Why Canadian small businesses aren't staying all in the family

Given the role of independent businesses in the broader economy, it can be argued that giving ownership of small businesses to the next generation may be the most important form of wealth transfer. But according to new research from the Family Enterprise Foundation, a lot of enterprise value might be getting lost in transition.

Drawing from a survey of 300 Canadian business owners conducted by Abacus Data, the report said more than 60% of family enterprises will see a change in ownership within the next decade, with nearly 40% happening in the next seven years.

Just over half of current owners expect the next generation to become owners of the family, including 47% of respondents who expect their business to stay fully family-owned and 5% who plan to introduce non-family executive leaders.

Almost four-fifths of busines-owning families expect future generations to own the family business, even if they don’t have a hand in the day-to-day operations. That includes 41% who somewhat agree with and 37% who were confident in that assertion.

However, more than a third of families (36%) said they intend to turn ownership of their businesses over to non-family members. Some business owners failed to see the essential skills they used to build their business in the next generation. In many cases, the first generation doesn’t develop a former transition process, leaving prospective heirs in the dark. Other business owners also stated that the next generation doesn’t want to take on the risk or work the same way as elder family members did.

Among business-owning families who are inclined to transfer ownership outside the family, the most-cited reason was a lack of experience or interest among family members (38%). Echoing that data point, elder-generation business owners were concerned or apprehensive about transferring control because they think the next generation isn’t ready (51%) or is not interested (39%).

The survey also uncovered other reasons, including the tax implications of transferring to a family member (22%), family disagreement or conflict (17%), and an unwillingness by the senior-generation owner to let go (15%).

The report also listed some ways for the senior generation to encourage relatives who are next in line to take the reins, including:

• Having candid conversations to explore the intentions of both generations;
• Give next-generation owners the option to sell or harvest to open opportunities for diversification into other businesses;
• Encouraging next-generation business owners to put the capital towards something their passionate about;
• Allow time and flexibility for next generations to make their own mark; and
• Expose the next-generation owners to the business so they become more engaged.