Canada’s SMBs bullish on growth, betting big on AI

Nine in 10 Canadian small- and medium-sized business (SMBs) leaders are feeling confident in their company’s growth prospects and see investments in generative artificial intelligence (AI) as the key to achieving their objectives over the next three years, finds a new KPMG in Canada survey.

The 2024 KPMG Private Enterprise™ Business Survey of 735 companies reveals 92 per cent are confident in their ability to meet their expansion targets, up from 88 per cent in 2023 and 83 per cent in 2022, and notably higher than KPMG’s 2024 CEO Outlook report (76 per cent). Having navigated a prolonged economic downturn by embracing digital transformation, today nine in 10 leaders say they now feel more resilient and better able to anticipate and manage economic turbulence, and 88 per cent feel their business is in a stronger position than a year ago.

Canada’s SMB leaders say understanding and implementing generative AI and upskilling their workforce are their most important operational strategies to deliver on their three-year growth objectives. More than eight in 10 say they are stepping up automation and AI adoption to improve efficiencies and make their operations and people more productive.

“After a period of severe disruption, Canada’s SMB leaders have learned valuable lessons in resiliency and agility, making them more confident in their ability to steer through uncertainty and shield their business from future risks,” says Mary Jo Fedy, National Lead Partner, KPMG Private Enterprise, and Chief Financial Officer at KPMG. “Four years ago, many firms were just starting to adopt a digital mindset, and today they see generative AI as the most important strategy to deliver on growth. Given Canada’s historic underinvestment in tech and growing productivity challenge, it is encouraging to see that business leaders are committed to investing in gen AI.”

Key survey findings :

• 92 per cent are confident in their company’s growth prospects over the next three years
• 90 per cent feel they are more resilient, agile, and better able to anticipate and manage economic turbulence due to lessons learned over the last five years (38 per cent agree strongly)
• 86 per cent are ramping up automation and adopting new technologies like traditional and generative AI to improve efficiencies and address labour market shifts

• 88 per cent are making major expenditures to boost productivity (e.g., equipment, machinery, technology, new facilities, and upskilling employees)
• 86 per cent also feel under more pressure to ensure the long-term prosperity of their business (39 per cent agree strongly)
• 65 per cent expect revenue growth of 2.5 per cent or more annually, compared with 60 per cent of CEOs in corporate Canada

Wanted: Investors with a long-term view

With nearly nine in 10 SMBs looking at major expenditures to make their operations and people more efficient and productive, eight in 10 leaders (80 per cent) say they would like to partner with a long-term investor that can help them identify the skills and competencies needed to turn their business into a bigger one. More than a third strongly believe that this is needed to deliver on their growth strategies.

“SMB leaders are seeking partners to provide sustainable funding and sound advice on ways to expand their business,” says Johanna Gerrie, Partner, National M&A Tax Leader. “With an increased focus on technology, they are looking for investors with patient capital who are willing to invest in their business for 10 years or longer.”

While SMB leaders are less focused on M&A growth strategies than CEOs of large corporations, some are feeling acquisitive as the market rebounds, with about one third (34 per cent) considering a significant acquisition over the next three years. With 61 per cent of SMB leaders saying they plan to retire over the next decade, transition planning and decisions about whether or not to sell the business are increasingly attracting the interest of private capital.

New technology poses risks as well as opportunities

While Canadian SMBs are bullish on their prospects, they identified cybersecurity risks as the biggest threat to delivering on their growth objectives, consistent with last year’s findings. The risks associated with disruptive technologies ranked second, followed by energy security and affordability, operational issues and environmental and climate change impacts.

These business leaders are concerned about the rise in protectionist attitudes and global trade tensions, increasing the risk of economic decoupling and more tariffs. They are also concerned about the challenge of attracting the right talent to implement their digital and gen AI strategies, the need to contain inflationary costs and attract investors, and the current tax and regulatory environment.

Strategies for growth

_{Source: KPMG Private Enterprise Business Survey}

Tax policies having a chilling effect

Nearly nine in 10 (88 per cent) respondents feel new tax measures, such as the capital gains rate hike, are having a chilling effect on the Canadian businesses community and risk stifling economic growth. Almost a third (32 per cent) say they are strongly considering moving their investments or business to a jurisdiction with more favourable tax conditions, including the U.S.

“Our survey revealed an undercurrent of frustration over the impact of new taxes on Canadian business owners and entrepreneurs, who want to see Canadian tax policy become more competitive, relative to our major trading partners,” says Dino Infanti, National Private Enterprise Tax Leader, KPMG in Canada. “As calls for broad tax reform continue, many business leaders feel that the current tax system is deepening Canada’s productivity problem and increasing the risk of wealth and jobs leaving the country.”

Tax considerations may also be a factor when companies assess their plans to expand domestically or outside Canada. A further 82 per cent of SMBs say they are expanding or pursuing acquisitions outside of Canada. “As companies pursue new markets, it’s important to understand the cross-border and international tax rules to stay compliant,” Infanti adds.

Additional findings

• 88 per cent are looking for ways to improve margins (e.g., discount brands, higher volumes, passing on costs to customers, revenue optimization, etc.)
• 80 per cent say they want to partner with a long-term investor that will help them identify the skills and competencies that they need to turn their business into a bigger one
• 34 per cent feel strongly that Canada’s current tax system penalizes success and is increasing the risk that wealth and jobs leave the country.

About the KPMG Private Enterprise™ Business Survey

KPMG in Canada surveyed 735 business owners or executive level C-suite decision makers at small- and medium-sized Canadian companies between August 13 and Sept. 4, 2024, using Sago's premier business research panel. Thirty-seven per cent helm companies with more than C$500 million and less than C$1 billion in annual revenue, a quarter have more than C$300 million and less than $500 million in annual revenue, 26 per cent have between C$100 million and C$300 million in annual revenue, and 13 per cent have between C$10 million and C$50 million in annual revenue.