Selling up is a huge emotional challenge, compounded by tax regulations and finding someone qualified to step into the business: Opinion
By Corinne Pohlmann
Published in the Financial Post on December 13, 2018.
Small business owners dedicate most of their life to their business. In many ways, it’s like their baby. They put all their savings and energy into it for years on end so it can thrive and truly succeed. They experience their share of ups and downs, but press ahead because they believe in the business and want it to grow.
But what happens when it comes time to hand over their business and let someone else take care of what they built with their sweat and tears? Doing so means accepting that they no longer make key decisions for its future. But who is there to take over? Finding the right person can be the biggest challenge for owners looking to exit their business.
Nearly three quarters of small business owners in Canada will be faced with this challenge in the next 10 years, leading to a transfer of business assets potentially worth more than $1.5 trillion, new research by the Canadian Federation of Independent Business found. And many don’t even know where to begin. If they want their children or a member of their family to take over, they will find the choice has not been made easy for them.
Current tax rules stipulate that entrepreneurs have to pay more taxes if they sell their business to a family member than were they to sell to a third party. Many entrepreneurs count on selling their business to fund their retirement, so these tax rules are discouraging for a number of business owners.
Additionally, their children have to be interested in running the show, especially given that labour shortages, administration and a growing tax burden are just a few of the many challenges. In fact, 48 per cent of business owners say they wouldn’t recommend that their children go into business for themselves. There is still the option of handing the business over to an outside party, but even then, finding someone who will look after their life’s work as well as they do isn’t easy.
There’s a lot of talk now about how important it is to keep head offices in Canada and to empower local businesses to remain local in order to revitalize communities, so we need a way to help entrepreneurs find successors to take over their business. It is perfectly possible to find the right people to take over if all stakeholders (including entrepreneurs, governments, financial institutions, financial advisors) work together.
Governments can help by amending the Income Tax Act so that selling a business to a family member can be just as advantageous as selling to an outside party. They could also increase the Lifetime Capital Gains Exemption (LCGE) limit to $1 million for all small- and medium-size businesses, simplify the LCGE and expand it to include at least some assets so that selling a business can be a better source of retirement income. Finally, they can improve the climate for small businesses to encourage younger generations to venture into the exciting world of entrepreneurship.
Of course, entrepreneurs also have a role to play. They have to start planning early, even if it’s hard to think about leaving. It may not be a top priority compared with all the small and large emergencies that are a regular part of running a small business, but one of the keys to success is to have a formal written succession plan and a variety of exit strategies in order to prepare for the unexpected.
A formal plan determines, among other things, a business’s value ahead of time and removes the emotional aspect of negotiations at the time of a transaction. Many CFIB members have told us that a plan helped them know where they were going and gave them peace of mind. It’s also reassuring for employees and clients alike to know that there are plans set out for the future. The more carefully the transition is planned, the higher the chances of success. And a successful handover means that jobs will be kept — and more could even be created.
As about 75 per cent of business owners plan to pass the torch within the next decade, we have to try to keep jobs here, to help our regions prosper and to stimulate the Canadian economy. To do this, we must focus on the next generation of entrepreneurs and put in the necessary effort to ensure successful transitions.
Corinne Pohlmann is the Senior Vice-President of National Affairs for the Canadian Federation of Independent Business (CFIB).