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COVID-19 caused almost three in four Canadian small businesses (71 per cent) to take on an average of $169,985 in debt, according to a Canadian Federation of Independent Business report in August.Halfpoint/iStockPhoto / Getty Images

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Small business owners faced a range of challenges through the pandemic – from capacity limits and lockdowns to employee shortages and broken supply chains.

Some are struggling and steeped in debt. Others are thriving but exhausted. In both groups, many are thinking hard about the future and sometimes considering charting a new course.

“Even the clients who are doing okay through [the pandemic], many of them are looking at the past two years [and thinking], ‘Maybe I don’t want to do this anymore,’ or ‘I want to find a different way forward,’” says Darren Coleman, senior portfolio manager, private client group, with Coleman Wealth at Raymond James Ltd. in Toronto.

As an example, he cites the story of a client who was in the process of acquiring another business when the pandemic started. Now, the client has decided to let his own company be acquired instead.

“At the beginning of the pandemic, he entered into it with a certain amount of verve and energy, and I think after two years he’s like, ‘Yeah, I think I’m just going to take the money and run,’” Mr. Coleman says.

Although he’s been working with the client’s legal and tax advisors on the transaction, Mr. Coleman says it’s equally important to coach the client through the emotional impact of selling the business he spent most of his professional career building.

“Not enough people put the time and effort into that part of the planning,” he says. “It’s very normal to get caught up in the mathematics and taxation of the transaction. [But] we also have to work with that client for a long time, so how do we navigate them successfully to what life looks like when life is different?”

Taking on more debt

Yet, for small business owners who are not considering selling, there are other major hurdles on the horizon.

COVID-19 caused almost three in four Canadian small businesses (71 per cent) to take on an average of $169,985 in debt, according to a Canadian Federation of Independent Business report published in August 2021. That debt will eventually have to be repaid – even though the federal government recently extended the repayment deadline to qualify for some loan forgiveness for Canada Emergency Business Account loans by a full year to Dec. 31, 2023.

However, the challenge is that the scale of the loans many small businesses have taken on is making owners and their family members increasingly nervous.

Mr. Coleman has one client whose spouse is so anxious for him to start repaying his company’s debt that he’s considering withdrawing funds from his registered accounts.

“We’re still trying to navigate that. I think we’ll try and come up with a half answer of, ‘Okay, maybe we do [limited withdrawals],’” Mr. Coleman says. “We’re going to make a less than an optimal financial decision to give [the client] financial peace of mind in the short term – but we’re not going to make a bigger financial mistake just to make [him] comfortable.”

Jackie Porter, certified financial planner and advisor at Carte Wealth Management Inc. in Mississauga, says she also worries that small business debt has the potential to become a significant drag on these clients’ personal finances.

“Is that liability going to haunt them if the business goes under [and it’s not incorporated]?” she asks. “Is it going to prevent them from being able to put money aside for retirement, or for their children’s education, or paying down personal debt?”

Ms. Porter works with dentists who invested a lot of money – some of it borrowed – to improve ventilation, install Plexiglas and introduce other safety measures before reopening after the first pandemic lockdown. For established practices, this was generally manageable.

“I know a number of dental offices that had profit in 2020, which wasn’t great, but they largely recovered in 2021, so [incurring those expenses] to keep the business open made sense,” she says. “But if let’s say, for example, you are a new dentist that just took on all that debt, you might not have the financial bandwidth to carry it for another year or two because you’re still building out.”

Ms. Porter says it’s critical to assess the potential return on investment of any debt a small business owner takes on, analyzing best and worst-case scenarios to protect both the business and the client’s personal financial well-being.

The time to talk more, not less

Meanwhile, Jennifer Watson, managing partner and wealth manager at Watson Investments in Oakville, Ont. says the pandemic created a very stressful and busy time for small business owners, which has taken its toll.

“There are processes and systems that had to change, and [they] had to navigate the health risk for employees [with rules that] changed very frequently,” she says.

Ms. Watson says she had done the groundwork with her small business owner clients before the pandemic, conducting sensitivity analyses for their companies’ cash flow needs and ensuring they had a plan for how to access additional funds if needed. But, like Mr. Coleman, Ms. Watson says it takes more than technical expertise to guide clients through pandemic-related challenges.

“Whenever there’s a time, either personally or professionally, when there’s a risk to finances, it means that we need to be looking at things more, not less,” she says.

Communication with clients increased significantly throughout the pandemic, she says, during which conversations were often about offering reassurance as well as checking in to see if adjustments were needed to cash-flow projections and/or tax planning strategies.

But while the pandemic may result in the loss of some small businesses, Ms. Watson sees the opportunity for growth in the sector as well given that many people with full-time jobs learned to appreciate the flexibility and greater independence of working from home.

Some may have caught the entrepreneurial bug, which could help sustain a sector that’s critical to Canada’s economy.

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