A new year, another appearance on the CBC News Network Weekend Business Panel; this time, alongside Dennis Mitchell, Christian Bravo, and Chris Glover, talking inflation rates, possible changes to mortgage guidelines, and business succession (of particular relevance for small business owners!). You can watch our segment here.
Some thoughts on our conversation.
The rate of inflation announced this week in the US indicates a continued decline over the past six months; what does this mean? It’s important to remember the need to step back and consider in context, as this allows trends to be identified, even if only on a preliminary basis. Although six months of inflation rate declines can be reasonably considered as a trend, it is important to recognize that the timeframe is short term in nature (less than one year), and that rates may vary slightly from month to month (real life isn’t always a straight line). Further, much of the most recent decline can be attributed to falling gas prices, so it will be important to monitor movement in this regard in the coming months.
Further, as the US is expected to reach its debt ceiling this week, it remains to be seen how Congress will address this issue in the coming months. Failure to raise the debt ceiling could result in confidence issues, which can lead to economic and financial risk. While business lives in the practical world of the direct impact of rising prices, a tight labour market, and ongoing supply chain challenges, politics can get lost in the theatre of partisanship, holdouts, and tradeoffs; stay tuned.
As interest rates continue to rise, Canada’s top banking regulator is considering tightening mortgage rules. Although it makes sense to manage risk in areas where households in situations of significant debt and mortgage amounts, a balance is needed to ensure that those who should reasonably qualify for a mortgage are able to do so. It is not helpful to create additional stress on the rental market, or to slow reasonable home sales in a manner that could also impact the construction market. Rules can sometimes have unintended consequences, so understanding the practical realities is important, prior to development and implementation.
And, finally, a recent (and familiar) report from the Canadian Federation of Independent Business indicates that 76% of owners plan to exit their businesses within 10 years. As a business advisor and author of Defusing the Family Business Time Bomb, this headline is not surprising, as reports over the last decade or more have had similar findings. A few things to think about on this topic of critical importance to business owners and Canada’s economy:
- Unless a business leader has bought and sold several companies, they tend to have little experience in the areas of succession and transition.
- These studies tend to find that only a small percentage (in the single digits) have a formal, written succession plan. While some have an “informal plan”, the majority of business owners tend to indicate that they do not have a succession plan.
- For numerous reasons, succession planning should commence years in advance of the time of transition (a minimum of three to five years) and it is critical to demonstrate a track record of “good to great” financial performance (over years, not months). Keep in mind that companies that are able to generate a strong exit value (i.e., sales price) have a track record well in excess of the norm.
- Qualified successors/acquirers with the necessary capital to undertake a transaction are limited, which makes business succession competitive. This is something that business owners tend to underestimate.
Advisors can help, and the sooner that business owners put a priority on succession planning, the better (a new year is a great time to start). Thanks for watching, and see you again soon.