Passing on the business baton

Up to 100,000 businesses a year are facing closure due to the lack of an effective succession plan, according to a report published by the DTI's Small Business Service (SBS).

The review, 'Passing the baton - encouraging successful business transfers' highlights the following key issues:

• While considerable support is provided for business start-ups and growth, the succession process doesn't currently receive the same attention.
  
• Social and demographic changes mean that succession is becoming an increasingly important issue - family members are less willing to join family businesses; there are a growing number of older owners and entrepreneurs; and there is a trend towards earlier retirement.
  
• A lack of succession planning can hold back growth and make it harder for businesses to generate new ideas for future success.
  
• Succession failure can damage local economies through loss of jobs, knowledge and expertise.

Small Business Minister Nigel Griffiths said: "Government has listened closely to the concerns of small business on this issue and is keen to play its part in addressing them. There are benefits for everyone when a business is transferred properly. Sellers are rewarded for their lifetime's work, buyers can take on a viable new business and cut their risks, while the UK economy benefits from retaining skills and expertise that may otherwise have been lost."

Key issues

The review builds on previous research that showed that there are several basic factors that put a business at risk of succession failure including:

• The business relying on the owner's specific knowledge (such as of markets, customers, systems) which cannot be easily passed on to a successor.
  
• Lack of a suitable and willing successor manager drawn from the ranks of employees or the owner's family.
  
• The absence of any plans for transfer.

It confirms that there are additional factors that can throw light on the types of businesses likely to be at risk of succession failure. Since business transfer is most often (and increasingly) to a non-family member, the most significant of these is attractiveness of a business to buyers; especially outside buyers.

Key recommendations and findings from the report include:

More needs to be done to raise awareness: There is a need to raise awareness with SMEs of the vital importance of succession, encourage owners to address succession at an early stage, promote greater awareness of all the succession options, including employee buy-outs, and improve the quality and availability of advice for business owners.

More support for business: Succession support needs to be an integral part of business support and advice services to provide business owners with information, training, advice and support on business transfer. The SBS will now consider how this can be achieved. This may include an online national database of business transfer advisers to help businesses find the right source of professional advice; and a 'No-Nonsense Guide' to buying and selling a business.

Money matters: The report highlighted the increasing relevance of intangible property - its recognition and valuation - and vendor finance to business transfers. The SBS has said that it will work with the accountancy bodies and the banks to investigate the recognition and valuation of intangible property to improve understanding amongst buyers and sellers of valuation methodologies and consider developing a best practice model for business transfers where some or all of the finance is provided by the vendor.