The Small Business Service's business transfer review
Comments from ACCA
July 2004
Executive Summary
ACCA welcomes the Small Business Service's Business Transfer Review. Many successful businesses are facing unnecessary closure in the future due to a lack of an effective succession plan. Failure to plan not only affects the survival of the firm in question, but can also have serious implications for the family of the owner, local employment and supply chains and, therefore, the local economy.
Ownership succession is a complex issue. Enterprises are differentiated by size, sector and the motivations of their owners. This extreme heterogeneity means that each business requires a fundamentally different succession plan.
Evidence indicates that the philosophy which drives the business, the owner's motivation and involvement are extremely important to a succession plan and the eventual business transfer. The businesses financial performance is also fundamental to the perceived value of any business.
The European Commission estimates that more than 90% of businesses have no documented plan for succession. ACCA research has found that owner-managers delay considering succession planning until certain critical events or changes in their circumstances. This usually leaves insufficient time to develop an effective plan, which can take several years.
The survival rate of transferred businesses is better than that of start-ups. It is generally recognised that business transfers generate more employment than new businesses. ACCA believes that there is a need for more Government support for owner-managers in the later years of their business life cycles vis-à-vis support for business start-ups.
The recognition of intellectual property through registration of Intellectual Property Rights can provide a basis for the valuation of a business. This is often critical when considering the transfer of small businesses. Owner-managers' tend not to appreciate and recognise the value of intellectual property in their business which could attract potential buyers.
It is widely recognised that independent research demonstrates that accountants are the first-choice advisers of small business . 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. We consider that the Government should be more proactive in promoting the provision of the expert advice services which are currently available for business owners and their potential successors.
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 relevant individual questions in the Consultation Paper.
Are your experiences of business transfer general to the whole of the SME market or do they relate specifically to one sector represented by your organisation?
Over half ACCA's 100,000 members work in or service SMEs (Small and Medium-sized Enterprises). We therefore have experience and a special interest in issues which concern the whole SME market. Because our membership is so deeply involved in small-business issues, we recognise the importance of creating the right environment for SMEs to thrive and survive through encouraging the early adoption of succession plans and facilitating business transfers.
Business transfer has the potential to be a critical issue for all businesses. However, are there certain types of businesses particularly susceptible to transfer failure, for example in terms of sector, size, stage of growth and other characteristics?
Smaller businesses exist in every area of the economy. They are established and managed by individuals of both sexes and from varying age groups, educational backgrounds and ethnic groups. This wide diversity means that they face different markets and are driven by a range of both personal and business goals. 1
Ownership succession is, therefore, a complex issue. Each business requires a fundamentally different succession plan. For example, one business may be saleable because it occupies a niche position with significant assets, another may have no future without extensive advice to identify an effective exit route. 2
Different business sectors tend to treat the matter in different ways. ACCA research has found, for example, that those in agriculture tend to consider succession planning earlier. 3 This could be due to the fact that farming is an industry which is traditionally passed down through many generations.
The age of the business is another factor. Research indicates that up to 60% of all start-ups close within five years. 4 Survival and becoming established, as opposed to succession planning, are usually the main concerns for firms in their early years.
To what extent is business transfer a feasible alternative to starting a business from scratch for entrepreneurs seeking to go into business?
Research reveals that more than 40% of independent family business owners aim to pass on their business to the next generation, but in fact only 4% of family businesses are inherited.5 The importance of succession planning and the low number of successful business transfers to a next generation demonstrates the need for more Government support for owner-managers in the later years of their business life cycles vis-à-vis business start-ups.
A considerable amount of support is available for new businesses despite the short life expectancy of many new small firms. This is arguably because of the generic issues faced by start-ups, compared to the wide variety problems which are encountered when providing support for business transfers.
ACCA believes that the Government should be more proactive in promoting the alternative of business transfers to entrepreneurs as a viable, attractive and potentially more sustainable option than business start-ups.
How many jobs would you estimate are created by business transfer in any single year?
The survival rate of transferred businesses is better than that of new businesses. 6 European Commission figures indicate that, measured by employment, on average a business transfer is 150% more effective than a start-up. In other words, one and a half people are employed for every transfer, as compared to one for a start-up. 7
In your experience is business transfer constrained by the goals of a business, for example, do those businesses with strategic goals transfer ownership with greater success than those with personal or lifestyle goals?
We agree that the business philosophy and the owner's motivation and attitude are extremely important to a succession plan and business transfer. Small Business Service research indicates that businesses driven primarily by personal goals and a 'lifestyle' agenda are vulnerable to succession failure. Lifestyle business owners can often have an unrealistic view of the value of their business. Businesses driven by commercial interests and strategic goals often perform better and are more saleable. 8
ACCA research indicates that business owners' attitude and goals towards succession and business transfer often reflect their attitudes towards their businesses generally. The owners' mindset is also found to have a significant influence on how and when accountants provided succession advice. 9
In your experience is business transfer constrained by the financial performance of a business?
Business performance, both past and present, is fundamental to the perceived value of any business. Whether succession is an internal or external transfer, the business's history, current operations, business plan and financial statements will all be reviewed rigorously. Lifestyle businesses tend to perform less well, reducing the attractiveness of the business and increasing the difficulties when an �exit strategy' is considered.
It is important to note that most small-firm closures are not businesses that have failed. The main reasons for closing a small business are to retire, move on to another job or to sell the business. 10
In your experience are owner-managed businesses transferred with greater success than those businesses where the owner plays a less active role?
Over-reliance on the business owner can make it more difficult to implement a succession plan and transfer a business because it is dependent on the owner's managerial and knowledge input. It is an advantage if the business has in place a professionalised management structure with a clear emphasis on knowledge transfer. This process can lead to a natural internal or family succession in a systematic manner, lessening the emotional impact for the owner when the time comes to leave the business. 11
In your experience is business transfer constrained by a lack of a natural family or internal successor?
In the UK , it is estimated that some 75% of SMEs are owned and controlled by families. 12 While family succession is often the owner's aspirational ideal, it is becoming increasingly rare for businesses to be passed on to the next generation; approximately only 24% survive through to the second generation and only 14% make it beyond the third. 13 This is due to a range of issues, such as the wider opportunities available to younger members of the family and, crucially, a lack of a succession plan.
In your experience is business transfer constrained by insufficient preparation made for succession?
The European Commission estimates more than 90% of businesses have no documented plan for succession. 14 There is a concerning tendency for businesses not to see succession planning as an issue until it becomes critical for owner-managers in their later years. Owner-managers need to start considering succession planning from an early stage and begin thinking about an 'exit strategy'. It can take several years to develop an effective plan. Businesses that address succession late will not have sufficient time to make the necessary plans. This may result in the owner-manager not profiting fully from the position of the business.
ACCA research has found that most owner-managers' delay considering succession issues until certain critical events or a change in circumstances which activate a desire to leave the businesses within two or three years. This usually leaves insufficient time to devise an effective succession plan and exit in a way that maintained the value of the business. 15
How significant is the role of the accountant in advising on business transfer?
Independent research demonstrates that accountants are the first-choice advisers of small business . The 2004 Federation of Small Businesses Survey found that accountants are the most used source of advice and have the highest satisfaction rating for business support.16 Research indicates that generalist business advisers are likely to have less of an impact on SMEs than that of accountants and solicitors, simply because of the basis of their relationship.17 Mole argues that agency theory and organisational behaviour literature suggests that accountants and solicitors have legitimate power because firms must produce accounts and require legal services. Generalist business advisers are at a disadvantage because they need to enter relationships with new clients cautiously, demonstrate expertise and transfer knowledge across a generic wide-ranging sector. Accountants often fulfil a broad business adviser role. It is clear that the level of trust between accountants and their clients and the quality of the relationship are important reasons for this.18
There are a number of tax, legislative and administrative issues, such as high inheritance tax, 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 research has identified four themes of succession advice provided by accountants - tax and ownership structure advice, valuation advice, business development advice and �emotional' support. The provision of succession advice by accountants was found to be embedded within the provision of wider business and strategic advisory services. The advice given depended on the businesses' size and the complexity of the succession processes involved.
ACCA believes that the Government should be more proactive in promoting the provision of the expert advice services which are currently available for business owners and their potential successors.
Value and IPR
ACCA believes that the issue of Intellectual Property Rights (IPR) is an important action point for the Government 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 Government should work with the accountancy profession to promote best practices, where the value of intellectual property will be recognised.
Endnotes
1 Curran, J., and Blackburn , R. Panacea or white elephant? A critical review of the proposed new Small Business Service and response to the DTI Consultancy Paper. Regional Studies, Vol 34.2. pp. 181-206, 2000.
2 Martin, C.J. Provision of ownership succession advice by accountants to the owners of small and medium-sized enterprises (SMEs), ACCA, published September 2004.
3 ACCA. Succession Planning Survey, 2003.
4 Stanworth, J., Purdy, D. SME facts & issues, University of Westminster , 2003.
5 Poutziouris, P., Sitorus, S., Chittenden, F. The financial affairs of family companies, Manchester Business School , 2002.
6 European Commission. European Seminar on the Transfer of Businesses Final Report. 2003.
7 ACCA. Family planning for small business, 2002 http://www.accaglobal.com/news/articles/730234?session=fffffffeffffffffc28288ca40f7e3657209d3b9336f19b1c79d9cf2cbdae92e (Accessed July 2004).
8 Martin, C., Martin, L., Mabbett, A. Ownership succession - business support and policy implications, SBS, 2002.
9 Martin, C.J. Provision of ownership succession advice by accountants to the owners of small and medium-sized enterprises (SMEs), ACCA, published September 2004.
10 Stokes, D., and Blackburn , R. Opening up business closures: a study of businesses that close and owners' exit routes, Small Business Research Centre, Kingston University , 2001.
11 Martin, C., Martin, L., Mabbett, A. Ownership succession - business support and policy implications, SBS, 2002.
12 Poutziouris, P., and Chittenden, F. Family businesses or business families?', Leeds , UK ISBA Monograph in association with NatWest, 1996.
13 Leach, P., and Bogod, T. The BDO Stoy Hayward guide to the family business, 1999.
14 ACCA. Family planning for small business, 2002. http://www.accaglobal.com/news/articles/730234?session=fffffffeffffffffc28288ca40f7e3657209d3b9336f19b1c79d9cf2cbdae92e (Accessed July 2004).
15 Martin, C.J. Provision of ownership succession advice by accountants to the owners of small and medium-sized enterprises (SMEs), ACCA, published September 2004.
16 Federation of Small Businesses Survey. Lifting the barriers to growth in UK small businesses, 2004.
17 Mole, K. Business advisers' impact on SMEs: an agency theory approach. International Small Business Journal , Vol. 20 (2) pp. 139-162. 2002.
18 Ram, M., and Carter, S. Smaller practices in profile. ACCA Research Report No. 71, 2001.
19 Martin, C.J. Provision of ownership succession advice by accountants to the owners of small and medium-sized enterprises (SMEs), ACCA, published September 2004.