Canada / Analyst Insights
Canadian Industries Driven by Small Businesses

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by Ediz Ozelkan Analyst
May 30 2018

With data becoming more ubiquitous and accessible, business-valuation models are becoming more complex. Small business valuation is an increasingly difficult area of examination; information is not as readily available for small operators as it is for larger multinationals and publicly traded companies. However, these small businesses form the backbone of the Canadian economy, and measuring their successes and failures is crucial, even if it requires special metrics. The range of data in IBISWorld’s collection provides an opportunity for creative groupings that can elicit meaningful insights for these small but significant businesses.  IBISWorld data applies a macroeconomic perspective at the industry level, while also providing the tools to discover more-granular insights through the manipulation of these figures.

small business valuation canada employees per establishment graph

Industries can be broken down in many ways, and each approach provides unique insights into how companies stack up to their industry counterparts. For example, grouping industries together by average employees per establishment can help to identify companies that operate under drastically different conditions from their competitors. IBISWorld data suggests that there are 206 Canadian industries where the average number of employees per establishment is 10 or fewer. These industries collectively account for 41.3% of total revenue covered by IBISWorld’s industry reports. Because these small-business-heavy industries cannot leverage economies of scale, their average wage costs tend to be higher than those of their larger counterparts. Additionally, low-employment industries have average profit margins above the national average. These industries dedicate 22.4% of their revenue to wage costs and have 9.8% profit margins on average, compared with 20.3% of revenue spent on wages and a 9.4% average profit margin across the Canadian economy.

Small-business driven industries cluster in a few sectors

Industries that, on average, have fewer than 10 employees per establishment exist in every 2-digit NAICS sector but are primarily clustered in Retail Trade; Professional, Scientific and Technical Services; and Wholesale Trade. These sectors are not particularly high-profit-margin areas, meaning that the performance of these sectors’ low-employment industries is driven by other factors. The most profitable of these sectors is Professional, Scientific and Technical Services, which includes many high-profit industries that have low purchase costs but require high-skill labour. Management Consulting, Tax Preparation Services, Payroll & Bookkeeping Services, Accounting Services and HR Consulting are the most profitable industries in this sector group, with an average margin of 16.9%.

small business valuation canada industries by employment table

The Professional, Scientific and Technical Services sector is built on small businesses; 25 of the sector’s 26 industries have an average of fewer than 10 employees per establishment. While these industries are more profitable on average than the Canadian economy as a whole, they also dedicate a larger share of their revenue to wage costs at 38.3%, exceeding even the sector’s average wage outlays of 37.9% of revenue. Of the 25 industries with low employment in the Professional, Scientific and Technical Services sector, IBISWorld’s overall risk score metric designates 20 of them as “low to medium-low” risk. Moreover, all of these industries are characterized by a “low to very-low” sensitivity risk level, which indicates that these industries’ external performance drivers are in a period of low risk relative to the past 10 years.

small business valuation canada infographic

The reach of small businesses in Canada

According to Statistics Canada, out of all employing establishments in Canada, 74.8% have a staff of fewer than 10 people. Moreover, since 68.6% of all establishments are considered nonemployers, the share of small businesses is likely even higher. If we assume that all nonemployers have fewer than 10 employees, the percentage of domestic establishments across the entire Canadian economy with fewer than 10 workers reaches 92.1%. Even though this is likely a slight exaggeration of the true value, the fact remains that evaluating these enterprises is crucial to understanding the domestic economy and business landscape. IBISWorld data, while emphasizing broader macroeconomic trends, can be creatively utilized to attain actionable insights into seemingly inaccessible datasets, including small-business metrics for valuation.

Edited by Kieran Newton. Designed by Emily Lidstone.