninterested in taking it on.

Baby boomers are retiring

With many baby boomers retiring in the near future, succession is becoming a big story in Canada. The impact is especially significant in rural areas where losing one business can mean the loss of a substantial percentage of business being done in town or families leaving the community.

From farms to retail, the coming mass exodus of baby boomers from the labour force and business ownership means a lot of management and business transitions are happening or about to. The impact on rural communities will be especially acute.

A growing market

Most levels of government, economic development professionals and business leaders are aware of this coming “tsunami.” An increasing number of entrepreneurs are seeing the opportunity in this shift and have started businesses that help manage these transactions and transitions. So, there is a growing market for businesses that help with business succession and transitions.

In 2017, BDC produced a report called “The Coming Wave of Business Transitions in Canada.” According to this report, 60% of small to medium business (SMB) owners in Canada are over 50 years old. 4 in 10 will leave their business in the next 5 years. Half will sell or transition to a third party, a quarter hope family will take over and 1 in 5 will shut down.

The threat to the Canadian economy is multiple, but chief among them is that a business in transition will often slow its growth for a period prior to the actual transition. Another other is jobs. In Saskatchewan, about 93% of the workforce is employed by SMBs. The importance of SMB to jobs and communities can’t be overstated, especially in western Canada.

What to expect

So, what can we expect from this period of transition?

There are essentially four ways to exit a business. The first is the least desirable for entrepreneurs and communities: closing and selling assets. Second is passing it on to a successor, such as a family member. Third is employee ownership. And fourth is third party sale.

Let’s explore each of these.

governance-course

Closing and sale of assets

Closing and the assets of a successful business is unfortunate at best and more often than not detrimental to local – and especially small – economies and markets. Losing a business in a small town can seriously damage local jobs, wealth and community morale. Plus, an entrepreneur has spent much of their life building, developing and growing their business. The last thing they want to see is that dismantled and sold off in parts.

Beyond perceptions and jobs, the return on investment is also generally lower than other options.

Passing on to successor

Passing on a business to a family member or direct successor, while also retaining local wealth, jobs and organizational culture, is an ideal solution. Moreover, this option generally allows for a longer transition period with the original owner retaining a certain degree of influence, which may help with the success of the transition.

The financial aspect of this type of succession can be more complicated than other options. But the potential is greater for long term success that remains in the local community.

Employee buyout

In the absence of a direct successor or family member to take over, employee buyout is generally a great solution. This is because it preserves the culture and much of the vision of the entrepreneur. The likelihood of long term success can also increase with substantial employee and management buy-in.

There are a number of ways for employees to buy a business – a co-operative being one and employee stock option plan being another popular one. Co-ops, because they are a corporation of shareholders, have succession written into their structure, which makes them a good option. A worker-owner shareholder may come and go, but the business usually remains despite this departure, so the business model has provisions for succession and can be a very successful model over time.

READ MORE: How Co-ops Can Help Solve Canada’s Succession Planning Problem

Third Party purchase

The last of the options we’re discussing here, while relatively easy in terms of the purchase transition, can be risky for the culture of the business and the community. This is because it generally involves outside investors of some sort. In this case, the business owner will try to sell shares publicly (IPO), through private equity (shares or full sale), or attract another business to purchase it and take it over. The risk being the potential for a substantially negative shift in culture or a decision being made to move the operation.

PHOTO CREDIT: Anthony Houle
SOURCE: Country-Guide.ca

Local investment option

There is growing interest in rural communities for community investment funds that serve the role of private investor. These firms purchase local businesses that are or have closed for home-grown entrepreneurs to take over and purchase back investment shares over time. This strategy helps ensure the business, jobs and families remain in the community, while also providing a local entrepreneur the opportunity to purchase a business they otherwise may not have had the opportunity for.

All of these options have their benefits and drawbacks. Some are easier than others. Starting a worker co-operative is not easy and sometimes raising the capital required to purchase a business can be a major hurtle. Transitioning a business to family can cause conflict or be complicated financially. Attracting an investor can take a long time and a local base of control over the business will often be lost entirely. And a fire sale is generally not good for anyone.

But each option should be assessed, and a plan drawn up, hopefully with employees and community in mind. If an investment co-op or worker co-op is an option you’re considering, contact us. We’d love to help.

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