Has COVID altered business owners' succession plans?

While the rising costs of doing business is weighing heavily on small businesses’ operations and revenues across Canada, whether they will have a long-term impact on entrepreneurs’ succession and retirement plans remains an open question, according to one B.C.-based portfolio manager.

“I think it's still too early to tell,” says Kevin Burkett, portfolio manager at Burkett Asset Management. With his experience in accounting and expertise in wealth management, Burkett caters to the needs of high-net-worth business owners and other individuals facing complex financial situations.

“Business succession tends to be a long process and not an event,” he says. “Inflation has really only been an issue since the start of this year, so it will still take time before we see a direct impact on how it's changing small business owners’ succession plans.”

Read more: How to help business owners de-risk transitions in succession plan?

While the current economic backdrop might not change the trajectory of entrepreneurs’ succession plan, it’s already having an impact for those close enough to their retirement horizon.

Among older Canadians in general, the financial stress caused by the challenging economic environment has prompted many to delay plans to retire. A survey of Canadians aged 55 and older commissioned by Bromwich + Smith this year found 62% are delaying their retirement because they have inadequate savings and investments. Just over half (54%) said they’re putting off retiring because of rising inflation and costs of living this year, and 40% are doing so because they have too much debt.

Canada’s businesses are facing parallel pressures. In a recent report, the Canadian Federation of Independent Business (CFIB) said 70% of small business owners are expecting the rate hikes being deployed in the Bank of Canada’s war against inflation to negatively impact their operations. A June survey found that to cope with rising costs, nearly eight in 10 (79%) small businesses have had to raise prices more than usual.

Many are also still living in the long shadow of the COVID crisis, as CFIB estimates 62% of small business owners are carrying approximately $160,000 in pandemic-related debt on average. That includes more than 900,000 Canadian small businesses that reportedly had to take on a Canada Emergency Business Account (CEBA) loan.

“Think about the vintage of someone who started their own business and is close to retiring. They’ve been doing it for maybe 20 to 30 years, and they probably had that business running in a way that they were working comfortably,” he says. “COVID changed a lot of that.”

While Canada’s entrepreneurs are joining the rest of the country on recession watch, one study suggests most are staying positive. In a survey of leaders of small and medium businesses conducted by KPMG in Canada found that despite the prospects of near-term recession, 83% report being optimistic about their company’s growth over the next few years, while 82% are confident about their industry or sector.

Read more: Canada's SMBs are confident of growth despite recession fears

But from Burkett’s vantage point, many business owners on the brink of retirement are moving forward with their plans more quickly as the pace of changes over the past two years brought high levels of stress and anxiety.

“There are a lot of folks who were probably beyond when they expected to retire, who just enjoy their job,” Burkett says. “But with all the disruptions and changes that have come along, it seems to be accelerating people’s decisions to complete their succession plans.”

The succession planning process can vary widely across small businesses, Burkett says, as they encompass a large variety of enterprises across Canada and a whole host of fact-specific factors can come into play. But for small entrepreneurs who have yet to prepare their succession plans, he recommends that they consider three questions.

“Generally, the first question is understanding who's going to eventually buy your business? Then how are you going to connect with that person, and how much will they pay you for your business?” he says. “If you can figure out the answers to those three questions, you’re off to a good start.”