How Co-ops Can Help Solve Canada’s Succession Planning Problem

 

One of the most important, and often overlooked, components of a business plan is what happens when you’re ready to retire: succession planning.

Co-operatives First recently attended a session with Succession Matching CEO, Alison Anderson, at the Economic Development Association of Canada. During the session, Alison shared why she started an online business buying platform. Her answer, in short, is that Canada is currently staring down a pretty serious succession planning challenge.

In North America, there are trillions of dollars in business assets about to change hands. In Canada, CIBC estimates that half of Canada’s family businesses will change hands by 2019, and a 2016 Industry Canada report found that approximately half of all small and medium enterprise owners are between the ages of 50-64. Many of those baby boomers will be looking to sell and retire.

In 2015, well over 8 million Canadians were employed by small to medium businesses, which is a major portion of the 12 million total employed by the private sector. If a significant number of these businesses were to simply close, the impact to economies and the millions employed by them would be enormous.

Is anyone out there?

So, there is a serious concern about who will take over those businesses – especially in rural communities. And this growing need is why we’re seeing companies, like Succession Matching or business brokers, building businesses on connecting outgoing owners with potential buyers.

By the statistics, this should be an easy sell. The business case for buying a business is strong. 70% of bought businesses survive more than 5 years compared to 10% of start-ups.

So, why don’t we see more businesses successfully changing hands? The answer seems to be a mix of no planning and trouble finding the right buyer.

Absence of planning and outside investment

No planning is pretty normal. Entrepreneurs are busy with cash flow, inventories, increasing sales, wages and benefits, hiring and firing, and the countless other daily challenges of running a small to medium business in Canada.

Economic developers can generally help with the planning problem, and they do an amazing job of working with business owners in developing succession plans and marketing their communities to potential investors.

Unfortunately, finding investors for rural areas of Canada is (and has been) a challenge. With the recent shift in agriculture to corporate farms over more family-based farming, this challenge may be growing.

Unless a rural area is a bedroom community within a short drive of a city, there’s a good chance the population is shrinking or aging. With reduced growth in populations comes a smaller market place and less incentives for investment from external sources.

This is where a co-operative can fit into the opportunity tool box.

Consider a Co-op

Transitioning a business to a co-operative has been used by community and business leaders around the world to retain or gain jobs, wealth and control of companies. But, this solution is not particularly common in Canada. Lack of awareness and understanding of the co-operative business model is largely to blame.

If investment attraction or succession matching isn’t working out, here’s a couple options community and business leaders should consider when planning for business succession.

Co-op buy-out

Co-operatives are a legitimate business model option for any industry. So, who might be interested in forming a co-operative to buy an existing business?

Workers 

Employees have a vested interest in seeing a business continue its operations and they usually have an intimate knowledge of how the company operates. Raising sufficient capital may be an issue for employees, but worker co-ops frequently issue investment shares or access funding to secure a buy-out. In the US, this option is a growing phenomenon and solution providers are also popping up, such as Project-Equity.org

Producers

Wholesalers, manufacturers, and suppliers often rely on local service-providers to deliver their products to the public. To ensure this supply chain remains operational, and continue using a business people are familiar with, producers may work together to acquire a business under a producers co-op. Co-operatives, such as Agropur, have acquired several brands that help bring their members’ products to market.

Consumers

Communities place a high value on accessing services, especially in rural and remote areas. Ensuring those services continue to be delivered is important for further community development and sustainability. As such consumers may organize themselves and invest in a co-operative that purchases a business to retain those services while also keeping profits and decision-making local. Consumers co-ops have a long history servicing western Canada through the credit union network and co-operative retailing system.

Investor-led co-ops

For communities where access to capital inhibits entrepreneurship, another type of co-operative may be a good fit. The “opportunities development” co-op model, as implemented in Sangudo, AB, allows retired individuals to invest a portion of their RRSPs or TFSAs in an investment co-operative. The co-op then makes strategic investments on their behalf. The first projects pursued in Sangudo were partnerships with local entrepreneurs that needed investors to purchase businesses. These partnerships allowed Sangudo to retain their meat processing facility and coffee shop – both important local services.

Help is available

Maintaining a succession plan involves effective communication between local businesses and economic developers. Understanding what is needed to preserve local business by building on the community’s existing economic and social capacity can help create continuity and retain local benefits. So, contacting your local economic development organization or person is a great place to start.

If you’re facing a succession challenge and would like to explore a co-operative option, contact us.