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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
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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 Centre Kingston University UK Tel: 00-44-20885477354 r.blackburn@kingston.ac.uk http://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 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
Exits: what happens to the business? (n=379) Source: SBRC (2001)
Exits: what happens to the owners? (n=367) Source: SBRC (2001)
Barclays/BMRB research: closure does not mean failure Percent HSBC • 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 European Commission Best Report (2002) p47
Types of Business Transfer 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.