A tidal wave of business exits is coming, with $300 billion in revenue up for grabs: BDC report

The Business Development Bank of Canada said nearly one in five small- and medium-sized business owners plan to exit within the next five years. Photo by Business Development Bank of Canada

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You might call it the Great Wealth Transfer, Inc. An incoming wave of retirement is creating a “once-in-a-generation opportunity” for Canadian business owners to scale up their companies and grow profits faster through acquisitions, according to a new report.

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The Business Development Bank of Canada (BDC) said Wednesday that nearly 61 per cent of small- and medium-sized business owners are aged 50 or older, and nearly one in five plan to exit within the next five years.

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That demographic shift represents more than $300 billion in revenue up for grabs across a range of sectors including IT, telecom, retail, manufacturing, wholesale trade, education and health, said Pierre Cléroux, BDC’s chief economist and vice-president, research.

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“The vast majority (of companies in Canada) are very small, below 100 employees. And small- and mid-sized firms generate 50 per cent of the GDP, so they are very important for the Canadian economy,” he said.

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The fact that smaller businesses are “generally less productive and more vulnerable to economic shocks” could also help explain some of Canada’s productivity challenges, the report said.

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“What makes a business increase their productivity is investing in technology, having better processes and reducing costs. You need to be a certain size to be able to do that,” said Cléroux.

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The report draws from Statistics Canada data that tracked the financial performance of companies that made at least one acquisition between 2010 and 2022 against firms that did not.

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BDC’s analysis found that businesses in the wholesale trade, manufacturing, retail trade and education and health industries reported higher revenues five years after an acquisition compared to their non-acquiring counterparts.

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Cléroux said some businesses grow organically, but companies that merge or acquire others benefit from economies of scale.

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“You can reduce your overhead costs because you can have one finance department or one HR department,” said Cléroux. “Another benefit is that you’re in a better position to negotiate with your suppliers. So, you get a better price because you are bigger. You can develop new markets that you couldn’t before.”

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The report noted that smaller private deals aren’t as complex, expensive or risky as those between larger public corporations, but acquisitions do come with growing pains. Buying another company requires significant financial investment, and the integration process can disrupt operations for months.

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“Although acquirers’ profit position dips the year of the acquisition, it starts recovering gradually the following year,” the report said.

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Cléroux said most businesses change ownership by selling to outside investors, followed by management buy-outs or family succession.

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Canada’s growing population of seniors — the youngest of the baby boomer generation are in their early 60s — means there will be much more business up for sale than in the past, Cléroux said. However, there is a limited “window of opportunity” for an acquiring company to make moves before owners either sell to someone else or close.

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Canada is home to roughly 100,000 entrepreneurs over the age of 65, Cléroux said, and many have already started to retire.

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“We are right in the middle of this wave, which is going to last for another five years. After that, the baby boomers will be retired,” he said. “There will always be business transitions, but nothing compared to what we have now.”

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