Planning shortfalls, skewed tax rules, and inadequate exemptions are just some challenges highlighted in a new survey
A new poll by the Canadian Federation of Independent Business (CFIB) has found nearly three quarters (72%) of small-business owners plan to exit their business within the next ten years. That will put $1.5 trillion in business assets in play — but a concerning number of retiring entrepreneurs don’t have a game plan yet.
According to the CFIB, just 49% of business owners have a succession plan; only 8% have a formal written plan. Among owners with shorter exit timelines (12 months or less), 21% have a formal plan; that percentage declines to 10% among those exiting in the next one to five years, and falls further to 6% among those with a six- to ten-year timeline.
When asked why they planned to exit, 81% of respondents cited retirement, while another 12% said they have not found a suitable successor. Plans to move on to another business venture figured in the decision for 9%, most of whom were under 50 years old.
“With many baby boomers planning to retire in the coming years, business succession is a major concern,” said Corinne Pohlmann, CFIB senior vice-president of national affairs. “We need to do everything possible to ease the transition."
A smooth transition might be hard to manage, however. When it comes to succession planning, the main hurdle cited by survey respondents was finding a suitable successor (56%). Small-business owners also cited barriers such as difficulty in valuing the business (48%), too much dependence on their active involvement (40%), and securing financing for the successor (37%).
Selling to unrelated third parties is on the minds of nearly half of business owners (48%). Another 25% are considering selling to employees, while the same proportion of respondents may sell to family members. Other exit methods cited were a transfer to family members through inheritance (21%) and winding down the business (15%).
Why are more small-business owners considering a sale to a third party than selling to a family member? Taxes may play a role. The CFIB noted that currently, the difference between the sale price of a business and the price originally paid is taxed as a dividend for those who sell to a family member. But when the business is sold to an unrelated person, it’s considered a capital gain, which makes it eligible for a lifetime capital gains exemption (LCGE).
“Under the current rules, business owners pay higher taxes when they sell to a family member than when they sell to a stranger,” Pohlmann said. “It doesn't make sense.”
Because many small-business owners derive retirement income from the sale of their business, the CFIB also urged governments to raise the LCGE threshold to $1 million for all small- and medium-sized enterprises (SMEs), not just farmers and fishermen. As for the transfer of a business to the owner’s children, it recommended that small corporations be allowed to defer the tax on the resulting capital gains.