Business Succession and Exit Planning: Issues and Challenges

Professor Robert Blackburn

Presentation to the 4th Craft and SME SummitMeet the Lisbon Agenda:

Simplification and Business Succession 22nd -23rd April Portoroz, Slovenia

Small Business Research CentreKingston University

UKTel: 00-44-20885477354

r.blackburn@kingston.ac.ukhttp://business.kingston.ac.uk/sbrc

Objectives of the presentation

Provide evidence on business succession issues: point out the scale of the ‘exit’ phenomenon

Some definitions:• Business transfer• Business exit …etc

What are the challenges to business transfer? What can be done to raise levels of successful

transfer? Business owner and support provider perspectives Conclude with some points for discussion

Why address business transfer?

Business closures do happen, but.. Already established businesses more likely to

survive than new businesses Transfer has been shown to stimulate innovation Loss of employment if closed Post-transfer businesses show better performance

(AISBR)

Conventional wisdom is that there is a ‘business transfer deficit’ in economies ie that the number of transfers could be increased

Some definitions

Business transfer: the transfer of the ownership of a business• Business transfer ‘success’• Business transfer ‘failure’

Business ‘exit’: the end of an owners participation in a business

Business ‘closure’: discontinuance of the business (could be voluntary or involuntary)• Business ‘failure’: closure due to bankruptcy etc• Business can be bought if thought viable

Challenges to understanding business transfer and succession

Study of business transfer involves a variety of sub issues: human, economic, financial and legal

No single dataset on exits and transfers• Eg different nation state definitions and issues

But, it is difficult to disagree with those famous words (adapted from Franklin):

‘In this world [of business ownership] nothing can be said to be certain, except death and taxes’

Worldwide recognition that business transfer is now a critical issue for policy makers and support providers (EU, 2004)

The scale of the potential business transfer phenomenon

EU estimates over next decade (from 2004):• 610,000 SMEs will transfer ownership• Of which, 300,000 SMEs with employees and 310,000 one-

person businesses• Involves transfer of 2.4m jobs

Business succession will be on the rise:• Ageing of business owners (in line with an ageing

population)• Increase in business formation in 1970s and 1980s: these

business owners will be in their 60s• Maturity of the businesses and product life cycle

Potential Business Transfers: Annual estimates

Country No of business transfers per year

No of business transfers per year as % of all enterprises

No of jobs involved per year

No of jobs involved per year as % of total employment

Belgium 3,637

Denmark 10,000 3-4% 34,000 2.5%

Germany 71,000 900,000

Greece

Spain 150,000

France 43,160 162,000 1.16%

Italy 66,000 4% 220,000

Luxembourg

500 3,000 1.5%

Netherlands

20,000 3%

Austria 5,600 2.8% 45,000 2%

Portugal

Finland 8,900 4%

European Commission Best Report (2002) p46. Yearly transfers are averages for a five or 10 year period.

Business closures vis a vis ‘transfers’

How do transfers relate to business closures? Estimates suggest:

• 10% of the business stock ‘close’ each year (eg in UK 400,000 closures and 400,000 new starts)

Some of these businesses are bought and re-opened

But, some transfers occur without having to close Difficult to calculate what % of ‘starts’ are transfers

Sold-On34%

Re-Opened17%

Insolvent18%

Closed-Down31%

Exits: what happens to the business? (n=379)

Source: SBRC (2001)

What happened to the business?

Status of the Business

Liquidated

Re-Opened Closed-Down

Sold-On

Family Owner/Manager Voluntary Compulsory 3d Party

Compulsory Bankruptcy

Compulsory Liquidation

Voluntary Liquidation

Creditor Arrangements

18 % 34%

31% 17%

14% 26% 6% 3% 4%

5% 9% 2% 2%

Retired9%

Sought Employment

29%

Continued as Business

Owner62%

Exits: what happens to the owners? (n=367)

Source: SBRC (2001)

Sought Employment Continued as Business Owner

In Existing Business

Continued other

existing business

Continued business in different

form

Started/ Bought

different business

Unemployed /ill

62% 9%

18%

29%

9%

33%

20% 15%

7% 3% 20%

Retired

29%

Started a business Employed Continued

paid job

Started similar business

Fate of the Business Owner

Barclays/BMRB research: closure does not mean failure

PercentHSBC

Sold to another individual 23 }34

Sold to another business 6 Passed to family member 3 3 Business failed 5 4 Closed voluntarily 48 37+14

Changes in legislation (IR45) 2 }17

Business still operating 5 Illness 3 2? Retirement 1 9

Other 5

Businesses ‘vulnerable’ to business succession

Business transfer more likely to occur amongst businesses with older owner-managers

Inter-generational transfer a modern myth?• Up to 24% transferred to family • Declining with 2nd and 3rd generations to <10%

Over time there has been a growth in outside family transfer

Some data from the UK suggests that up 100,000 businesses pa may be affected by business ‘transfer failure’ (SBS, 2004)

Clearly, vulnerability is linked to owner-manager characteristics

Reasons for Business Transfers

Country Age Illness, accident or death

Personal Reasons

Belgium

Denmark

Germany 42% 32%

Greece

Spain

France 58%

Italy

Luxembourg

Netherlands 54% 26% 20%

Austria 45% 31% 24%

Portugal

Finland

European Commission Best Report (2002) p47

Types of Business Transfer

Transfer within family

Transfer to employees

Transfer to third parties

No successor / closure

Belgium

Denmark 25% 10% 40% 25%

Germany 42% 13% 15% 13%

Greece

Spain

France 14% 34%

Italy 68%

Luxembourg

Netherlands 27% 15% >50%

Austria 41%

Portugal

Finland 29% 4% 16% 51%

European Commission Best Report (2002) p8

Why does transfer fail? Sellers’ perspectives

Lack of ‘exit’ readiness by owners• Absence of planning: done at the last minute

Psychological difficulty of ‘letting go’• Ambivalence of letting the ‘baby’ go

Succession advice involves paying fees: a deterrent?

Difficulty in the valuation of the business• How do we value eg IP and ‘goodwill’ in SMEs?• Some sectors more difficult than others

Not understanding the transfer ‘systems’• Market place, legal, financial, human dimensions

Why does transfer fail? Buyers’ perspectives

People prefer to start their own business Lack of awareness of what is for sale

• Market imperfections • Economies of scale for intermediaries

Difficulty in working out ‘the business’• Particularly in smaller firms absence of formal records• Disentangling the business from the owner-manager

Poor business performance

Supporting the Business Transfer Process

Assisting in succession planning is a long-term, complex process

Covers emotional, technical, employment, financial, legal, marketing issues…

Market segmentation• Businesses require bespoke advice

Use of tried and tested advisers, ‘succession advice’ part of an ongoing relationship• Accountants particularly important• Eg ACCA undertaken research in this area

Role of markets in bringing together buyers and sellers

Conclusions…

Business transfer is a multi-faceted activity

But should be a priority for attention by support providers and govt agencies

Of growing significance numerically

Indications that there is a deficiency in meeting the potential: a business transfer deficit

Conclusions…

Improve situation through owner-manager planning: from reactive to proactive

Support providers’ raising their ability to meet particular needs of small businesses• Human as well as conventional business issues

Also an agenda for government:• Bankruptcy laws, allowing honest failures?

Need to improve EU and nat. databases on transfers Need to fuel the markets for business buyers and sellers

Selected references

ACCA (2005) Accountancy practices and the provision of ownership succession advice, ACCA Research Report No. 85, ACCA, London.

Austrian Institute for Small Business Research (2002) Business Transfers and Successions in Austria, by P Voithofer, AISBR, Vienna.

European Commission (2002) Final Report of the Expert Group on the Transfer of SMEs, May.

SBS (2004) Passing the baton – encouraging successful business transfers, Evidence and key stakeholder opinion, DTI, London.

SBRC (2001) Opening up Business Closures, SBRC for HSBC bank, Kingston University.