Overcoming Obstacles to Creating Value for Businesses in Transition

Why are only 29% of SME owners looking to transition out of their business willing to take on risk to Create Value?

About 3 years ago the Business Development Bank of Canada (BDC) conducted a study of over 2,500 owners of Canadian small and medium-sized enterprises (SMEs)* - The Coming Wave of Business Transitions in Canada – a summary of the study can be found here.

There were some interesting findings which I am sure still hold true today. Here are some of the highlights:

4 out of 10 owners plan to exit their business in the next 5 years

Half of these owners expect to transfer their business outside of their family

Only half of these owners have sound financial reporting, and;

Just less than one third of these owners are willing to take risks to increase the value of their business

To be perfectly honest, I am not surprised by the 3rd point in the list. In my experience, sound financial and management reporting in small to medium sized enterprises has largely been an afterthought. This is due to several very understandable challenges they face. Although important to business transitions, I will save an in-depth discussion on this topic for a future article.

What I was astonished to find out is that just 29% of SME owners looking to transition out of their businesses are willing to take risks to improve the value of that business. As I typically do, I want to know more about WHY this is the case. Until I find out more, here is my hypothesis:

Owners believe “risk” is bad and feel like the downside of risk is just too great

Most owners are content with what their business is, are looking forward to retirement and do not want the additional burden they feel comes along with change

Some owners may not have the appropriate staff or resources in place to undertake value creation initiatives

SME financial and management reporting is sometimes weak, resulting in limited reliable decision-making information

Some of these are legitimate concerns, others are myths and all of them can be easily managed. In many cases, a business is the largest asset for an owner and the proceeds from a business sale will go directly to fund their retirement. It stands to reason, then, that tackling any or all of these obstacles will not only clear the way to create value in a business but will also create value in retirement for the owner. Time, then, becomes the real issue. Proper business transition planning takes anywhere from 2 to 5 years. The time for action is now!

If you own or manage a small to medium size business and some of this sounds familiar, if you disagree with my hypothesis or if you want to tackle any or all of these value creation obstacles, please reach out to tell me more. Let’s have a conversation and share your passion with somebody who wants to listen. Send me an e-mail or call. Patterson Consulting Group wants to know more.

* An SME as defined by the BDC study (and Statistics Canada) is any business with 1-499 employees.

November 27, 2020 By Bob Patterson