Four out of 10 small- and medium-sized business owners intend to exit their businesses within five years, with this number jumping to seven in 10 when extended over 10 years, according to a report released today by the Canadian Federation of Independent Business (CFIB).

Three quarters of those intending to leave cited retirement as the reason.

The survey on SMIE succession garnered over 4,300 responses. It focused on several key issues including: when do owners expect to exit their business; how are they preparing for succession; and what barriers do they face in implementing their succession plans.

Questions were also asked of those owners who recently acquired a business through succession.

CFIB’s survey found that generally, only one third (35%) of SME owners are currently planning for their future succession, and that among those who have a succession plan, the majority are informal, unwritten plans, which have not necessarily been shared with the intended successor.

The reasons for not having a formal succession plan are often either the belief that there is still time, or reluctance to tackle the personal issues that surround succession such as choosing an heir.

However, Catherine Swift, CFIB’s president and CEO, pointed out that there are several key institutional barriers to succession planning as well.

“The government acknowledges the demographic challenge facing Canada, but it is deeply troubling that we have federal spending commitments that extend out seven to ten years and no succession measures to ensure that the next generation of businesses exists to fund health care, pensions and the social safety net,” said Swift, in a release.

Swift asserted that the current government emphasis on start-ups must be complimented by appropriate support for transition of SMEs from one entrepreneur to the next.

Swift added that financial institutions also have a role to play, as the most commonly identified barrier to succession, according to recent successors (44%), is the financing of the purchase or transfer.

Half of successors actually invested their own personal equity to purchase their businesses, while approximately 30% obtained financing from the previous owner.

Next to successor financing, the study found the valuation of the business was the most significant barrier, as cited by 39% of successors. Swift said the difficulty in valuing a business is in itself a barrier to obtaining adequate financing and in assessing future profitability.