This is part of the Globe and Mail's week-long series on baby boomers and how their spending, investing, health and lifestyle decisions could affect Canada's economy in the next 15 years. Is Canada ready for the boom?
For more, visit tgam.ca/boomershift and on Twitter at #GlobeBoomers
Dennis Dussin, president of Alps Welding Ltd. in Woodbridge, Ont., initially didn't want to take over his parents' business, even though it had been part of his life almost since he was born.
The company was founded when Mr. Dussin was a year old, and he worked there through high school and university. But, after completing a finance degree, he decided to work in investment banking and private equity.
Then, in 2004, Mr. Dussin went back to the family company, which makes large custom equipment for the petrochemical and oil business. After advising other firms and entrepreneurs, he realized he liked the idea of running his own business, and that the ideal place to do it was right under his nose.
The alternative for his parents Joe and Alida, baby boomers in their 60s, would have been to sell their welding business – and that would have been tough. "Once my mother and father walked out of the door, a lot of the value would have gone with them," Mr. Dussin said. "What happens to a lot of businesses of that size and in that baby-boomer generation, is that they just kind of wind down."
The Dussins' dilemma will face hundreds of thousands of small companies across the country in the coming years, as entrepreneurial baby boomers deal with a crucial decision: what to do with their small businesses when they finally give up the reins and retire.
A myriad of small firms across the country are run by people in the baby-boom generation, and succession issues are top of mind for many of them. Handing over a business is tough for any entrepreneur at any time, but there's going to be a tsunami of businesses changing hands as the boomers move into the next phase of their life.
Indeed, three-quarters of all small business owners plan to exit their enterprises in the next decade, according to a survey by the Canadian Federation of Independent Business. The vast majority of those departures – 85 per cent – will result from a desire to retire.
PricewaterhouseCoopers, in a recent report, predicts a "highly competitive buyer's market between 2018 and 2025" for family businesses, and suggests that many owners will not get the nest egg they hoped for.
Over all, the sale of small businesses in the coming decade will involve a massive transfer of assets – estimated at between $1-trillion and $4-trillion in Canada alone. And if many of those businesses simply close up shop, it could damage the economy through significant loss of employment.
The huge transfer of small business wealth is the last big direct impact that the baby boomers are going to have on the economy during their working lives, said Glenn Huber, president of Calgary-based private equity firm Chrysalis Acquisition Partners Inc. After that, boomers' big influence will be mainly on the travel industry, retirement homes, and ultimately, the funeral business.
Mr. Huber's company has set up a fund, the Chrysalis Acquisition Fund 1, to buy up small and medium-sized businesses in Western Canada that are looking for an alternative to selling to heirs, employees, or individual buyers. In many cases the fund will partner with a small firm's remaining management, providing the capital to help buy out the founder.
Jacoline Loewen, director of business development at UBS Bank (Canada) and an expert on small business succession, said the recession delayed the start of the boomer transition because many entrepreneurs did not want to sell out while the economy was weak. Now, she said, many are ready to think about it, although few have done the necessary preparation. That has created an even bigger bubble of small companies ready to change hands.
Ideally, business owners should begin thinking about transition five to 10 years before they leave, she said, and even before they hit their 50th birthday. In preparation, they should hire advisers, or at least set up an expert advisory board that can help guide them and provide contacts. But baby boomers tend to overestimate their health and stamina, and "stay on for far too long," Ms. Loewen said.
The first choice for many small business owners is to have their children take over, Ms. Loewen said, although often the kids just aren't interested, having seen the toll that running an enterprise can take. When the children are keen to take over, she said, a proper valuation of the business needs to be performed, and the next generation should be prepared to buy in – even competing with external buyers if necessary.
At Alps Welding, Mr. Dussin and his parents set up a structure where he received shares that will gain value as the business grows. Eventually, he can buy out his parents' holding.
More importantly, Mr. Dussin said, was the gradual process of shifting managerial control from one generation to the next. He came in as vice-president 11 years ago, then took on more responsibility over time, becoming president about five years ago.
Mr. Dussin's father is still involved, and that is a key aspect of baby-boomer business succession if it is to proceed smoothly. "This business is my father's life … He doesn't have a lot of interests outside of work. It is not like he has been waiting to play golf five times a week," Mr. Dussin said.