Encouraging Successful Exit Strategies–Passing the Baton
“Failure to plan is planning to fail” is often an overused phrase applicable in many different circumstances and situations. One area where it is vitally important, but often over-looked, is in an organization’s succession planning and business transfer strategies, especially within small- and medium-sized entities (SMEs). Failure to plan effectively for the future not only affects the survival of the organization, but can also have serious implications for local employment, supply chains, and therefore, the local economy. It should, however, also be recognized that not all business closures are “failures” and the terminology used is very important – ‘exit strategy’ may be an alternative to ‘business transfer’.
SMEs represent over 90 per cent of the business population, 60-70% of employment and 55% of GDP in developed economies (please see the article Foundation for Economies Worldwide = Small Business). IFAC research ‘The Role of SMPs Providing Business Support to SMEs’ identified that a significant proportion of SMEs are family enterprises, characterized by family involvement and values permeating ownership, governance and management. These enterprises desire to maintain family control and usually attach considerable importance to non-financial objectives (e.g., reputation, image, culture of the business and life-work balance).
SMEs tend to be more at risk of succession failure than large businesses as relatively few have a formal succession plan. SMEs also have less potential individuals and the owner-managers can have a “lifestyle” approach to the business. A survey conducted by the Family Firm Institute in 2017 illustrates that while 79% of family owned businesses plan to transfer the management within the family, only 16% of these have prepared a consolidated family succession plan. The 2018 PWC Global Family Business Survey (2,953 companies in 53 territories) found that only 33% see ‘succession’ as one of the key challenges for family businesses over the next two years (12 out of 18 challenges).
SME Public Policy
Succession planning and ensuring a successful environment for business transfers are critical global issues. Effective transfer of business ownership has the potential to drive productivity benefits through improved innovation, investment and skills.
In certain jurisdictions, there is a deficiency in the evidence base, with no single dataset on “exits” and “transfers”, which needs to be addressed if sound policy decisions are to be made. Public policy has a broad educational role, as well as a responsibility to stimulate more research and improve the statistical data and collection frameworks and the quality of information available.
The European Union (EU) Entrepreneurship 2020 Action Plan notes that around 450,000 SMEs change ownership annually, affecting more than 2 million employees, but up to one-third of these transfers may not be successful, thus endangering around 150,000 enterprises and 600,000 jobs.
In 2018, IFAC was privileged to be a member of the B20 Argentina SME Development Task Force and provided input on developing a policy paper covering practical recommendations to the G20. This included a specific policy action (1.3) to “Increase awareness of the importance and complexity of business transfer planning”. The paper notes that “Governments can collaborate to improve the conditions for business transfer, such as through gift and inheritance tax preferences, special financial facilities, the development of platforms for business transfer, and encouraging access to professional intermediaries and advisers. National awareness campaigns are useful to inform upcoming entrepreneurs through brochures, seminars, innovative digital tools, such as webinars and social media, as well as through personal consultations”.
The February 2019 IFAC SMP Committee (SMPC) meeting in Tokyo, Japan included a session on this topic as succession planning for SMEs in Japan is a major challenge. The OECD 2018 Policy Note ‘Business transfers as an engine for SME growth’ includes that in Japan more than 300,000 SME incumbents will reach the age of 70 within the next five years. In addition, about twenty percent of small firms consider that it is unavoidable to discontinue the business in one’s own generation, and approximately 70% of those owner-managers who think that business closure is unavoidable have come to this conclusion without actually considering the possibility of business transfer.
During the SMPC meeting, Mr. Yoshiki Watanabe, an Executive Board Member of the Japanese Institute of Certified Public Accountants (JICPA) mentioned that because Japan has an aging society, in the next ten years, 800,000 out of an estimated 3.8 million companies will be facing business succession issues, i.e. issues of management change. Mr. Watanabe pointed out that the percentage of business successions occurring outside the family has been increasing, and that many of those are by M&A. Japan has adopted a strategy of providing special measures for inheritance tax or gift tax on unlisted stocks as an incentive to promote business successions. These tax laws are valid between 2018 and 2027. For example, if successors are given a stake in the company, then tax exemptions will be applied during these 10 years unless the stock is sold.
The Role of Professional Accountants
There is a need to raise awareness of succession planning among business owner-managers and move from reactive to proactive in the approach towards exit strategies. Business transfers can be a complex matter due to the range of parties involved; there are legal, tax and regulatory considerations as well as the need for business valuations. There can be differences in the buyer and seller perspectives as to why business transfers can fail. For example, there can be a lack of “exit” readiness by owners and a psychological difficulty with “letting go”. Fee costs may also be a deterrent, combined with difficulties in the valuation of businesses. From the buyer’s perspective, there can be a lack of awareness of what is for sale (e.g. tangible assets versus valuation of intangible assets) and individuals may have a preference to start their own business as entrepreneurs instead.
Transferring a business therefore demands sufficient planning and strong adviser competencies. IFAC successfully advocated for the recognition of professional intermediaries and advisers in the B20 recommendations. Professional accountants have established relationships with their clients and can provide objective and expert advice on a wide range of succession and transfer situations, specifically relating to each business’ individual circumstances.
The 2018 IFAC Global SMP Survey found that 24% of small- and medium-sized practices (SMPs) provided business advisory/ consultancy advice on succession planning and business transfers. This varied significantly in different jurisdictions, for example it was 58% in North America, compared to 16% in the Middle East. Four key themes of advice provided by professional accountants are: tax and ownership structure advice, valuation advice, business development advice and ‘emotional’ support. The advice provided depends on the size of the business and complexity of the succession processes involved.
SMP Succession Planning
The Guide to Practice Management for Small- and Medium-Sized Practices includes a whole module on succession planning for firms, including developing a succession plan, valuation methodologies, options for partnerships, consolidations, M&A, and exit considerations. It also has a range of helpful checklists.
In addition, the Global Knowledge Gateway features an 8-part video series covering key factors for firms:
- Considering a Merger or Acquisition? What Problem Are You Looking to Solve?
- Buyer and Seller Perspectives on Small- and Medium-sized Practices
- Common Risks for Accounting Mergers and Acquisitions
- Accountancy Mergers & Acquisitions: Timing and Market Conditions
- Preparing for a Merger or Acquisition: Consider Any Changes Carefully
- Valuing an Accounting Firm
- When Should You and Your Practice Start to Plan Your Succession?
- Choosing Your Successor Firm