Saving the family business. (Guest Columnist).

Only 30 per cent of family-owned businesses survive to the next generation.

A family-owned business is at serious risk when a son or daughter takes the chief executive officer's chair. Our experience as a merchant bank, which is supported by U.S. studies, is that 70 per cent of family businesses do not survive to the next generation. The odds are little better, just 50/50, when a business is sold to an outside buyer. In contrast, successions involving leveraged employee buyouts, supported by key managers, succeed in about 80 per cent of cases.

These numbers reveal a simple truth that financial institutions involved in financing acquisitions of private businesses have known for years: those with direct experience in the business are a firm's best bet after a transition of ownership.

Yet a recent succession study by Deloitte & Touche reveals a disturbing fact. Only one-third of mid-market family businesses have estabilshed any process to select a successor, making them vulnerable to changes in ownership and management.

The study also showed that 27 per cent of owners of family businesses with sales of at least $1 million will retire in the next five years; 56 per cent within 10 years and 78 per cent within 15 years.

The sheer number of "for sale" signs that will be springing up across Canada raises serious concerns about the future health of the family business sector.

How great are the stakes? The study reports there are currently 124,000 family-owned businesses with sales of $1 million or more in Canada. These companies employ about six million Canadians and generate as much as $1.3 trillion in gross annual sales.

Unless action is taken to support and stimulate succession planning, a likely outcome is that many. of these firms will either fall outright or fall into the hands of strategic buyers; many of whom will likely be foreign, intent on rolling them into larger organizations.

We have seen a marked increase in such acquisitions within mid-market sectors as strategic buyers employ "roll up" strategies, and the magnitude of this trend should be of concern to the federal government. Left unchecked, the result will be a general loss of jobs, fewer mid-market companies and a significantly higher incidence of foreign ownership aided and abetted by current exchange rates.

Specifically, what is needed is recognition by the federal government that tax laws should be amended to encourage leveraged employee buyouts.

Given the importance of Canada's family businesses to jobs and the economy, the Department of Finance should take a page out of the Internal Revenue Service play book and introduce similar tax incentives here. Such tax reform would provide owners and employees with highly attractive financing and investment opportunities and foster the continuance of a strong mid-market sector and all the benefits that flourishing family businesses bring to our economy.

Rod Reynolds is president and chief executive officer of RoyNat Capital Inc.