Business Succession and Exit Planning: Issues and Challenges

1. 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

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 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 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

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 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

15. Reasons for Business Transfers European Commission Best Report (2002) p47

16. Types of Business Transfer 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.