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From Pivot Magazine

Business succession: where is the next generation of risk takers?

With an aging population, we need entrepreneurs even more than we need workers

Two businesswomen stand looking over business papers together Research indicates that family succession will amount to only a quarter of exit options for entrepreneurs (iStock)

The older population is truly in the driver’s seat. We see their impact across a labour market that is asking for more employees, a health care system under pressure and struggling public finances. It also means the retirement of many entrepreneurs: 64 per cent of entrepreneurs are 45 years old or over, while 37 per cent are 55 and over. Even if retirement comes later for them, it has implications for business transfers, sales and closings.

The question of entrepreneurial succession is a complex one, and not as simple as the labour issues associated with an aging population: it’s hard to predict, and we can’t reach an irrefutable conclusion. The available data on entrepreneurial intentions are, at best, uncertain. How intentions translate into business creation or acquisition can vary wildly between people and can change over time. Nevertheless, it needs to be on our radar due to the implications it could have, which include unwanted consolidations, increasing foreign ownership, viable businesses closing, and the potential increase of inequalities.

WHERE WILL THE “NEXT GENERATION” OF ENTREPRENEURS COME FROM?

Research from Business Development Bank of Canada (BDC) has highlighted that family succession will amount to only a quarter of exit options for entrepreneurs. Family succession or business transfer is more frequent for larger businesses (with more than 20 employees), leaving smaller businesses, which account for 87 per cent of businesses in Canada, to rely on a business sale or closing as an exit strategy. In fact, business sales are more than twice as likely than business transfers in all industries apart from agriculture, construction and transport.

It would not be an issue if we had sufficient buyers, but entrepreneurs intending to sell their businesses far outnumber entrepreneurs intending to buy businesses in six out of 15 industries. Therefore, a significant chunk of the “next generation” of entrepreneurs need to come from outside of the business, or even industry. If not, it could prove problematic for sectors other than real estate, which is more accessible. Hence, we need “outside” investors or career transitioners to join the entrepreneurial ranks in Canada.

IS THE CURRENT CONTEXT SUITABLE FOR ENTREPRENEURIAL ASPIRATIONS?

The pandemic has been harsh for businesses and entrepreneurs. At our lowest point, 100,000 businesses shut down across the country, and it took a year and a half to get back on our feet. As for entrepreneurs, there are 50,000 fewer people who identify as self-employed individuals supporting other paid workers, compared to pre-pandemic. Meanwhile, private sector employment has grown by 10 per cent, indicating an imbalance between employment and entrepreneurship.

I would also argue that Canadians are not positioned favourably to invest or take risks. With significant wealth going into—or already tied to—real estate, younger generations have a harder time generating wealth and banks are risk averse. If you add the lingering inflation, higher interest rate environment, and economic uncertainty, you have overlapping issues that make it harder for Canadians to buy and build businesses or simply envision it.

Additionally, the country doubled down on public sector employment (governments, health and education) during the pandemic. It’s understandable: the public sector tends to act as a buffer by maintaining hiring throughout an economic downturn. Public sector employment is accompanied by public pension plans which puts people in “salaried” positions even during retirement. The leap from that to entrepreneurship can be a big one. With approximately 21 per cent of our workforce in the public sector, one can wonder if the growth of that sector is truly desirable to foster entrepreneurship across the country.

IS A TIGHT LABOUR MARKET A SOLUTION OR A HINDRANCE TO ENTREPRENEURSHIP?

The tight labour market (due to an aging population) means that employment is and will be available in the foreseeable future, apart from the potential short-term economic slowdown due to high interest rate hikes. The potential impact on entrepreneurship is that the labour market ends up being the default go-to career, even more than it currently is. However, it can provide a safety net for Canadians who might be more inclined to take entrepreneurial risks.

For current entrepreneurs, attracting workers will be the key to business growth and they might eventually fight for workers harder than they fight for clients or customers. As for entrepreneurs on the verge of retirement, transferring ownership is a tool to attract and retain talent. The gradual transition from employees to entrepreneurs could be how we lure Canadians over to entrepreneurship. But it takes two to tango: entrepreneurs have to initiate ownership transfer and employees need to be willing to shoulder that responsibility and take a leap.

BUSINESS SUCCESSION AND MORE

Read up on the new tax rules to consider for family business transfers, as well as the transition costs of succession.

And check out David-Alexandre Brassard’s other columns to find out whether Canada’s banking system is as solid as it’s said to be, whether it’s harder for younger generations to get ahead, and why Canada may be betting too big on immigration.