CANADA IS FACING A BUSINESS SUCCESSION CRISIS

According to an article printed in the August 11, 2001 Financial Post, written by Rod Reynolds, President and CEO of RoyNat Capital Inc., a family business is at serious risk when a son or daughter takes over the business. To quote directly: "Our (RoyNat's) experience as a merchant bank, which is supported by U.S. studies, is that 70 per cent of family businesses do not survive to the next generation. The odds are a bit better, 50-50, when a business is sold to an outside buyer. In contrast, successions involving leveraged employee buyouts, supported by key managers, succeed in about 80 per cent of cases."

"The study also showed that 27per cent of owners of family businesses with sales of at least one million dollars will retire in the next five years; 56 per cent within 10 years and 78 per cent within 15 years."

"The study shows that there are currently one hundred and twenty four thousand family businesses with sales of one million dollars or more in Canada. These companies employ about six million Canadians and generate as much as one-point-three trillion dollars in gross annual sales."

The Canadian Federation of Independent Businesses recently cited a risk of two million lost jobs in Canada due to an absence of family members prepared to take over the family business and to the fact that these business owners are unprepared for their imminent retirement. Apparently, the resulting trend is to sell these businesses to competitors - and US competitors in particular - a trend that is expected to see numerous businesses close their doors, since purchasers are mainly interested in buying goodwill rather than production capacity.

In addition, statistical data analyzed by the Fonds de Solidarité in 2005 show that:

• 70 per cent of SMEs do not outlast the first generation and 90 per cent do not outlast the second generation
• 56 per cent of SME founders will be retiring by 20-10 and 73 per cent by 20-15
• 70 per cent of business owners thinking about retirement have yet to choose their successor.

The issue of business ownership transfer is not confined to North America, the Enterprise Directorate General of the European Commission estimates that approximately one- third of the European businesses will transfer ownership in the coming decade.[1]

The impact that this growing trend will have on rural areas and remote regions across Canada already affected by significant structural unemployment and population drain caused by young people moving will be dramatic.

A CO-OPERATIVE SOLUTION?

The Canadian Co-operative Association (CCA)in partnership with the Canadian Worker Co-operative Federation (CWCF) and with the provincial co-operative associations in BC, Ontario and Nova Scotia, is working to develop co-operative solutions to the impending business succession crisis in rural areas with the support of funding from the Co-operative Development Initiative.

Building upon research undertaken by CWCF and resources developed by the Fédération des co-opératives de développement régional du Québec, as well as work undertaken in the UK by Co-operatives UK and the Plunkett Foundation, the partners have developed approaches and tools to advise small rural business owners considering retirement and the community or employee groups who are interested in taking on the business. The project has prepared case examples of successful business transfers to the co-operative model. In addition, the partners will put in place a 'Watch' system with other stakeholders such as chambers of commerce, municipal or regional economic development officers, accounting and legal firms to identify businesses considering the transferring of ownership to alert them to the co-operative or community-owned model.

This project has huge potential to provide lasting benefits to rural communities across Canada. Alongside the development and promotion of tools, resources and advisory services as a response to the growing concerns over the traditional business ownership models in rural communities, this project also has the scope to develop new models of co- operative entrepreneurship.

This type of response of economic self-help solutions to problems in rural and urban areas is not unusual in the co-op sector. The opportunity to develop new models can be evidenced by the growth in rural parts of the UK of community-owned stores, other service providers, and small manufacturing businesses in the past 15 years. Despite the increasing decline of retail services in rural areas (over 70 per cent of rural communities do not have a general store), more than 200 community-owned co-operative general stores, pubs, gas stations and manufacturing businesses have been established as a response to the number of traditional store-owners and small business owners seeking to close their business.

As Carol Hunter, Executive Director of the Canadian Co-operative Association, stated to the Senate Agriculture and Forestry Committee Hearing on Rural Poverty in 2007:

"The potential to develop new models of co-operative and community ownership in Canada as a response to the growing challenge of many businesses transferring ownership in the next 5 years is very exciting for the sector."

ACKNOWLEDGEMENTS

CCA, CWCF and the project partners on the Business Succession in Rural Communities project would like to acknowledge the Fédération des coopératives de développement régional du Québec, in partnership with the Orion Co-operative, who developed the cooperative succession framework entitled "Relais Coop." The entire process is based on steps the various stakeholders must take to ensure entrepreneurial succession using the cooperative formula tailored to the needs of businesses interested in transferring ownership and safeguarding regional employment.

This Guide was originally prepared by the Relais Coop project for communities and co- operative developers in Quebec and has been adapted by the Business Succession in Rural Communities project team for use outside of Quebec.

Both projects were made possible through funding under the Innovations and Research component of the Co-operative Development Initiative (CDI), a federally-funded program managed by the Co-operatives Secretariat at Agriculture and Agri-food Canada. The partners gratefully acknowledge the support of the Co-operatives Secretariat in supporting the project.

This guide has been produced with the collaboration of: