Services – Successful succession

Services - Successful succession

Business closure can be as much a result of poorly handled succession as financial failure. Accountants are in a unique position to help.

The insolvency statistics are an indicator of the health of the economy. Some 17,000 companies are currently being wound up each year, a figure that is hugely offset by the annual rate of new incorporations.

But of all the company liquidations and partnership and sole trader terminations, how many actually involve businesses being brought down by their debts?

Many firms close down, not because the business ‘fails’ in the normal sense, but because their owners do not make effective arrangements, in the run up to their retirement, either to sell the business or to pass on ownership of the firm to the next generation. It is estimated that such failures may make up around 30% of all closures.

The European Commission estimates that a third of all the enterprises in the EU will change hands over the next 10 years. This process will involve around 600,000 SMEs and 2.4 million jobs each year. Unsurprisingly, governments around Europe are becoming concerned about the risks involved in the process.

Unfortunately, the succession process is often fraught with danger. Only around 5% to 15% of family firms survive to the third generation. This reflects the fact that many small firms are run on a ‘lifestyle’ basis, rather than with a view to creating a cross-generational enterprise. Age-related succession failure is high and, apparently, on the rise.

Research published by ACCA analysed the role that accountants play in encouraging small firms to consider and manage an effective sale or handover process.

Researchers questioned 53 accountancy UK firms, most of them either sole practitioners or partners in small or medium-sized firms, about the nature of their involvement in the succession field. The results found that involvement in succession issues was quite substantial with medium-sized practices – 10% to 20% of the total fee income from clients.

But in the small firm environment, there seems to be a greater reluctance on the part of business owners to consider succession issues. When they eventually do, it is sometimes too late for the practice to provide optimal professional advice.

The research – ‘Accountancy practices and the provision of ownership succession advice’ by Chris Martin – can be accessed via www.accaglobal.com.

The author says the first step for advisers must always be to remove any barriers to considering the issue of succession. Partners should take the lead on raising the issue.

Accountants should also encourage their clients to give them an idea of their thinking as to what they hope to achieve from their eventual withdrawal from the business. If they have not done so already, now’s the time to encourage them to start the ball rolling.

Most importantly, accountants should be prepared to present to their clients the business case for considering an effective succession. This may be an easier case to argue where family members are employed by or reliant on the business.

John Davies is head of business law at ACCA.

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