Lack of succession planning could dampen economic growth

Aging small and medium-sized business owners are ill prepared to transition their businesses and that oversight, says CIBC economist Benjamin Tal, could be costly — for business owners and for the economy.

In a recent report, Inadequate Business Succession Planning — a Growing Macroeconomic Risk, Tal looks at the economic impact of the “demographic reality” of small and medium-sized business owners who have not planned for their succession. The lack of planning, while understandable, has reached a point where it not only affects the business owners but also, he says, affects “the growth potential of the economy as a whole.

“The sheer number of business owners who will retire in the coming decade,” he adds, “is turning this micro issue into a potentially damaging macro problem.”

Tal confines his comments to business owners with employees but even so, he notes, about 250,000 business owners, or one-fifth of all businesses with employees, are now aged 55 and over. That number has risen by 4% a year over the past decade — and will continue to rise in coming decades.

“By the end of the decade, close to 350,000 business owners will be over the age of 55,” Tal writes. Within five years, 310,000 or 30% of business owners will exit ownership or transfer control of their businesses. By the 10-year mark, that number will reach 550,000.

“In the coming five years, an estimated $1.9 trillion in business assets are poised to change hands — the largest turnover of economic control on record,” says Tal, “and by 2022, this number will mushroom to no less than $3.7 trillion. Note that the firms that will change ownership in the coming five years currently employ close to two million people and account for no less than 15% of GDP.”

The magnitude of these numbers calls for small and medium-sized business owners — and their advisors — to get serious about succession planning, as difficult as that task may be. Without succession plans, business owners will struggle to achieve full value for their businesses, undermining their retirements savings. As well, notes Tal, “A faulty or badly executed succession planning process could have a ripple effect throughout the Canadian economy.”