A boom in business startups*

A huge number of new businesses will be started in the next five years, providing great growth opportunities for CAs

*This is an expanded version of a summary that first appeared in the September 2004 issue of CAmagazine.

Have you recently decided to take the leap and open your very own business? You're not alone. According to a recent report released by CIBC Small Business, 100,000 startups will be created over the next five years. In the past two years alone, 25,000 small businesses began operations, with Alberta and British Columbia leading the way. This is an impressive performance, considering it occurred along with robust labour market activity.

The report, Start Me Up: A Look at New Entrepreneurs in Canada, shows the fastest-growing segment of the startup market is the 55-and-over age group. As for types of businesses, science and health-related fields head the list, along with financial services, sales and service. This will provide a huge growth opportunity for CAs, both as business owners and as advisers to small businesses.

Boomer businesses are booming
New entrepreneurs are both more educated and older than in the past. Almost one in four of those who have started a business in the past two years have a university degree, double the rate seen in 1990. At the same time, the share of startups with less than high school education fell from 38% in 1990 to 21% in 2003.

The fastest-growing segment of the startup market is the 55-and-over age group, which now accounts for 15% of total startups, compared to 11% in 1990. This reflects not only an aging Canadian society, but an increased tendency toward early retirement. With computers and the Internet, it's now easier for older Canadians to provide consulting services from home. They can also make use of their well-developed skills and wide business network.

NEWLY SELF-EMPLOYED ARE OLDER AND MORE EDUCATED

More people are choosing self-employment
Since the startup boom arose in the midst of a strong labour market, it would seem many new entrepreneurs chose self-employment rather than being forced to open a business because of bleak employment prospects. In fact, only 20% of those who started their own business in the past two years were motivated by harsh employment conditions. With more business owners starting operations by choice, their likelihood of survival may increase. This means that the entrepreneur's initial need for a CA as the business is established may grow into a long-term relationship.

Jumping in with both feet
Almost half (48%) of those who started a business in the past two years are the main breadwinners, while close to 8% opened their business as a secondary source of income. At the same time, one in four people who started operations did so on a part-time basis – a much higher rate than that seen for regular employees. One in five of the newly self-employed chose to work part-time due to family reasons such as childcare, while 45% mentioned other lifestyle-related reasons.

STARTING A BUSINESS: CHOICE VS NECESSITY
% of startups created due to economic hardship

Women in business for the long haul
Startup activity is still dominated by men, who accounted for just under 60% of total startups in 2003. The share of startups run by women fell from 48% in 1990 to 43% in 2003. But there's more to the story. Among established businesses (non-startups), the percentage of female entrepreneurs rose from 27% to 33%. This suggests that when women decide to start a business, their survival rates are higher on average.

Activity strongest in West
British Columbia is leading the way in startups – particularly in sales and services, where the number of newly formed small businesses rose by almost 8% over the past two years. Alberta is close behind, with a concentration of startups in business services. This strong performance in Western Canada is consistent with the region's overall economy, which has performed quite well. Startups in Ontario are growing at a rate consistent with the national average. In Quebec, there has been no growth in startups, which could reflect the development over the past few years of a strong demand for regular employees in the province. This may have deflated entrepreneurial aspirations.

GROWTH IN START-UPS BY REGION

Science and health fields are the biggest draw
The fastest-growing segment of the newly self-employed is in natural and applied science-related fields, where the number of new entrepreneurs has risen by almost 12% over the past two years. The recent focus on health care is also generating both regular employment (total employment in the sector rose by a strong 175,000 in the past two years) and startups, which are up 10% over the same period. The aging population might also have a part to play in the rapid startup growth in health care.

Outsourcing by corporate Canada is likely fueling the growth in startups in business and financial services, where the number of startups rose by more than 8.5% in the past two years. (This is more than double the national average.) Many new entrepreneurs are also heading for sales and services – not surprising, given the strong consumer spending witnessed over the past two years, as well as the growing demand for spas, catering and other personal services being driven by the aging baby boomers.

What does this mean for CAs?
Tremendous growth opportunities are in store for CAs over the coming decade, as demographic and technological forces converge to speed up the pace of business startups. The nature of small business is also changing, with business models becoming increasingly complex. More than ever, young companies find themselves without the necessary infrastructure, either in human resources or technology, to manage their accounting and financial functions.

As these newly formed businesses grow and mature, some may find that the use of professional accounting services  can boost the confidence of both customers and potential investors. And as the older entrepreneurs wind down their businesses, they will also need the assistance of CAs.

Not only will existing CA firms find increased demand for their services, but more and more CAs will begin operations. This process is already evident with the number of small businesses in accounting and other financial services rising by more than 80% over the past decade. That is three times faster that the average pace of growth witnessed in all other professions. This trend could accelerate in the next five to 10 years.

The growth in demand for accounting services will not come without challenges. Due to globalization, increased connectivity and the emergence of the "virtual enterprise," it will become increasingly difficult to identify what exactly is a small business. The CA profession will have to adjust its current practices to meet this new reality.