Smaller businesses most confident in years
Study says acquisition plans up 79% in a year
Small to medium- sized enterprises ( SMEs) in Canada are showing a renewed confidence in their future prospects, according to the Business Development of Canada’s ( BDC) newly released study, Investment Intentions of Canadian Entrepreneurs: An Outlook for 2018.
The cross- Canada report reveals that business optimism is at its highest point of the past three years. Overall, the upswing is attributable to business acquisition and growth plans, with SMEs planning to make $140.5 billion in investments this year — a three- per- cent increase over 2017.
“This is a strong indication we are going to have a good year for the Canadian economy in 2018,” says Pierre Cléroux, vicepresident research and chief economist at BDC. “What is particularly surprising is that the biggest increase is in business acquisition plans. We have not seen that before.”
According to the study, acquisition plans have increased by 79 per cent over the past year ($ 18.9 billion, up from $ 10.6 billion in 2017). “That’s a huge difference on where SMEs are going to focus their investment,” Cléroux says. “But this is not unique to Canada. It is happening globally. In Germany for example, there are 500,000 businesses for sale.”
The acquisition f ocus is attributable to the fact there are a growing number of entrepreneurs reaching retirement age and ready to sell t heir businesses, Cléroux says. “Many probably waited to sell because the economy wasn’t strong. Now if you’re 60 or 65 and thinking of retiring, it’s a pretty good time to do it, and a great time for young entrepreneurs to make a move and expand.”
Other highlights of the study include: ❚ Sustaining growth was the top- cited reason for investing in 2018, followed by boosting the value of the business and keeping pace with the competition. ❚ Technology and services businesses showed the highest growth in investment intentions at eight and seven per cent respectively, while manufacturing is flat, and construction and resources industries are expected to decline. ❚ The brightest investment outlooks are in British Columbia and the territories (17 per cent), Alberta (12 per cent) and Quebec ( 11 per cent). ❚ Ontario businesses expect to trim investments by one per cent in 2018 and other regions anticipate steeper drops.
Another trend of note is that investment is increasingly focused on intangible assets versus equipment and buildings. The study indicates that spending on R& D and employee training will rise by $2.4 billion this year, reflecting a long- term shift in the way Canadian businesses invest. “This is a phenomenon that has gained ground over the last four years,” Cléroux, says. “It will be interesting to watch as there will be more and more need for financing based on intangible assets. Financial institutions will have to adjust to this new reality.”
In looking at obstacles to growth, shortage of skilled workers topped the list in most provinces, with chronic labour shortages especially pronounced in rural Quebec and Nova Scotia. “In exploring further, we found in some cases, they could not find anybody,” Cléroux says. “In others it was working with what they can find. Businesses are spending more money now on hiring people that may not be the right fit, and helping them to gain the right experience and skills. That’s another trend we have not seen in the past.”
In terms of variables that may influence business investment decisions in 2018, Cléroux cites interest rates, NAFTA and labour. “Interest rates are going to increase in Canada and the U. S. The Canadian economy is running at full capacity, and unemployment at 5.7 per cent, which is very low. We expect to see ( rate) increases that will have an impact on businesses and consumers.”
NAFTA negotiations continue to create uncertainty for businesses, he adds. “I have not met a single business owner that knows what their tariff would be if NAFTA does not go through. They are not well prepared about an end to NAFTA. Even if there is no Free Trade Agreement, however, I don’t believe it will have a major impact.”
On the labour front, Cléroux believes enterprises have underestimated the drastic changes taking place. “The labour force is not increasing anymore and will not for the next few years. It will get much more difficult to hire people. Baby Boomers will be gone, and millennials are taking over with different expectations.”
With the massive retirement numbers, businesses will need more people from the outside, he adds. “Eighty per cent of growth in the labour force will come from outside of Canada over the next decade. Businesses will have to be more openminded and think differently about how they manage human resources in the future.”
BDC’s third annual study of SME investment intentions is based on a survey conducted last August and September by the research firm SOM with 4,019 business owners.
BUSINESSES ARE SPENDING MORE MONEY NOW ON HIRING PEOPLE THAT MAY NOT BE THE RIGHT FIT, AND HELPING THEM TO GAIN THE RIGHT EXPERIENCE AND SKILLS. THAT’S ANOTHER TREND WE HAVE NOT SEEN IN THE PAST. — PIERRE CLÉROUX OF BUSINESS DEVELOPMENT OF CANADA