Companies’ Transmission a Ticking Bomb for Modern Western Economies

The ageing population in modern western economies creates greater issues and challenges for health care systems, pension policies, and labour markets. A significant level of resources in Western countries  have  been deployed  to better understanding the demographic nature of these topics to provide the population with strong, sustainable social programs. However, one aspect of public policy that has been neglected is the impact of an ageing small and medium-sized enterprise (SME) sector.

Succession / transition planning has major implications for the future of Western Countries  overall economy and job creation potential. Approximately 90 % of all businesses employ fewer than ten employees and almost 60 per cent of employed people work for a small or medium-sized business. In addition, the SME sector contributes approximately 40 per cent of Western Countries  GDP and is the catalyst for innovative products and services.

Our findings:

  • Survey results indicate that slightly more than one third of independent business owners are over 55 and plan to retire, exit their business within the next 10 years. Another third plan to exit in the next 10 years for other reasons: starting another business, securing and providing enough fund for their children education, become business angels, being the most popular.
  • The majority of SME owners are not adequately prepared for their business succession: only 10 per cent of SME owners have a formal, written succession plan; 40 per cent have an informal, unwritten plan and the remaining 50 per cent do not have any succession plan at all.
  • Accountants and legal advisers are the most common types of professionals used by SME owners to prepare a succession plan but they are not trained properly on transition planning and as such provide incomplete advice, which can lead to disastrous situations.
  • Business owners have highlighted the need to train professionals to help them finding     the   necessary information    and    advice    on transition   planning, and engage the public and banking sector to be more proactive in helping financing the transactions.
  • This has important implications for the growth of the SME sector and the overall economy given that exiting a business does not always entail retirement for the owner, but that a transition plan is the link between old and new ventures.
  •  One third of European business closures are due to transfer failures.
  • Funding is very difficult to find for needs below € 2 millions.

Possible solutions to address these issues, which if not solved could have serious implications on local economies and people lives  creating high unemployment :

  • A large proportion of business owners, 90 per cent do not have any written transition plan at all. In various regions of Europe we have found that the public sector is trying to raise business owners’ awareness on the importance of planning for their exit, this is good and should be extended to all regions. Given a succession plan can take up to five years to result in a properly executed transition, much more needs to be done at an early stage, we recommend to plan the exit right from the start-up mode.
  •  Access to financing is the most significant challenge in the succession planning process from both the perspective of the current owner (seller) and the successor (buyer). Banks are not helping when it comes to SME succession, as result the banks will likely find it very challenging to maintain, or even increase, the number of small business clients in the next decade. One factor that will help define the level of success is the banks’ ability to offer guidance, using certified transition planning advisers, on how owners can successfully transition their business to the next generation of owners.
  • There is a need to train professionals (lawyers, accountants, management consultants, wealth managers, bankers…) on transition planning to support business owners in this very complex and demanding process. Te Exit Planning Company  has developed in partnership with the Cardiff Metropolitan University, the Exit planning Institute in Chicago and IPAG Nice, a French Business school, a training on transition planning for professional advisers.
  • Another factor is the need for the banks to be challenged to provide financing to the successor and the current owner to ensure a smooth business transition. We propose  that financing institutions and the public sector create funds dedicated to transition from one owner to another for small or micro businesses in order to preserve employment. This will help the banks to minimise their risks and costs to lend to micro businesses and reach the targets imposed on them to lend to SMEs by governments. The governments will be happy employment will be protected.

The aim of these initiatives would be to  help business owners to find innovative, low risk, win-win solutions for all business stakeholders involved in transition planning, themselves, their families, the employees, the new owner and the regional economy, to transfer their businesses painlessly and successfully to obtain an achievable optimum result for all. This can be achieved by the public sector raising the importance of transition planning through awareness campaign and lending funds to specific investment funds. The private sector  providing business owners with guidance  on how to transfer successfully their business to the next generation and  training certified professionals on transition planning, the financial sector providing  a mechanism to fund  micro businesses’ owners  to transfer easily and fruitfully their businesses to  employees or management team lending money to specific  investment funds.

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If you envisage to transition out of your business in the near future and would want to explore what you should do. You are an adviser that would wnat  to be trained on an holistic approach to exit planning for your clients, please do not hesitate to call Jean-Bertrand de Lartigue on +44 1656 766 363 or e- mail him at JB@macint.co.uk

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