PRESENTATION. CGA-Canada Shares Its Views on Succession Planning for Small Business Owners

Transcription

1 PRESENTATION CGA-Canada Shares Its Views on Succession Planning for Small Business Owners Elena Simonova, Principal, Research and Policy CGA-Canada Members of Parliament Entrepreneur Caucus February 27, 2014 Check against delivery

2 Good morning. Thank you for inviting CGA-Canada to share views on succession planning for small business owners. The issue of succession planning has been part of the policy dialogue for some while already and although this is not a highly visible subject, some research and analyses have been undertaken in this area. Likewise, some measures have been implemented to help the situation. Given that some of this information may already be available to you, and that our colleagues from CFIB will probably speak to that as well, I will focus my comments primarily on elements that we believe may oftentimes be overlooked despite their importance. 2

3 The first such element deals with the proper identification of the challenge that we would try to address and the role of succession planning within it. The second has to do with the refinement of the target group that we seek to affect, and the third relates to the barriers or frictions that may preclude meaningful progress in the area of business succession and commercial continuity. I will speak in more detail about each of these elements. 3

4 Perhaps the most paramount element is the recognition that the focus of the discussion may need to shift. The best opportunities may lie in ensuring the overall success of succession rather than measuring the act of succession planning itself. After all, the positive outcomes for business owners and the economy as a whole are derived from the effective succession or transformation of a business rather than from the succession plan. In broad terms, succession is a process through which owners plan to transfer or dispose of the business. This process typically consists of several phases, namely: developing the succession plan, preparing for succession by identifying and coaching the successor, transferring the power to the successor, and fulfilling pre and post-transfer commitments (if any). Although the succession process may seem to be linear, it is often not. For instance, challenges in identifying the successor during the preparation phase may require a business owner to revisit the planning phase and make necessary adjustments. Similarly, lack of funding for the successor or disagreements regarding the purchase price that surface during the transferring phase may likewise require the business owner to alter the succession plan. In these circumstances, the mere presence of a formal succession plan does not ensure the desired outcome, i.e. a successful transfer of business. As such, placing disproportionate emphasis on only one phase of the succession process the succession planning may put business owners at risk by nurturing the assumption that successful completion of the planning phase would by default lead to the success of succession. 4

5 The disproportionate emphasis on the succession planning may also be serving to sustain some mistaken beliefs that discourage business owners from engaging in succession planning. For instance, some factors that are often cited as barriers to succession planning do not actually impede planning itself. Research shows that finding a buyer or suitable successor is perceived as one of the main barriers to succession planning. In fact, this barrier does not impede planning itself which is often undertaken (or should be undertaken) prior to the search for the successor. However, this barrier may indeed be a significant obstacle during the preparation and transfer phases of the succession process. On the other hand, it is often mentioned that lack of succession planning may be associated with negative consequences, such as loss of consumer or stakeholder confidence, departure of top talent, loss of shareholder value, disruption in operations, and threats to business continuity. However, these effects often kick in only during the preparation and transfer phases of the succession process and may appear in companies that have formal succession plan as well as in those that do not. This is because the mentioned negative effects are often triggered not by the absence or presence of a succession plan but by the failure of the succession process (e.g. low confidence of stakeholders in the successor s abilities, struggle for power between the successor and the predecessor, or loss of corporate knowledge due to the transfer). Keeping the focus of the discussion narrowed on succession planning may give business owners a false perception of safeguards against such negative consequences. 5

6 The second element, which we think is often overlooked in the discussion on succession planning, relates to the diversity of small business. Industry Canada defines small businesses as those that employ less than 100 employees. Even though this definition reduces the scope of businesses we are trying to affect considerably, the diversity of small businesses in terms of their size and sophistication continues to be substantial. For instance, Canada has approximately 610,000 micro businesses with 1 to 4 employees and some 29,000 larger small businesses that employ between 50 and 99 employees. Naturally, the difference in needs and business approaches utilized by a micro business that consists of the owner and few family members, and a 90-employee company with a board of directors and a number of executive committees may be vast. 6

7 The size of the firm, the form of ownership, the governance structure, and the nature of the core business influence the succession process (and succession planning). For instance, owner s retirement income may be the main motivation for succession in a micro family business; in this case, continuity of the business may be of a lesser concern to the owner than the sell price and tax implications. Contrary, for the owner of a small business with a sophisticated corporate structure, the main objective of succession may be to ensure stability and sustainability of the business as the owner s involvement in the ownership is transformed but not fully withdrawn. Another example of the impact of diversity relates to the access to professional services. The owner of a micro-business may face substantial financial constraints in obtaining professional advice when developing a succession plan or working its way through the phases of succession; however a more developed small business may have the necessary expertise on staff or can otherwise easily access such talent. 7

8 The third element that I would like to highlight today relates to barriers: it seems rather unclear what the real barriers to succession planning are. Barriers identified by surveys and academic literature point out to behavioral (or self-inflicted) barriers rather than systemic barriers. For instance, research suggests that lack of time to engage in succession planning and perceived lack of urgency are the main reasons for postponing the planning phase of the succession process. Research on family business often cites lack of potential successors within the family as the main reason for not engaging. With no intent to belittle these frictions, it may be fair to say that these limitations do not necessarily represent serious structural barriers. 8

9 What we hear from our members may further support the point that barriers are primarily of a behavioural nature. For instance, our survey of CGA public practices conducted in 2011 showed that only one in five (20%) firms had a formal succession plan in place although nearly half (45%) of partners were 50 years of age or older. As accountants, our members are competent in technical matters related to succession planning and exposed to numerous variations in business situations through their clients. Our members are also often small business owners themselves. This gives them a unique combination of professional and personal experience which together serves them well when considering matters of business continuity. Nevertheless, the results of our survey show that even those who are knowledgeable and experienced in succession planning, and thus may be well aware of its benefits, do overlook to engage in the practice of developing the longer-term visions of their business continuity. 9

10 Two other points may be worth mentioning as they may help us to put the current state of the succession planning into perspective. First, it may be fair to assume that some firms may simply not need to engage in succession planning. It is well known that turnover among small businesses is very high. For instance, about one third (32%) of micro-businesses and one quarter (28%) of other small businesses exit the market within two years after the entry; and only 53% of firms survive for more than five years. Under these circumstances, it may be quite natural that at any point in time, succession planning may simply be premature for a number of small businesses given their stage of business development. 10

11 Another point worth mentioning relates to the origin of SMEs. Information available from Industry Canada suggests that three quarters (76%) of SMEs are started from scratch and only 23% are bought (from either a family member or a person outside the family). It would be interesting to know what the cause of this is. Is this determined by the preference of new business owners, or is this caused by the asymmetry of market information that impedes matching between the buyer and the seller? If launching a start-up (as opposed to purchasing an existing business) is a true preference of new entrepreneurs, then the apathy to succession planning among business owners becomes somewhat more understandable. However, our advice in this case would be not to disengage from succession planning but develop a contingency plan that would discuss the options of winding down the business. 11

12 What is the role of government in improving succession planning? Our vision of the role orbits around three ideas. First, current programs and awareness initiatives may benefit from a more comprehensive approach to succession as a multi-facet, multi-staged process rather than a set of single succession-related events. Second, some specific tools (as well as awareness programs) may be developed for different streams of small business; this could facilitate a more targeted outreach. 12

13 Third, our understanding of the consequences of not engaging in succession planning may be improved through research on the net overall impact of failed business succession on the Canadian economy. Support for comprehensive research that examines reasons for lack of succession planning would also be helpful in identifying specific measures that can reverse troubling trends. Government support may also be targeted towards the areas with high potential for the overall economy. Those may include high-growth SMEs, export-oriented SMEs and those actively involved in R&D. 13

14 The federal government could also explore the feasibility of developing an online searchable database of business and project opportunities a repository for bringing potential buyers and sellers together. For instance, a somewhat similar online tool was launched in BC in 2012 to provide an updated list of opportunities suitable for foreign investment; it is called OpportunitiesBC ( In addition to the database of opportunities, such a website could also house resources important to the effectiveness of a succession. For example, such things as boilerplate succession plans and shareholder agreements could be made available; as well as guidance and direction around available financing, use of experts, government grants and incentives, and soft endorsements in the form of testimonials and success stories. 14

15 15