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ACCA Research Report No. 85

Chris Martin, 2004

Executive summary

The issue

Recent research undertaken by the European Commission (EC 2003) estimates that one third of all enterprises in the European Union will transfer ownership in the next ten years, involving some 610,000 small and medium-sized enterprises and potentially affecting 2.4 million jobs each year. The European trends identified by this research are:

1. the increasing importance of business transfers as a policy issue owing to the high and rising number of transfers within the ten year period 2003-13
   
2. an increasing number of business transfers will take place outside the family to third parties
   
3. an increasing number of entrepreneurs will stay in the same enterprise for a shorter period of time, not a lifetime
   and
   
4. increasingly, personal decisions (early retirement, change of profession, interests, or in the family situation, etc) and the competitive environment (changing markets, new products, new channels of distribution, etc) and not just age, will be the triggers for transfers.
   

In the UK, research commissioned by the Small Business Service (Martin et al. 2002) shows that over one third of owners of small and medium-sized enterprises were vulnerable to age-related succession failure, and that this proportion had increased substantially during the 1990s. The high proportion of ageing owner-managers making no provision for succession or for the continuity of their businesses was of concern.

Research undertaken

Against the background of the increasing frequency of ownership succession and business transfers, the purpose of this research was to investigate the provision of ownership succession advice by accountancy practices and identify opportunities for practices to expand their advisory services in this area.

A qualitative research approach was adopted in order to obtain an understanding of how practices provide ownership-succession-related business advice and of the issues involved. Data was gathered from 53 different accountancy practices, involving face-to-face interviews, a questionnaire and telephone discussions. Almost all the accountants involved in the research were sole practitioners or partners from a range of small and medium-sized practices throughout the UK.

The face-to-face interviews were semi-structured, with accountants being provided beforehand with a list of discussion areas. To help interpret the findings, practices have been profiled in terms of the number of partners and staff and the size of their client base, using a profiling framework based on that used in Ram and Carter's Smaller Practices in Profile (2001).

All the chartered accountants interviewed shared a number of common characteristics. They were generalists, rather than specialists in one of the core professional skill areas. Their clients were predominantly owner-managed businesses. They were all seeking to develop and maintain long-term relationships with clients and had an interest in providing business advice, as well as traditional accountancy services. There were, however, a number of significant differences between the accountants' practices, which related to differences in size, from sole practitioners to one medium-sized practice with 12 partners.

Findings

Succession advice - key features

• This research identifies the following key features of the succession advice provided by accountancy practices.
  
• Succession advice is not offered as a stand-alone service by accountants but embedded within accountant-client relationships and forms part of the wider provision of business and strategic advice.
  
• Succession advice spans the following specialist services provided by practices: strategic planning, business planning, management consultancy, mergers and acquisitions, retirement strategies, corporate wills, business valuations, taxation planning and mitigation, estate planning, trust services, trusts and executorships, wills, and investment advice.
  
• Succession-related advice typically represents 10-20% of total advisory fee income for the medium-sized practices interviewed but is less important for small practices and sole practitioners. For clients, however, exit and succession decisions often involve fundamental, once in a lifetime, business and lifestyle changes.
  
• Succession advice involves combining expertise from individual specialist areas, including external specialist knowledge, into packages of succession advice appropriate to individual client situations.
  
• Four themes - tax and ownership structure advice, valuation advice, business development advice, and 'emotional' support - provide a useful framework for viewing the succession advice provided by accountants.
  
• The succession advice most commonly provided relates to tax issues and often involves the structuring and timing of transactions in order to mitigate clients' inheritance, capital transfer and capital gains tax liabilities. In some more complex situations, accountants provide approaches to structuring owners' businesses and assets that are tax-efficient and help owners achieve their business and family objectives.
  
• Clients seek advice on valuing and selling their businesses. Accountants need to provide practical and realistic advice on how clients' businesses could be sold, the appropriate agents and intermediaries, and other options that would enable clients to retire.
  
• Business development advice involves both helping clients leave the business and building business value. This could consist of 'grooming' businesses for succession by, for example, ensuring that appropriate employment contracts are in place and key employees are tied into the business. Building business value usually involves addressing fundamental issues and reducing owner dependency by, for example, systematising businesses, developing management teams and helping clients become more strategic in outlook.
  
• During succession processes, accountants often provide 'emotional' support to their clients, who are often facing traumatic changes in lifestyles and relationships with their businesses.

Influence of client size
The succession advice provided by the accountants interviewed depends upon the size of clients' businesses and the complexity of the succession processes involved.

• Larger clients, with sales turnover of greater than around £0.5m, are offered succession advice as part of continuing, broadly-based advisory and accountancy service relationships. The nature of the advice tends to depend upon clients' mindsets and priorities, the depth of advisory relationships and the complexity of the succession issues involved.
  
• Smaller clients, usually sole proprietors and self-employed people with sales of less than around £0.5m, usually require advice related to the tax implications of the transaction-based events associated with selling or closing their businesses. Advice sometimes involves separating business and property assets to facilitate the transfer of trading businesses.
  
• Business closure is the natural exit route for the owners of many very small businesses, especially where they are trades or occupations for their self-employed owners.
  

Importance of owner attitudes towards exit and succession
Clients' mindsets and attitudes towards exit and succession issues (which often reflect their attitudes towards their businesses generally), have an important bearing on how and when accountants provide succession advice.

• Clients preoccupied with the development, or survival, of their businesses give a low priority to thinking about exit and succession.
  
• Apart from entrepreneurially orientated owners, most clients put succession to the back of their minds until some event or change in circumstances acts as a trigger, suddenly making them want to be out of their businesses within two or three years. This usually leaves insufficient time to make the changes needed to enable clients to leave in ways that maintain the value of the business.
  
• Sudden changes in clients' attitudes towards exit and succession usually occur when clients reach their fifties.

Accountancy practice and experience issues
When providing succession advice, a number of features are identified, relating to how accountants and their practices provide succession advice.

• The provision of succession advice is primarily a partner-led activity, reflecting clients' expectations that they will deal directly with partners on important personal and business matters.
  
• Some clients prefer to discuss important matters with accountants from their own generation.
  
• Accountants need to be able to empathise and relate to clients' situations when providing succession advice, as well as combining common-sense, generalist approaches with an ability to draw in specialist expertise where needed.
  
• Accountants are able to draw on experience gained from succession processes in their own practices when advising clients.
  
• Practices can protect continuing fee income, where internal succession processes are occurring, by involving younger partners with the new generation of owners while older partners continue to work with the exiting owners.

Conclusions

This research has identified the way in which providing succession advice has important advisory process aspects, as well as involving specific business and financial knowledge and expertise. Many owners give a low priority to succession issues. This acts as a barrier to providing fee-earning succession advice as accountants normally respond to current client concerns. When owners do start thinking about leaving the business there is often insufficient time to make the changes necessary to achieve an optimal exit. In other situations, accountants do not have sufficient knowledge of their clients' succession thinking to identify opportunities to provide advice.
Effective ownership succession advisory processes involve first, removing the barriers to providing succession advice, secondly, bringing succession issues into the open and, finally, providing packages of value-adding succession advice appropriate to individual client situations.

When owners' attitude barriers to succession have been removed, value-adding succession support can be provided by:

• developing approaches that reflect clients' mindsets, the size of their businesses and the complexity of the issues involved
  
• identifying the benefits that clients could obtain from succession advice and convincing clients of the value of obtaining advice
  
• identifying whether value is being lost when clients close their businesses to provide an exit route
  
• seeking to incorporate succession planning into wider strategic planning advice involving the time-scales needed to build exit routes and create value.

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