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When his father wanted to pass on the family business in the late 1980s, James McKenzie jumped at the opportunity to buy control of Victoria-based Monk Office Supply Ltd.

Now, like many of Canada's small-business owners, the 49-year-old father is looking at how -- or if -- he and his wife will hand over the business to their two children.

"Even though [the children] are 19 and 20, they know exactly what our wills state and what happens with the company should I die," Mr. McKenzie said.

"And I'm very careful not to make them feel obliged that they have to take this company on, but I make it very clear to them that they must be qualified to run the company and they must be qualified to own the company."

More than 40 per cent of the owners of small to medium-sized Canadian businesses -- about 400,000 people -- plan to retire in the next five years, yet only about one-third have formal succession plans like Mr. McKenzie, according to a survey released yesterday by the Canadian Federation of Independent Business.

These often family-run businesses make up almost half of the Canadian economy, and the changes could disrupt two million jobs across the country, the CFIB says.

The problem is exacerbated by a population increasing in age, and the looming retirement of the baby boomer generation, said Catherine Swift, CFIB president and chief executive officer.

"We knew this was a serious looming issue," Ms. Swift said. "This isn't only an issue for the businesses; when you see the magnitude of people that are planning to do some form of succession over the next few years, that could have a real whack on the economy and not a good one if not handled properly. This is a big economic issue. You have half of the economy here."

Two-thirds of the 4,300 people surveyed by the CFIB said they felt it was too early to plan for succession, while others indicated they had little time to deal with such issues and found the whole process too complex.

Ms. Swift added another reason -- it can be difficult to face the prospect of death.

Ms. Swift said training a business successor, putting a value on a company's assets, drafting a takeover plan, obtaining financing, and dealing with government rulings can take up to five years.

While succession planning can be onerous, it's necessary, Ms. Swift said.

"Seventy per cent of businesses that don't have a plan go under."

The CFIB survey results will be presented at an international small-business conference in Washington, D.C., June 22.

The survey has prompted the CFIB to recommend the Canadian government raise the lifetime capital gains exemption to $1-million from $500,000, partly to cover inflation and also to reassure owners who plan to sell their businesses as a way to generate retirement income.

For Mr. McKenzie, who employs 100 people in nine Monk Office stores on Vancouver Island, succession planning means quarterly meetings with his wife and children in a "neutral-ground" conference room, with professional advisers.

The meetings might seem odd, Mr. McKenzie said, but he looks back on his father's succession plan and remembers how things got "very emotional" between him and his brother Ian, both of whom had different ideas on the future of the business.

Mr. McKenzie's own succession plan includes a 25-per-cent business partner and a groomed senior manager, in case the kids don't want to carry on the family tradition.

"I'm just encouraging them to follow their dreams," he said.