Aging entrepreneurs need transition plan

(February 1, 2005) While most financial advisors are already aware of the impending intergenerational transfer of wealth in a general sense, a new study by CIBC finds a new wrinkle in this massive shift of economic power.

Within the next five years, half a million small business owners will retire, resulting in the transfer of about $1.2 trillion by 2010, according to a report released today, entitled “Are Canadian Entrepreneurs Ready for Retirement?”

“In the next 15 years, half of Canada’s current small business owners expect to retire,” said Rob Paterson, senior vice-president, CIBC small business banking. “This figure is staggering, even though we know that there has been 7.5% growth annually in the number of firms run by individuals aged 55 to 64 since 2000.”

Even though they are rapidly approaching retirement age, many small business owners are not taking full advantage of their RRSPs — but these are the very people the program was developed for in the first place. The RRSP was originally intended as a personal pension for self-employed professionals who did not have access to a corporate plan.

Just 22% of all small business owners maximized their RRSP contribution in 2003, while 32% of those between 55 and 64 years of age did so. But only 35% of small business owners contributed to their RRSP in 2003 at all.

“By the end of 2003, the cumulative unused RRSP room for self-employed Canadians ballooned to $370 billion, or nearly $20,000 per small business owner with an RRSP,” said Paterson. “This suggests that entrepreneurs are not as ready for retirement as they can and should be.”

On the upside, small business owners are more likely to have an RRSP, with 70% taking advantage of the program compared to just 55% of salaried employees. They appear confident that the sale of their business will provide a solid financial base for their retirement, making up about 31% of their expected retirement income, while they expect RRSPs to account for 28% of their income.

But the study says only about 40% have a clear strategy for exiting their business, and 60% of those aged 55 to 64 have yet to even discuss their plans with family or business partners. About 15% want to pass the business on to their family, while 40% hope to sell it outright.

Advisors should make sure their entrepreneur clients have a business succession plan in place. If you haven’t specifically discussed it, now is the time to ask. Transition plans should be periodically reviewed as well, just in case the client’s goals or their wishes have changed.

It appears financial advisors are not immune from this planning shortfall. While they may focus on planning for others, they frequently overlook their own eventual business succession needs.

According to Advisor.ca research, about one third of Canadian advisors are already in their 60s, with other studies showing a similar demographic in the U.S. and Australia. Many have yet to lay out a plan for transitioning their business, leaving their clients at risk, according to Mark Tibergien of Moss-Adams Advisory Services in Seattle. He says too many of these aging advisors are reluctant to train the next generation of independent service providers.

“For many advisors, there’s discomfort in bringing along the associate because of a perceived threat to the advisor’s ego, income and client relationships,” Tibergien says. “At some point, if you are investing in a person, you want to see them flourish.

“The more you can grow your partners, the more you can grow your business.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com