1. Business Succession and Exit Planning: Issues and Challenges Professor Robert Blackburn Presentation to the 4 th Craft and SME Summit Meet the Lisbon Agenda: Simplification and Business Succession 22 nd -23 rd April Portoroz, Slovenia Small Business Research Centre Kingston University UK Tel: 00-44-20885477354 r.blackburn@kingston.ac.uk http://business.kingston.ac.uk/sbrc

2. 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

3. 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

4. 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

5. 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)

6. 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

7. Potential Business Transfers: Annual estimates CountryNo 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 Belgium3,637 Denmark10,0003-4%34,0002.5% Germany71,000900,000 Greece Spain150,000 France43,160162,0001.16% Italy66,0004%220,000 Luxembour g 5003,0001.5% Netherland s 20,0003% Austria5,6002.8%45,0002% Portugal Finland8,9004% European Commission Best Report (2002) p46. Yearly transfers are averages for a five or 10 year period.

8. 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

9. Exits: what happens to the business? (n=379) Source: SBRC (2001)

10. What happened to the business?

11. Exits: what happens to the owners? (n=367) Source: SBRC (2001)

12. Fate of the Business Owner

13. Barclays/BMRB research: closure does not mean failure PercentHSBC  Sold to another individual23 } 34  Sold to another business 6  Passed to family member 3 3  Business failed 5 4  Closed voluntarily4837+14  Changes in legislation (IR45) 2 } 17  Business still operating 5  Illness 3 2?  Retirement 1 9  Other 5

14. 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 2 nd and 3 rd 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

15. Reasons for Business Transfers CountryAgeIllness, accident or deathPersonal Reasons Belgium Denmark Germany42%32% Greece Spain France58% Italy Luxembourg Netherlands54%26%20% Austria45%31%24% Portugal Finland European Commission Best Report (2002) p47

16. Types of Business Transfer Transfer within family Transfer to employees Transfer to third parties No successor / closure Belgium Denmark25%10%40%25% Germany42%13%15%13% Greece Spain France14%34% Italy68% Luxembourg Netherlands27%15%>50% Austria41% Portugal Finland29%4%16%51% European Commission Best Report (2002) p8

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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.