So when do independent pharmacy owners intend to transition out of ownership?
According to the CFIB (Canadian Federation for Independent Business) report on succession planning for small to medium size businesses in Canada 2018 titled “Getting the Transition Right”the numbers and reasons look like this.
CFIB research finds that 47% of business owners intend to exit their business within the next five years ─ 8% within 12 months, and 39% in the next 1 to 5 years. Looking further ahead, 72% of owners plan to exit their businesses within the next ten years. To put this into perspective, over $1.5 trillion of business assets could be transferred to a new generation of business owners over the next decade, up 50% from our last estimate in 2012. If not managed well, this could have a significant impact on jobs in many local communities and the economy overall.
8% -within 12 months
39%-in the next 1-5 years
25%-in the next 6-10 years
20%- More than 10 years from now
8%- Don’t know
Retirement is the main reason cited by about four in five business owners (81%) for
exiting their business (see Figure 2). Another 12% will exit since they have not found a suitable successor and 9%, mostly those under the age of 50, plan on moving to another business venture. Since most business owners (62%) rely on the sale of their business as a source of retirement income, any obstacles encountered by business owners looking to sell a business may not only be problematic to the business itself but to the wellbeing of the business owner and their family.
Reasons for Exiting
No suitable successor-12%
Move on to another business venture-9%
No potential buyer- 7%
Business is not profitable enough-6%
Start full time employment elsewhere-2%
Don’t know- 4%
The most common method business owners plan to use to exit their business is to sell to buyer(s) unrelated to their family ─ cited by close to half of business owners (48%) About one quarter (25%) of business owners intend on selling their
business to their employee(s), and the same proportion (25%) plan to sell to their
family member(s). About one in five (21%) business owners intend to transfer the
business to family member(s) through inheritance, and another 15% will wind down their business. To ensure business owners successfully accomplish their transition, it is essential that they have the necessary tools and resources at their disposal. For example, those selling to an outside buyer will need help finding potential buyers. With regards to family transfers, it is essential to remove impediments within the tax system. Under the current tax rules, when owners sell their business to a family member, the difference between the sale price and the price originally paid is considered a dividend.However, if they sell to an unrelated person, it is considered a capital gain. In effect,these rules can discourage the transfer of a business to a family member because thetransaction does not include the right to a lifetime capital gains exemption and is,therefore, more heavily taxed.
Method of Exiting
Sell to buyer(s) unrelated to my family-48%
Sell to employee(s)-25%
Sell to family member(s)-25%
Transfer to family member(s) (e.g. inheritance)-21%
Wind down (close) the business-15%
Whether business owners decide to exit or transfer ownership of their business, having a succession plan is critical for a smooth transition. Succession planning is the process by which a business owner chooses the best exit strategy for them to successfully transition into the next stage of their life. Succession plans can be informal or formal in nature. A formal succession plan sets out the process and schedule for a business owners’ withdrawal, including legal and supporting documents needed to put the plan into effect. An informal plan is more ad-hoc in nature. Formal succession plans have many benefits which cannot be replaced by informal plans. For example, formal written succession plans are developed with the input of various advisors, including accountants and legal professionals who help to address the technical aspects of transferring a business ─ e.g. financial, tax and legal considerations including the mechanics for the transfer, a process for resolving disputes, and a timetable. Figure 4 contains a few examples of the benefits of being involved with a business succession plan as described by business owners.
The Benefits of a Succession Plan- Business Owners’ Comments
“It is vital to the success of the transaction to have a firm framework with dates, expectations and both sides be held to it. As well its imperative to have a strong support team of accountants, lawyers, tax planners and investment advisors. The only way to drive the succession is to be involved 100%.”(Construction Business)
“Knowing exactly what the value of the business was and how to negotiate the sale. Also, what the expenses would be for the sale including fees and lawyer costs. Then there is knowing what your inventory is worth.” (Courier Services)
“Insight, experience, understanding how things are done. Protection for myself, my family, my employees and my clients.” (Insurance Broker)
Given the importance of having a succession plan, just how prepared are business
owners for exiting their business? About half (51%) of business owners do not have a succession plan and of the other half (49%) of business owners that do have a
succession plan, 41% have an informal plan and only 8% have a formal written plan
The level of preparedness (i.e. having a succession plan) varies based on
the business owners exit timeline. A closer look at those business owners with either a formal or informal plan reveals that the nearer an owner is to the intended exit date, the more focus is placed on having a succession plan (see Figure 6). In terms of having a formal plan, 21% of business owners intending to exit within 12 months have such a plan, compared to only 6% for those exiting in the next 6 to 10 years. While it is encouraging that a good proportion of business owners intend to pass their business on to a new generation, the lack of formal planning gives rise to significant risks for Canada’s competitiveness and prosperity. With potentially over $1.5 trillion in assets changing hands during the next ten years, Canada cannot afford to have so many SME owners unprepared to make that transition. Finding ways to assist SMEs in
overcoming obstacles they may face when planning the succession of their business
will be critical to help them succeed. This will not only benefit the business owner and their successor, but may very well help to save and even create new jobs, keep local communities prosperous and continue to grow Canada’s economy.