Canada’s mid-market has big plans

The health and vitality of the Canadian economy is tied directly to the tenacity and success of its small and medium-sized businesses (SMBs), which is why results from the latest KPMG Private Enterprise™ Business Survey are so promising. They show that these businesses are coming out of the past few years of inflation, high interest rates and suppressed consumer confidence with strategic determination, eager and more ready than ever to navigate the growth opportunities, and the hurdles, in their path.

Canadian SMBs going into 2025 are agile. They are optimistic. They are resilient. Resilience in particular is a recurring theme from this year’s survey, in which we heard from 735 SMB leaders, including private companies and family-owned businesses, across Canada.

An overwhelming majority (92 per cent) are confident in their company's growth prospects over the next three years, representing an uptick in their outlook from 2023 (88 per cent) and 2022 (83 per cent)—and relative to CEOs in corporate Canada at 76 per cent, according to the KPMG 2024 Canadian CEO Outlook. Notably, more than nine in 10 SMBs feel confident that their business is in a stronger position today than it was a year ago, with nearly two-thirds (65 per cent) anticipating growth of 2.5 per cent or more per year over the next three years.

92% are confident in their company's growth prospects

88% are confident their business is in a stronger position today than a year ago

65% anticipate growth of 2.5% or more per year over the next three years

At the same time, SMBs are realistic about the obstacles in front of them. They recognize that cybersecurity threats, geopolitical conflicts, talent shortages, technological disruption (e.g., AI), transition planning and new taxation policies pose risks to their ability to thrive. This is likely why 86 per cent of them say they are feeling more pressure than they did last year to ensure the long-term prosperity of their businesses.

Some of the challenges are fundamental, some are new. If SMBs can rise to them, they are poised for a period of sustained growth and prosperity that will benefit Canadians from coast to coast to coast.

After a period of economic downturn, SMBs are looking forward to renewed growth in business investment, even if the pace appears slow at first. Nevertheless, several threats are on their minds, the top three of which have carried over from last year.

As they did in 2023, cybersecurity and technology risks rank high on SMBs’ list of perceived threats. Anxiety comes from continuously evolving cyberattacks and the vulnerabilities that the swift uptake of game-changing technologies has created. And while many appreciate the momentous potential of generative AI, they’re sensitive to the ways in which these technologies can expand avenues for cyber attackers and introduce greater regulatory complexities around data privacy and protection.

Worries about energy security and affordability have also carried over from last year. This is to be expected, as SMBs continue to make good on their clean energy initiatives and environmental objectives, while also navigating Canada’s overall Net Zero transition.

Operational costs remain top-of-mind as SMBs are still contending with the ongoing impacts of high interest rates and inflation. Indeed, a quarter of survey respondents said economic uncertainty continues to demand vigilance from their teams. Concerns around global trade, tariffs and growing protectionist attitudes are also resulting in economic decoupling and stressed business relationships, keeping businesses on their toes.

In response to all of this, Canada's SMB leaders are pursuing a mix of growth strategies. Most prominent are tech-related initiatives, such as adopting and implementing generative AI and advancing their digitalization and connectivity capabilities. Elsewhere, business leaders are investing in more fundamental approaches, such as exploring external partnerships and cultivating a future-ready workforce through upskilling initiatives and hiring top talent.

Organic growth also remains part of the game plan. To support it, the majority (88 per cent) of SMB leaders are making major expenditures to boost productivity (e.g., implementing new equipment, machinery and technology; expanding facilities; and upskilling employees), and implementing strategies to improve margins.

61% of leaders are planning to retire in the next 10 years

31% strongly agree they are taking a multi-year approach to succession planning

Still, with a majority of SMB leaders getting ready to move on, only 31 percent of family business leaders strongly agree they are taking a multi-year approach to succession planning and proactively preparing the successor through leadership programs, like FamilyShift.

Even as they think ahead, compliance in the here and now remains a priority for Canada’s SMB leaders, with many keeping a close eye on trends and changes that will impact their tax, reporting and regulatory obligations. Nearly nine in 10 say new tax measures, such as the capital gains rate hike, are negatively affecting the Canadian business community and could hinder economic growth.

However, only a quarter strongly agreed they have accelerated their business transition to the next generation ahead of the new tax rules on intergenerational family business transfers that came into effect January 1, 2024, suggesting that a majority have yet to fully consider this change.

Almost a third (32 per cent), meanwhile, say they are strongly considering moving their investments or business to a jurisdiction with more favourable tax conditions, including the U.S. Fully 85 per cent believe the current tax system increases the risk of jobs—and wealth—leaving the country.

Nonetheless, nearly nine in ten (86 per cent) welcome the increase in lifetime capital gains exemption for small business owners. Furthermore, 84 per cent believe the Canadian government is providing strong support for companies transitioning to a clean economy through tax credits, and 86 per cent plan to use or are already using these clean economy investment tax credits to subsidize their climate and decarbonization costs.

Much like respondents to the KPMG 2024 Canadian CEO Outlook, SMB leaders appear to be paying ever-closer attention to cyber threats, with a majority (81 per cent) telling us that cybersecurity, in these times of digital transformation, hybrid workforces and proliferating AI, is a critical business priority and requires bold action to manage.

SMBs also express higher levels of confidence than CEOs in corporate Canada in their ability to defend their digital gates—83 per cent of SMBs say they are prepared for a cyberattack, compared to only 53 per cent of CEOs.

That 70 per cent of SMB leaders also say their business doesn’t have the skilled personnel to implement cybersecurity or monitor for attacks suggests they are reliant on outsourcing or co-sourcing—and possibly that they aren’t as familiar with the persistently growing and evolving range of threats and threat actors keeping the CEOs of larger companies with well-staffed and dedicated teams up at night.

Either way, this year’s survey underscores the central role cybersecurity plays in organizational risk management, as well as in building resilience and maintaining stakeholder trust. This role will only grow as cyber threats increase in volume and sophistication, and as technology becomes even more essential to meeting the needs of customers, employees, suppliers and society at large.

While some uncertainty remains about how to implement it in ways that will realize the full benefits, the overall sentiment from SMB leaders on generative AI is positive. Very positive.

Businesses of every size are using it to increase productivity and profitability, to unlock operational value and to save costs in key areas. It’s also proving effective in fast-tracking solutions to complex problems, enhancing customer insights to enable sustainable growth and value creation, and attracting the next generation of talent.

Eighty-six per cent of SMB leaders are in fact accelerating their use of generative AI alongside automation and other new technologies to address the labour market shift and productivity gap, while 79 per cent are considering using AI to bolster their cybersecurity.

And with M&A increasingly back on the agenda for SMB leaders, 81 per cent believe that integrating generative AI into business operations will make their business much more valuable to prospective buyers.

While Canadian SMBs have a lot on their minds, they have not lost sight of their environmental, social and governance (ESG) commitments—a majority (86 per cent) say they have fully embedded ESG into their business to create new value. But a central challenge, according to 84 per cent, is that stakeholders' ESG expectations change faster than leaders can adapt their strategies, and the same number report that they’re dealing with more stringent environmental-related requirements from lenders, causing delays and/or impacting their ability to raise funds.

Additional factors keeping ESG in the spotlight include new and evolving reporting obligations, including Canada's Fighting Forced Labour and Child Labour in Supply Chains Act, which requires many businesses to report on steps taken to mitigate forced and child labour risks in their business and supply chain.

The passing of Bill C-59 has added even more considerations. This Act holds all Canadian businesses accountable for backing up environmental and social claims to bring more accountability and governance to ESG programs and prevent businesses from "greenwashing" (i.e., making exaggerated or misleading statements about environmental or social impact). On this issue specifically, 88 per cent of SMBs told us they are reviewing their ESG communications to ensure they comply.

All told, Canada's SMBs acknowledge the value of staying true to their ESG objectives, not only because it’s the right thing to do but also to meet stakeholder expectations, avoid financial penalties, uphold their reputation, attract and retain talent, and stay ahead of regulations. And while many say it’s difficult to stay current on specific regulations and standards, they don’t see this obstacle as a reason to slow down: nearly nine in 10 SMBs (89 per cent) say they are making efforts to improve environmental data and reporting.