Simon Fallows wants business owners to set themselves up for success today and tomorrow.

Owning a small business is big business in Canada. In 2022, 97.9% of businesses were categorized as small businesses, those with one to 99 employees. Many GVCA members fall within this category, but not every small construction or trade business operates in the same manner or with the same set of goals.

Simon Fallows, a business broker and exit planning consultant and president of Freedom for Founders, said there are three types of small business owners, each with a different mindset. He added that understanding your type is critical to ensuring you meet your personal goals and objectives, whether selling your business or setting yourself up for a successful transition to a manager or family member.

The three types of business owner

“I've come to recognize there are a number of different types of owners, and these types often come down to the mindset of how the owner treats the entity. My focus is helping owners move or transition within the context of their business, and all businesses are always in some form of transition,” Fallows said.

According to Fallows, the three types of business owners are:

• The Lifestyle Owner. They generate more revenue than they could by working for someone else as an employee. They use the business to pay personal expenses and do not reinvest capital into the business or other ventures. The business is dependent on the owner and is rarely saleable without adequate preparation.
• The Investment Owner. They have invested in people, systems, and processes. The business is not dependent on the owner to operate. They focus on profit over revenue and reinvest profits from the company into a holding company, real estate, or other ventures. They care about the return on their investment of time and capital in the business. These are saleable businesses.
• The Transactional Owner. This owner lacks focus and strategy and goes from project to project, discounting jobs to win business and gambling on making a profit.  They make the same or slightly more than they could working for someone else, but they are typically in debt and focus on life goals to get by, not business goals to work less and save for the future. They work into their 60s and 70s with no transition plan ending in liquidation. Not a saleable business. 

Lifestyle Owners get by, but miss opportunities

Fallows said Lifestyle Owners make a mistake in how they pay themselves from an income and tax perspective. Many drive personal expenses through the business to avoid paying corporate taxes instead of investing for themselves or reinvesting in the business.

“I've been a business owner for many years, and yes, it hurts when we work so hard in a business and have to pay tax on the bottom line. But what most business owners don't understand is the tax rate for any business making $500,000 or less is 12.2%. It’s one of the best benefits we have as a business owner ,” he said.

Lifestyle Owner businesses depend on the owner, so they often cannot afford to take time off for personal vacations. Fallows said there is too much of an entanglement of personal and business responsibilities.

“They're often making more than tvestment and future exit opportunities to make all that hard work pay-off. Most owners are often forced into an asset sale incurring taxes over 50% on the proceeds of a sale, so they liquidate or simply close the business”  Fallows said.

hey would in the marketplace, and they’re satisfied. But they’re missing out on current in

Investment Owners treat the business like a business

Investment Owners focus on the bottom line and see that as the priority. Fallows said these owners don't avoid paying taxes, and they don't push personal expenses through the business. This is a smaller group of owners, according to Fallows. His research showed that only 15-20% of business owners treat their businesses as investment vehicles.

“They treat it very professionally. They look at the business as an opportunity for personal net worth. It’s an investment, and they understand risk. These are the owners who are open to mergers and acquisitions, growing through joint ventures, or acquiring other businesses,” he said.

Fallows said these are the types of businesses that can successfully transition through a sale, merger, or exit.

“They understand that a share sale of their business includes a $1 million tax free capital gains exemption when they sell their business. They can move off to do the things they want, rather than being tied to the business like a lifestyle owner,” he said.

The Challenges of Being a Transactional Owner

Fallows said he has worked with owners who lose money year after year with their businesses. He said many of these owners have the capital or feel they have no other options but to treat the business as a hobby or grind through because they have obligations to pay the Rent, leased equipment and fulfill contracts, especially when deposits have been made. This creates a hamster wheel of insanity that most owners can’t seem to stop and redirect.

“They don't evaluate all the risks that they're incurring. These businesses are either just breaking even or are losing money. And these are the ones that eventually go insolvent. They're forced liquidations, and I'd say to these owners, ‘You’d better find a way to get off the ride before your health, marriage, sanity are put at risk.’ They don't like hearing that from me, but I’ve seen to many stubborn owners crash the plane and take everyone down with them,” Fallows said.

He added that there is a surprisingly large group of those types of owners.

“They should probably be working for someone else or self-employed. They have very few places to turn because they don't have the capital to spend on good advisors and advice—and most don't know how to turn their situations around,” he said.

Understanding your business owner type

Fallows works with business owners in these situations to understand their current challenges and opportunities to change their trajectory. He says it takes a triggering event for many business owners to pause and ask themselves what type of owner they are and whether their personal and business goals are aligned.

“Triggering events can be external issues like a pandemic, high interest rates, a lawsuit or bad debt. They can also be internal issues that impact an owner like a death, divorce, disease, or some other dispute or distress. Distress is a big one. Maybe they lose a key partner or key person in their organization. One or two tradespeople or technicians leave the business to go out on their own, work for the competition or trigger a union drive. Stack a few triggering events and it’s devastating for a company with ten to one hundred employees,” Fallows said.

The point is to understand your business owner type and be satisfied with the exit outcome before you are confronted with a triggering event, which is inevitable. This leaves most unsuspecting owners shocked to learn their 3-5+ million dollar business will net them less than $1 million, or nothing if it’s not transferable. 

Like people turn to the internet for medical advice, Fallows added that business owners often turn to online sources for advice and research to find a way out of their situations.

The challenge? There is a lot of information out there, but without context, business owners cannot apply it to their businesses in a way that will have any meaningful impact.

“Every single business is unique. I also want to say that every single business, from my perspective, has value. So many businesses have value they can extract customer relationships, supplier relationships, their brand, or even the lease location of their property. But many business owners don’t want to spend cash on coaching or consulting advice because exit and transition planning means facing some hard truths. Their business may be their baby, but their baby is often ugly,” he said.

How business owner types affect succession planning

Transitioning ownership to family members differs significantly from transitioning to an

unrelated third party. Owners can transition to unsuspecting family members, but 50% of the time, the business ultimately fails within the first one to two years, and 80% fails within five years. When the owner decides to sell to a third party, the buyer will complete due diligence and, 80% of the time, fail to impress the Buyer and don’t sell because Lifestyle and Transactional Owners operate them.

“Owners need educating because any form of business transition is complex. Owners in family transitions end up in personal disputes with family members and freeze, and owners selling to third parties often get taken advantage of by educated Buyers and Brokers."

“No matter what type of owner I’m trying to reach I wish more owners would be willing to engage in an exit planning conversation. If not for themselves then for their employees, extended family, customers, suppliers and the community that relay on our small and mid-sized companies to succeed for everyone’s sake.”

He added that the key to success with any business owner who wants or needs to transition their business is to start a conversation and ask for advice and help.

“I want every business owner to understand that they've got options in advance of the next triggering event. With proper planning value can be passed to the next generation or value can be extracted in the form of cash if they’d be willing to stop for a moment to consider their options before it’s too late.”