The Decibel - Are small, family-run businesses dying in Canada?

Episode Date: September 5, 2023

Small business owners are, on average, older than the Canadian population. That means that in the next ten years 75% of them are retiring, according to estimates from the federal government.So what happens to their businesses? Chris Hannay covers small business for the Globe and he joins us to discuss how these retirements could lead to a wave of consolidation of enterprise in Canada.Questions? Comments? Ideas? Email us at [e-mail]

My life was the business. I have no personal life, just business. I work so hard, and I don't want to do it anymore. Katalin Kotlai owns and operates Country Style Hungarian Restaurant in Toronto. It's a fixture in the city. But after more than two decades of running the business, she's decided to retire. Yes, I have my daughter, but I don't want her to take it over. It's not an easy thing, not an easy job. I don't want her to work that hard.

I worked so hard all in my life. Her situation, or version of it, is playing out across Canada. Small business owners are, on average, older than the Canadian population. And in the next decade, a large portion of these entrepreneurs could be retiring. Chris Hanay is The Globe's independent business reporter, and he's on the show to tell us about this coming wave of small business owner retirements and what this could mean for Canada's economy. I'm Cheryl Sutherland, and this is The Decibel from The Globe and Mail. Chris, thanks so much for being here today.

Hey, thanks for having me. So we just heard from Katalin Kotlai, who's the owner of Country Style Hungarian Restaurant, home of the schnitzel. I wonder how common is her story? It is super common. It is one of these major changes that is going to affect Canada's small business landscape, this demographic wave of retirees. Because if you look at the stats, in 2004, people who are over the age of 50 owned 47% of small and medium-sized businesses. And you'd kind of expect that people who are more experienced probably own a larger share. They've had some time to save up money to buy businesses, to grow in the businesses. But now,

in 2020, the most recent numbers, people over the age of 50 own 62% of these businesses. Yeah, and the federal government actually recently estimated that 75% of all small business owners are going to retire in the next decade. That's a huge number. Yeah. And so depending on what happens, it could mean a lot for Canada's economy, because small businesses are, you know, each individual small business obviously is small, it's in the name. But in the aggregate, you know, it's a huge percent of our economy. It's 98% of all the businesses. 98%? Yeah, it's more than half of all people who are not employed by the public sector. And so depending on what happens with these small businesses, it could mean

a lot to Canadians. Yeah. And can we just lay out the basics here? When we say small business, what do we mean by that? Well, different people have different definitions. Even if you go to different government departments, some of them have different definitions. Sometimes it's a bit of a state of mind. But in terms of writing a story where I need to have facts, I'm mostly going by Statistics Canada, which goes by the number of employees. So generally speaking, it's under 100 employees would be a small business, and between 100 and 500 would be a medium-sized business. Okay. So when a small business owner does retire, what are some of the things that could happen to the business?

Yeah. So there's different things. One was that the business could just close. It could just cease to exist. A business owner might be in a place to do that if they've managed to save up a lot of money for retirement over the course of their career. And they don't have anyone obvious to take over the business. Or perhaps it's a business like a restaurant that had to take on a lot of debt during the pandemic. And they can't find a buyer for whatever reason, in which case it's probably a more sad situation. I know I've talked to some business owners who had been planning to retire up until the pandemic happened, and then that kind of blew away their retirement plans because suddenly they were in debt that they had to get out of. Another common option is to sell the business. And here there's different things. So there might be a case where there's an employee who's worked there for a long time who might be ready to transition into ownership and they might be

able to work out some kind of deal with the bank to where that employee could buy it or they could sell it to another small business owner. Maybe there's a small business that has a handful of locations and they want to add another one and so they buy out someone else who's retiring. There's also family succession. So it could be a business owner wants to pass it on to their kid or a younger sibling is also a common thing. Family owned businesses actually make up a huge share of Canada's economy as well. But a third of all small and medium sized businesses are family owned. It's a big chunk. Yeah, exactly. And so some of them are starting to look at family succession as an option. You know, I've talked to experts about this. One of the things, though, is that family succession tends to work better when kids have been involved in the business for many years. And so maybe grew up in the business, learned the ropes. And so when they kind of go into that ownership, it's a smooth transition. But for kids that maybe have had no involvement, they may not feel much

attachment to the business and they may not want to run their parents' business. I mean, in Katalin's case, and this is the woman who owns Country Style Hungarian Kitchen, she mentioned that she didn't want to pass it on to her daughter because of the workload. What are you hearing about young people maybe not wanting to take on this family business? That is something that I've often heard from older business owners when I've talked to them about this issue of succession. A lot of people say young people don't want to own businesses anymore.

And part of me was like, there's always people saying young people nowadays don't want to do this. But there does seem to be surveys and data that backs up that that's the case. I was recently talking to the Business Development Bank of Canada who did a survey around mental health. And one of the things they found is that younger entrepreneurs are like way more stressed than older entrepreneurs

are way more likely to cite things like having work life balance as a source of stress and way more likely to agonize over the decisions that they were making and to have a fear of failure that their business wouldn't succeed. I also want to mention, like, I think that there's also some different economics, which I think also plays a role. So things like student debt, certainly in some professions I've looked at, people who may need to get professional schooling and accreditation, be in school longer, and have to pile up way more debt than their parents ever did.

That's obviously going to hold them back from business ownership as well. Because if you're already saddled with $100,000, $200,000 of student debt, the bank's not going to give you a couple million dollars to buy a business. Is the thought here that things are so expensive now, like you mentioned this student debt, that kind of thing for younger people, that it's so expensive that running a small business just isn't lucrative enough given the time you'd have to put in? I think that depends so broadly based on industry. I know certainly economic-wise,

side hustles have been a big thing, particularly during the pandemic. That's certainly one part of entrepreneurship that we see grow. I want to make a bit of a one kind of definition clear here. You know, when we've been talking about like young people don't want to own small businesses, obviously as well, there is a movement among like gen z millennial to be entrepreneurs the people i've talked to in the data seems to suggest that mostly takes the form of the side hustles earning some extra income on the side and you know i was talking to karen grieve young the chief executive officer of futurepreneur recently that's a non-profit that helps fund businesses and she was saying that they started a, quote, side hustle program during the pandemic to help support people with these extra businesses.

And they've seen huge uptake in that. And that's been a really big project for Future Produrer. But when we're talking about kind of young people, quote, don't want to own small businesses, we're talking more about the sort of traditional small business where you have employees and it's like a restaurant or a store or something like that. We'll be right back. So when we talk about some of the challenges small businesses might be facing, it makes me think of the big businesses that are gobbling them up. Chris, you've done a lot of reporting on consolidation. And so based on what you've seen already,

who can we expect to see buying some of these businesses if younger people in this case aren't? Yeah, so there's also the phenomenon of consolidation that's happening. And that's kind of happening at all levels. So in one case, you have in the bank sector, there was the recent purchase of HBC by Royal Bank, which is the first biggest bank buying the seventh biggest. In telecom, that's happened at all levels. You know, Rogers buying Shaw, some of the big players, but then also during the pandemic, a lot of the smaller players have been bought up. Just the other week, Tech Savvy, the biggest kind of independent internet service provider, has announced that it's going to go up

for sale. So in all sorts of sectors, there's big businesses consolidating. So it just gets down to a few players. And then what about on the small business scale? Are we seeing the same type of consolidation happening there as well? Yeah, depending on the industry, there has been a lot of activity. So I've done a number of stories around like health-based businesses like veterinarians and dentists and physio and optometry, all being fields where private equity-backed businesses have seen a lot of opportunity to buy up these sort of owner-operated small businesses. Some operate them as chains, but a lot of times they don't even change the name on the door or let you know that it's now owned by a chain. So that's definitely something that's happening in some industries.

And what does it mean for consumers then when small businesses get bought up by these, you know, either big corporations or by other businesses? Well, I think if we look at the economic literature, it's pretty clear that when we see less competition, fewer players, there's a lot fewer options for customers and prices go up. Yeah. And I guess, you know, even like walking down the street, you're also going to see kind of less of a unique landscape as well. Yeah. Yeah. There's that part of it for sure. And one of the things that I think, one of the reasons why I think that we as a society want to make sure that we have a robust number of small businesses is that they add a lot to the community.

You know, there's those small business owners, you know, employ people locally. They're very involved locally. They might be involved in municipal things. They may be donating to kids soccer teams. And I think that that is a nice feature of our economy and one that we should want to support. Consolidation can happen also on a smaller scale too. And we heard from Katlin Kotlai, which I've been talking about a lot now, but she's the one who owns Countrystyle Hungarian Restaurant. And she did find a buyer for her restaurant and the buyers already own two restaurants. And she's happy that experienced people are taking over the business, but it does mean that the Hungarian place closes. Very sad. Very sad.

But I didn't find any Hungarian person to buy it. They could make good business here, but nobody show up. Now I can't wait anymore. I have to retire. So there's a bit of sadness in her voice there. What do you make of her situation, Chris? You know, it's too bad that she couldn't find somebody to take on the tradition of that business because her restaurant had been such a place for its community. I think it's great, though, in the sense that she was able to find somebody, find a buyer, find a local buyer who might have, you know, might be running a different kind of restaurant.

But hopefully, you know, maybe it will also last decades and be part of a changing neighborhood. like really large businesses, businesses with dozens or hundreds of locations, particularly when we're talking about private equity funds that may be based in other countries. And they may not to paint with too broad a brush, but I think a lot of times they may not have the same respect for the traditions that the business owners want to leave behind. There are solutions to consolidation and there's something that's called employee ownership trusts. The kind of idea is for a small business owner, if they don't find someone, like one particular person who wants to take over the business, then they can sell it to their employees. And so, you know, I've talked to small business owners who are very excited by this possibility because they feel that that may be an option that

allows the business and its kind of traditions and legacy to be intact. There are some small business owners who have some concerns with exactly how the details of the current proposal, principally because there's not really a lot of advantages for the small business owners that want to sell, particularly when it comes to like capital gains. And the problem there is that when we looked at other jurisdictions, like in Britain, which has had this option before, they had employee ownership trusts for a number of years, and people weren't really making use of them until they had provided some incentives to the business owners, such as capital gains exemption. Because at the end of the day, a lot of times employees will not have as much money as a private equity fund. And so a small business owner who wants to sell their employees is not going to be making as much money

as they could from other options. So that's why it's sort of, in a lot of cases, up to the government to help the business owner at least get some kind of advantage out of it. So it sounds like it's

a little bit complicated here, but the idea is that a company kind of sets up a trust that it has hold shares for its employees. So essentially, the employees own the business. Is that kind of the idea here? Yes, exactly.

So there was this poll from RBC from 2021. And I know we have to take polls with a grain of salt. But this poll found that 55% of Canadians aspire to own their own business, which is a four-year high. So that motivation seems to be there, that people want to own a business. But there's also this tension with this fear of failure in Canada. Can you talk a bit about that, Chris? Yeah, it's kind of, you know, again, this maybe gets to, you know, one of the things with surveys when you're talking about, like, how people are thinking and feeling. And I think, yes, particularly during the pandemic, there were a lot of polls that showed a lot of people were interested in entrepreneurship and starting their own small businesses. But there's also other polling that kind of indicates that Canadians are like very at the same time hesitant about starting small businesses. the OECD, that showed that Canadian entrepreneurs, while sort of having good marks in some areas, expressed the most fear of failure of like any other country.

What's going on there? I don't know. It's one of those uniquely Canadian things. You know, I think it's very hard to start a small business in Canada, particularly if you have dreams of scaling it and becoming a bigger business. There's no real one cause for why it's hard to run a small business in Canada. But people I talk to point to regulation depending on the industry you're in. There can be a lot of red tape. The way that Canada is sort of spread out, its population is incredibly spread out, can make there be a lot of barriers to growth as well. And there's the fact, as we talked about with consolidation,

you know, there's a lot of industries where you have this oligopoly where there's just a few big players. And it's really hard to be, you know, a small fish when you got those big sharks swimming around. Yeah. Okay, Chris. So after all that you've laid out, how are entrepreneurs feeling about the future of Canada's small business sector? I think that a lot are worried about what's going to happen with this big demographic wave that we're seeing. And so I think, you know, the next decade is going to be a really interesting time and we'll, you know, really set the course for what Canada's future small business community looks like. Chris, thanks so much for being here today. Thanks so much for having me. That's it for today. I'm Cheryl Sutherland. Nagin Nia is

our summer producer. Jay Colburn produced this episode. Our producers are Madeline White and Rachel Levy-McLaughlin. David Crosby edits the show. Adrienne Chung is our senior producer, and Angela Pachenza is our executive editor. Thanks so much for listening.