Consultation on a Community Support Programme for Entrepreneurship and Enterprise Competitiveness 2006-2010

Comments from ACCA
April 2004

Executive Summary

ACCA welcomes the Consultation Paper for a Community Support Programme for Entrepreneurship and Enterprise Competitiveness (2006-2010) to succeed the current Multiannual Programme for Enterprise and Entrepreneurship. We believe that targeted interventions from the European Commission (EC) and Member States are important to redress the inequalities which exist for small businesses, as compared with large firms.

It is essential that the new programme be integrated with the objectives identified within the European Charter for Small Enterprises and the Action Plan: The European Agenda for Entrepreneurship. A co-ordinated approach to the various initiatives at a European and Member State level is critical to the success of the programme.

W e believe that when considering activities to promote business adoption of Information Communications Technology (ICT) there needs to be a focus on the benefits that ICT investment can bring to small enterprises, along with a greater understanding of the constraints, such as cost, on small and micro businesses.

We welcome the inclusion of the action to promote corporate social responsibility (CSR) in the new programme. The EC should, however, be careful about transferring generic initiatives on to small businesses without taking into consideration the complex and diverse nature of the SME sector. It can be argued that there is currently insufficient evidence on what initiatives are suitable for small businesses, although it is hoped that the Multi-Stakeholder Forum on CSR will identify schemes which are appropriate to best engage SMEs.

ACCA welcomes the action to ¿help entrepreneurs handle risk'. We agree with the EC that it would be beneficial if EU insolvency laws could reduce the barriers for entrepreneurs starting new businesses. Many businesses can avoid insolvency by adopting rescue procedures, as long as appropriate advice and support is provided in good time. ACCA believes that professionally qualified accountants are critical to this process and that their expertise should be recognised.

ACCA recognises the importance of the issue of the transfer of small businesses and welcomes the policy to encourage and facilitate business transfers. There are a number of tax, legislative and administrative issues, such as high inheritance tax, which act as barriers to entrepreneurs thinking both about transferring ownership and their potential successors. ACCA believes that qualified accountants can have a key role in succession planning. We believe that the EC should be more proactive in promoting the provision of the expert advice services which are currently available for business owners and their potential successors.

ACCA agrees that it is important that actions be taken to ensure that businesses are in a position to grow and contribute to job creation and economic growth. We believe, however, that the suggested activities should focus on ¿lifestyle' businesses, which form the majority of small enterprises, as well as on rapidly growing enterprises, termed ¿gazelles'.

ACCA believes that a positive and practical approach to dealing with regulation is required. The EC should consider how Member States can promote the use of information technology to reduce the growing administrative burden on small businesses so that information which is stored electronically can be transferred to the relevant authorities through the Internet, thereby reducing the cost of regulation.

ACCA considers that the issue of Intellectual Property Rights (IPR) is an important action point for the EC to address. The recognition of intellectual property through registration of IPR does not only protect the property but can also be a basis for the valuation of the business. This is critical for small businesses when raising external finance and for transferring the business. ACCA believes that if small knowledge-based firms are to prosper, the EC should work with the accountancy profession to promote best practices where the value of intellectual property will be recognised.

Over half ACCA's 98,000 members work in or service SMEs (Small and Medium-sized Enterprises). We therefore have a special interest in issues which concern small businesses. Uniquely among European accountancy bodies, ACCA has an active in-house staff resource aimed directly at the SME and small practitioner communities. Because our membership is so deeply involved in small business issues, we recognise the importance of creating the right environment for SMEs to thrive. We would be happy to discuss in greater depth any of the points raised in this response.

Specific Comments

In the following paragraphs we address the individual commitments discussed in the Consultation Paper.

Action 1: Promote and foster the integration of ICT into business strategies

ACCA agrees that businesses' adoption of Information Communications Technology (ICT) is important in improving productivity and growth. We believe that, when formulating actions in this area, the EC should consider recent evidence, which suggests that there is a divide between the size of businesses and whether they have embraced ICT and the Internet. There is a clear trend of small and micro businesses ¿clicking off', with many now questioning the value of the Internet and ICT. In the UK, Business Connectivity (defined as ¿businesses that have a website, and/or have 25% or more of employees making daily use of email¿) for micro businesses has decreased from 62% in 2001, to 50% in 2002 and is down to 45% in 2003. In small businesses it has decreased from 77% in 2001, to 70% in 2002 and has fallen to 69% in 2003. In contrast, Business Connectivity for medium and large businesses has remained the same or increased in the same period. 1

One of the primary reasons for the decline in small and micro businesses use of ICT is cost. Large businesses have the advantage of cheaper connections, together with the resources to employ specialist ICT personnel. There is also an increasing focus, not on whether businesses have Internet access, as it was in the late 1990s, but on the speed and type of access. Large businesses again have the advantage here of being able to afford almost unlimited bandwidth. 2

We believe that there needs to be a focus on the benefits that ICT investment can bring to small enterprises, along with a greater understanding of the constraints on small and micro businesses. Policies should be developed to redress this imbalance.

Action 2: Promote corporate social responsibility and sustainable production

ACCA believes in principle that all businesses, in all areas of industry, need to address the issue of Corporate Social Responsibility and integrate it into their business strategies. We therefore welcome the inclusion of this action in the new programme.

ACCA believes that the EC should take steps to ensure greater involvement from the small business community with respect to spreading socially responsible business practices throughout the whole corporate sector. The best way to do this is to emphasise the business benefits which flow from adopting good employment and environmental practices. These benefits may be reflected in a variety of ways, ranging from enhanced employee morale and productivity through to greater access to the supply chain as larger firms become more selective in sourcing their supplies from socially responsible producers.

The level of effort and expense that SMEs can devote to this will, however, vary and the special circumstances of SMEs need to be respected. ACCA welcomed the fact that the EC recognised this in its Sustainability Strategy and acknowledged that SMEs have fewer resources and, hence, that the expectations to be made of them need to be handled with care and sensitivity. We believe that the EC should be careful about transferring generic initiatives on to small businesses without taking into consideration the complex and heterogeneous nature of the SME sector. Small businesses are not just smaller versions of large firms. They are differentiated not only by size, but also by sector and the motivations of their owners.

Actions which are appropriate for large companies may not necessarily be suitable for smaller enterprises. It can be argued that there is currently insufficient evidence on what initiatives are suitable for small businesses, 3 although it is hoped that the Multi-Stakeholder Forum on CSR will identify what is appropriate for SMEs and how best to engage them.

Action 5: Help entrepreneurs handle risk

It is widely reported that fear of failure and bankruptcy is a barrier to many potential entrepreneurs setting up in business. ACCA agrees that it is necessary to change the cultural attitude to business failure. It is worth noting, however, that many businesses do not fail with large amounts of financial debt and that most small firm closures are not the result of serious business failure. The main reasons for closing a small business are to allow the owner-manager to retire, to move on to another job or to sell the business. 4

ACCA agrees with the EC that it would be beneficial if EU insolvency laws could reduce the barriers for entrepreneurs starting new businesses. In the UK , the Enterprise Act 2002 has reformed insolvency laws by providing a second chance for those who have failed through no fault of their own and by helping to ensure that companies which are in financial difficulty have recourse to well-established and well-recognised business rescue procedures.

Many businesses can avoid insolvency by adopting rescue procedures, as long as appropriate advice and support is provided in good time. ACCA believes that professionally qualified accountants are critical to this process and that their expertise should be recognised. Businesses can be made aware of certain warning signs and the steps which should be taken to address the problems and their underlying causes. As the Commission noted in its 2003 report ¿Restructuring, Bankruptcy and a fresh start¿, ACCA has produced guidance in the UK for SMEs and their financial advisers on how to ¿stay afloat' and believes that guidance material of this nature on a European level would be helpful. In this regard, we note that the Federation des Experts Comptables Europeens (FEE) is in the process of producing such guidelines.

ACCA recognises the importance of the issue of the transfer of small businesses and welcomes the policy to encourage and facilitate business transfers. Independent research reveals that, in the UK , over one-third of SME owners are vulnerable to age-related succession failure and that this proportion has increased substantially in recent years. 5 Handing over the running of a business can be extremely complex and stressful for the owner. Reluctance to let go of the reins can often mean that the transfer of know-how and skills is left until the last minute and is, therefore, rushed. ACCA believes that owner-managers need to start considering succession planning at an early stage. It can take several years to develop an effective 'exit strategy' for a successful business sale or transfer. ¿Success' in this instance would be defined as being where the owner-manager profits fully from the sale of the firm and the handed-over business goes on to survive and prosper.

It is difficult to implement a successful plan if the business is overly dependent on the owners' managerial and knowledge input. Good communication is essential. ACCA believes that moves to professionalise management structures - with an emphasis on knowledge transfer - should be encouraged by the EC. This process should lead to the emergence of a natural internal or family successor in a systematic manner, lessening the emotional impact for the owner when the time comes to leave the business.

There are a number of tax, legislative and administrative issues, such as high inheritance tax (a particular issue in Europe ), which act as barriers to people thinking both about transferring ownership and their potential successors. ACCA believes that qualified accountants can have a key role in succession planning. They have established relationships with their clients and can provide objective and expert advice on a range of different succession situations, specifically relating to each business's individual circumstances. ACCA believes that the EC should be more proactive in promoting the provision of the expert advice services which are currently available for business owners and their potential successors.

Action 6: Gear enterprises for growth and competitiveness

ACCA agrees that it is important that actions be taken to ensure that businesses are in a position to grow and contribute to job creation and economic growth. We believe, however, that more attention should be given to so-called 'lifestyle' businesses. Lifestyle businesses form the majority of firms, provide a large proportion of employment in Member States and make a significant contribution to the European economy. A lifestyle business is one which essentially represents an extension of the proprietor's private and personal life.

It is important to recognise that the creation of employment is not necessarily the main aim of owner-managers. Employment creation may occur, but often as a by-product of the owner-manager pursuing his or her personal and business goals. 6

Research indicates that owner-managers of 'lifestyle' businesses often perceive some 'ideal size' for their enterprises. Although some may wish to grow, this growth can be limited by concerns about maintaining control of day-to-day operations and increases in costs from expansion of the enterprise. For example, owner-managers may wish to avoid delegating to others managerial or oversight (especially financial) responsibilities. 7

While a small proportion of firms grow rapidly and are successful in creating new employment, ¿lifestyle' businesses massively outnumber them. We recommend that the EC recognise this problematic aspect of growth associated with lifestyle enterprises. We believe that the EC should attempt to achieve the right climate to allow all businesses to prosper by, for example, reducing the burden of regulation on small firms. The activities should focus on ¿lifestyle' businesses as well as on rapidly growing enterprises, termed ¿gazelles'.

Action 7: Promote access to finance for enterprises, particularly SMEs

Contrary to the impression given by the Consultation Paper, access to finance is generally not seen as a major problem by small businesses in the UK . The latest results from the Bank of England reveal that there is little evidence of firms facing difficulty accessing debt finance. 8 Concern about access to bank finance is not something which members of UK small business organisations are raising with them. 9 The Small Business Research Centre's European Survey for Lloyds TSB found that access to finance was a constraint on growth for only around 1% of businesses. 10

ACCA recognises that, although access to finance is not a major problem for many small businesses, there is evidence that a number of groups, such as ethnic minorities and women, do have problems in raising finance. The Consultation Paper is right, therefore, to highlight the fact that enterprises have divergent needs according to their individual aspirations and their stage in the enterprise life-cycle.

In the UK , a number of specific groups and sectors have been identified as facing distinct challenges when accessing finance. Women, for example, receive one-third of the level of finance as compared to men when starting up in business. 11 The newly formed National Council for Graduate Entrepreneurship will examine the issue of student debt and how this impacts on the ability of graduates to access finance to start a business. As recognised within the UK 's Treasury response to ¿Bridging the Finance Gap¿ December 2003, high-technology firms face specific issues in accessing finance. High-technology firms are more likely to trade on their intellectual property (IP) and, therefore, often find it difficult to capture money and support.

ACCA recommends that the introduction of any of the schemes proposed within the Consultation Paper should take account of the specific needs of the groups who face particular problems in accessing finance, to ensure that the groups who have the greatest need can access government support.

ACCA agrees with the Consultation Paper's commitment to provide adequate financing for the increasing number of business transfers. The business community has long argued that the UK Government focuses too much of its effort and support on business start-ups, at the expense of existing businesses. This is despite EC figures which indicate that the successful transfer of these businesses is more important in terms of employment and other economic measures than start-ups.

ACCA supports the commitment given in the Consultation Paper to analyse the barriers in accessing finance and identifying best practice. There is a plethora of programmes already in operation in the European Union (EU). We support the examination of existing programmes with a view to identifying the need for new schemes. A thorough consideration should be given to the alternative of adding to or replacing existing programmes. The EU should conduct rigorous research on what types of finance are being used by businesses of different sizes, sectors, locations, and at what particular times in their life cycles, before the new schemes which have been proposed within the Consultation Paper are introduced. This can be achieved by working with key stakeholders, including banks, business angels, venture capital organisations and intermediaries who advise small businesses on funding, such as accountants, as well as with small business owners themselves.

Action 8: Create a more enterprise-friendly regulatory and administrative framework at the national level

One way in which Member States can make a difference and reduce the inequalities which exist for small businesses, as compared with large firms is by addressing the issue of regulation, and the resource burden, both human and financial, which regulation places upon smaller businesses.

Small businesses consistently rank taxation and employment regulation as the most important constraints on business performance. Research in the UK demonstrates that tax administration is found to impose the heaviest burden on small businesses. The smaller the business, the heavier the red tape cost. 12 Recent research also shows that the cost of compliance with employment regulations can affect small businesses differently, according to their sizes and sectors. It also reveals that various types of regulation affect small businesses differently, according to their workforce composition. 13

ACCA believes that a 'bottom-up' approach to policy for small businesses, which is supported by rigorous research and considers their needs first, would prove much more effective than previous initiatives, which have often taken a 'top-down' approach, focusing on large businesses first. This approach to formulating economic and industrial policy should ensure that initiatives will be relevant to small business and that these firms do not face inequalities as a result of being small.

ACCA welcomed the EC Action Plan for Better Regulation, following its launch in June 2002. We recognise that improving the regulatory environment is crucial. We are, however, disappointed with the progress so far and call for the full and proper implementation of the Plan to deliver real benefits to SMEs. We also believe that the EC should not delay until 2006 the launch of the proposed key action in the ¿Action Plan: The European Agenda for Entrepreneurship' of ¿enabling micro-enterprises to recruit by reducing the complexity of regulations¿. Small businesses need assistance now.

Action 12: Foster innovation through better knowledge and more efficient management of intellectual property

ACCA believes that the issue of Intellectual Property Rights (IPR) is an important action point for the EC to address. In the UK , 90% of small enterprises are in the service sector. The nature of many of these businesses is knowledge based and their assets primarily consist of intellectual property. Research in the UK , however, indicates that small businesses are reluctant to use formal methods of registering intellectual property and that there is a lack of knowledge and understanding about this area.

The recognition of intellectual property through registration of IPR does not only protect the property but can also be a basis for the valuation of the business. This is critical for small businesses when raising external finance and for transferring the business. For example, a large proportion of owner-managers of small knowledge-based enterprises who retire or move on to another opportunity simply close down their businesses believing that they have no value because there are very few, if any, tangible assets. They fail to recognise the value of the intellectual property of the business. The act of registering intellectual property recognises value in the business. This would attract potential purchasers and bring welcome funds for the outgoing owner-manager.

There are a range of valuation methods that can be applied to intangible assets such as intellectual property. It should be remembered that the valuation of businesses is unlikely to be scientifically accurate but does represent an equitable way of establishing a value that can be used in terms of collateral or negotiation in the transfer of a business to different owners.

ACCA believes that if small knowledge-based firms are to prosper the EC should work with the accountancy profession to promote best practices where the value of intellectual property will be recognised.

1Booz, Allen, Hamilton. (2003). Business in the Information Age. International Benchmarking Study. DTI .

2 Ibid.

3 Jenkins, H. (2003). Small and Medium Enterprises (SMEs) and Corporate Social Responsibility (CSR). BRASS Research Centre, Cardiff University .

4 Stokes, D., & Blackburn , R. (2001). Opening up business closures: a study of businesses that close and owners' exit route. Small Business Research Centre, Kingston University .

5 Martin, C., Martin, L., Mabbett, A. (2002). SBS ownership succession ¿ business support and policy implications. Small Business Service .

6 Stead, P., & Kirkham, J. (2002). 25th Institute Small Business Affairs (ISBA) Conference.

7Jarvis, R., Curran, J., Kitching, J., & Lightfoot, G. (2000). The use of quantitative and qualitative criteria in the measurement of performance in small firms. Journal of Small Business and Enterprise Development , Spring Vol.7 No.2.

8Bank of England . Finance for Small Firms - A Tenth Report, April 2003.

9Institute of Directors and Confederation of British Industry. In Bank of England , Finance for Small Firms - A Tenth Report, April 2003.

10 Hart, M. (2003). Lloyds TSB/ Kingston University , European Small Business Survey. Small Business Research Centre, Kingston University .

11 Carter, Anderson and Shaw. (2001). Women's Business Ownership: A review of the academic, popular and internet literature.

12 Chittenden, F., Poutziouris, P., & Michaelas. (2000 ). The impact of the Budget on the small business economy. Manchester Business School .

13Blackburn , R., & Hart, M. (2002). Small Firms' Awareness, Knowledge and Access to Information on Individual Employment Rights. DTI .

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Consultation on a Community Support Programme for Entrepreneurship and Enterprise Competitiveness 2006-2010

Specific Comments