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Family business in Canada: looking towards tomorrow

Terri Hegum-Allen is national executive director of the Canadian Association of Family Enterprise.

The Canadian population is made up of a large proportion of baby boomers, and consequently a high percentage of first-generation family businesses. The key challenge for these companies, therefore, is succession. Are they ready? Terri Hegum-Allen reports

Thirteen Canadian companies made the list of the world's 500 largest companies in 2004. Three of the top four Canadian companies – George Weston, the Toronto-based food giant; Bombardier, a Montreal-based manufacturer of aircraft and trains; and Magna International, a global supplier of automotive systems – are family-controlled businesses.
 
The US accounted for 189 of the 500 largest companies generating 39% of total revenue. Japan, France, the UK and Germany rounded out the top five countries. Meanwhile, China took over sixth spot from Canada increasing from 11 to 15 companies in 2003.

In both value and employment terms, family businesses in Canada drive a large proportion of the economy. Family firms employed 4.7m full-time and 1.3m part-time workers generating sales of $1.3trn, according to a 1999 study by Deloitte Touche.
 
The big challenges facing Canadian family businesses are not new. International competition is a key concern. China, whose economy is now about the size of Italy's, is experiencing  economic growth of 7-10% a year. Will a cheap labour force affect the viability of the manufacturing industry in Canada and its place in the world economy? No doubt Canadian businesses will have to increase productivity and invest in new capital assets and technology. We have long dealt with an economic superpower to the south whose economy is more than ten times the size of our own. We know about competition and we embrace free trade.
 
To understand Canada's family business environment it is essential to understand the country's economic history. Canada is a young country formed in 1867. At the time its main trading partner was the UK. Canada enjoyed special privileges as a member of the Commonwealth until the first world war. But in the past 80 years Canada's economy became increasingly and deeply integrated with the US market.

Canada's original economy was based solely on natural resources, the cod fisheries of the Grand Banks, lumber, the fur trade, coal and metal mining and later oil and natural gas. Opening up the prairies for wheat farming from the mid-1800s helped finance Canada's transcontinental railways.

Today the US remains Canada's largest and most important trading partner, and therefore a major source of capital. By the 1920s the US market accounted for more than two-thirds of Canadian imports and exports. Currently over 80% of Canadian exports are destined for the US, while some 70% of imports originate south of the border, according to Statistics Canada.

Canada-US trade has grown not just in terms of volume but in value too. In the mid-1970s 25% of Canada's GDP was exported to the US. Today it is more than 44%. There are few if any countries with such close economic ties. It's both a blessing and a curse to be next door to such an economic giant. Former prime minister Pierre Trudeau likened it to a mouse sleeping with an elephant.

Free trade is an important facet of the Canadian economy and shrewd business families have long supported open markets in order to stimulate growth in the domestic manufacturing sector as well trade in the wider US market. The geographic spread of the country is such that the natural trade routes are north-south rather than east-west.

In geographic terms Canada is a large country. The majority of its 31m inhabitants live close to the US border. Indeed, over 55% of GDP is generated in a narrow strip of land adjacent to the US, stretching from Hamilton on the west side of Lake Ontario to Montreal on the St Laurence river.

Four major urban regions continue to emerge, and they account for a large and growing proportion of the nation's population. These regions are southern Ontario, Montreal and the adjacent region; British Columbia's Lower Mainland and southern Vancouver Island; and the Calgary-Edmonton corridor.

In 2001 15.3m people lived in these four regions and accounted for half of Canada's population, compared with 49% in 1996 and 41% in 1971. The reason for this is simple. The climate is best; the significant population and industry was already in these regions and in the Calgary-Edmonton corridor much of the growth has been powered by the oil and gas industry.

Demographics play a prominent role in understanding Canada's economy. Canada is unique in that its population contains a large proportion of baby boomers born between 1947 and 1966. There is a similar phenomenon in the US, Australia and New Zealand, although not as pronounced.

Consequently, Canada has a large percentage of first-generation family businesses – not simply because statistics indicate that only 30% make it to the second generation but because most are developing in tandem with a relatively young economy and relatively small but growing population.

Canada stepped into the 21st century six times as large as it was at the dawn of the 1900s when it had a population of 5.4m. Indeed, one would be hard pressed to find a building more than 50 years old throughout western Canada.

Another remarkable feature of Canada's population is cultural diversity, which can be largely attributed to the vast number of immigrants who settled in the country over the past 50 years. While the source of immigrants over the past 30 years has resulted in 10% of Canada's population speaking in a mother tongue other than English or French – Canada's two official languages – newcomers often bring their entrepreneurial spirit and start up family businesses.

In revenue terms the majority of Canada's family businesses are small and many are in their first generation.  The key challenge facing Canada's family buinesses – few of which are planning accordingly – is succession, according to Deloitte Touche. While more than 75% of family business leaders were planning to retire within 15 years, two-thirds had yet to establish a process to select a successor, noted the company in its 1999 study.

This is alarming because a good succession plan takes time. A lot of retooling is required in order to move from entrepreneur to sibling partnership. Whether you groom a family member or a non-family executive, a new leadership team requires training and time to learn the business. A fire sale of the business due to lack of planning can severely reduce the family assets that are almost exclusively tied up in the business if there has not been adequate planning.

The Canadian Association of Family Enterprise awards family businesses for excellence in planning. This year CAFE's Family Enterprise of the Year is Samuel Son & Co, a fifth generation family business involved in steel and plastics processing and distribution. The 150-year old company's story follows the pattern of business development in Canada from raw material exporters to value-added distributors. The Samuel family has put in place all the recommended governance practices for family business. They have an active family council and advisory board. It was evident from a review of their succession process for the fifth generation that the fourth generation started planning and communicating early, at least 10 years in advance.

As the Canadian family business owners pass their wealth to their children the challenge will be to help them to balance their time and energy with the increasing choices open to them. Some countries have a scarcity of resources and an abundance of time. In this land of abundant natural resources, Canadians have so many choices and not enough time to explore all the opportunities open to us.

"Canadian businesses based on light manufactured goods will have no advantages. They will have to compete in the global market because the days of the weak Canadian dollar are over," says Lloyd Atkinson, former chief economist of the Bank of Montreal. "Those dependent on technology and brains, they have opportunity. If Canadian business families use the stuff between their ears the opportunities are excellent."

The reduction in the cost of capital investment due to the strengthening Canadian dollar has great potential. Successful Canadian family businesses will look beyond their borders and see a panorama of excellent choices in the global economy.

For Canadian family business, how do you position yourself in today's global economy? The limit is your own mind! If you can dream it and plan for it you can do it.  

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