South

SurveyEast Business Owners

of Business Monitorand Senior Decision
Makersof Business Owners and Senior Decision Makers
Survey

10 Hot Topic Spotlight

Succession planning
January 2007
Contents

1. Introduction 2

2. Succession planning

Key messages 3

Background 3

SMEs and succession planning 4

Advice and support for SMEs 6

Conclusion 6

3. Annex - Statistics 7
 Hot Topic Spotlight 10: Succession planning

Introduction

This Hot Topic Spotlight is based upon findings from the South East Business Monitor - a
quarterly survey of businesses based in the South East, conducted by the region’s Business
Link Providers (BLPs).

The Business Monitor has the following key objectives:

1. To identify business issues and concerns

2. To monitor business intentions and future growth expectations
3. To explore attitudes towards and experiences of using external business support and
advice
4. To establish whether any gaps exist in current support provision

Every three months, at least 1,200 telephone interviews are conducted with business owners
and senior decision makers of small and medium-sized enterprises (SMEs), based in the
South East. This allows an ongoing ‘temperature check’ of business issues and concerns.
The survey results are weighted to reflect the size and structure of the Region’s SME
population.

The questionnaire consists of a set of fixed core questions, and additional ‘hot topic’
questions that change from wave to wave. Succession planning was covered in Wave 5 of
the South East Business Monitor, the fieldwork for which took place in November 2006.

The findings from the hot topic questions are published in a series of Hot Topic Spotlights,
freely available upon request.

Hot Topic Spotlights currently available are (as at January 2007):

1. Business start-ups 6. Home-based SMEs

2. Fuel, energy and water costs 7. Sustainability
3. 2012 Olympics 8. Work-related stress
4. Red tape and SMEs 9. Access to finance
5. Women’s enterprise 10. Succession planning

To request a Hot Topic Spotlight, or if you have any enquiries about this research, please
email Stuart Cole at Business Link, Stuart.Cole@businesslinkkent.co.uk.

This Hot Topic Spotlight was prepared for the South East Business Link Providers by Step Ahead Research. The
views expressed within it are the views of the authors, and do not necessarily reflect those of Business Link.

© Copyright WSX Enterprise Ltd 2007. The information contained in this paper may be quoted, provided
the following is acknowledged as the source: “South East Business Monitor, a quarterly survey of
business owners, conducted by the Region’s Business Link Providers”.

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 Hot Topic Spotlight 10: Succession planning

Succession planning

Key messages

• 29% of owner managers currently have no plans relating to what they will do with their
business on retirement. However, 7% intend to close the business.

• Owners aged 65 or over are the most likely to anticipate closure of their business in the
next 5 years (35% compared with less than 11% for other age groups). However, they
are among the least likely to anticipate a transfer of ownership.

• In all other age groups, anticipation of transfer of ownership is more common than
anticipation of closure and the difference is particularly significant for the 55-64 and 45-54
age groups. These findings suggest a need to target support for succession planning
towards these age groups.

• Over half (56%) of owner managers have a clear financial plan in place for their own
retirement. However, 50% are unaware whether their business has a clear succession
strategy for shareholding staff that leave or retire and 31% currently do not have one in
place.

• Only 17% of owner managers believe that they need external help with succession
planning but national research suggests that two thirds (68%) of SMEs do not know what
succession planning is.

Background

Succession plans or exit strategies are plans that small and medium-sized enterprises
(SMEs) put in place to help with a successful transfer of ownership when an owner wishes to
retire or leave the business. According to the Small Business Service report ‘Passing the
baton – encouraging successful business transfers’1 very few businesses have an explicit
succession plan in place. The report suggests that to maximise the chances of a successful
transition period the owner and the successor need to have similar values and have mutual
trust and respect for each other. The owner must also be prepared to ‘let go’ of the business
and also cooperate and delegate to their successor. A long and well-planned handover
process is also recommended.

Transfer of ownership also occurs within family-owned businesses and often transfer to
another family member is the preferred scenario. However, the report found that family
members are becoming less interested in taking over the family business or that they lack
the skills to do so. A recent Financial Times report suggests that many family-owned SMEs
do not survive beyond the second or third generation due to a lack of management skills.2

Passing the baton also suggests that one third of SME owners in the UK are vulnerable to
‘age-related transfer failure’ and that this number is increasing. A key message of the report

1
Passing the baton – encouraging successful business transfers, Evidence and key stakeholder opinion, Small Business
Service, 2004.
2
Family-run businesses ‘perform poorly’ Financial Times, 15/03/2006.

3
 Hot Topic Spotlight 10: Succession planning

was that business closures due to failed transfers could be avoided if SMEs were aware of
alternatives and planned well in advance.

SMEs and succession planning

Three quarters (75%) of respondents to the South East Business Monitor were full or part
owners of the business they managed (59% full owners plus 16% who owned a stake in the
business)3.

Of the owner managers interviewed, 29% currently have no succession plans, 29% intend to
sell the business and 24% intend to keep the business in their family. Although only 7% said
that they would close the business on retirement this could mean that a significant number of
businesses are closing unnecessarily. If the figure of 7% of owners anticipating the closure of
their business is reflected across all SMEs in the South East, this would relate to the closure
of around 23,300 businesses4.

Even though many owner managers indicated that they currently have no future succession
plans, they may need to start planning for the future now as it can be a lengthy process.
Home-based-businesses are more likely to intend to close than those who have their main
premises elsewhere (11% compared with 2% of those with premises). Owners in the land
based and construction sectors are also more likely (56% and 43% respectively) to intend to
keep the business in the family than those in other sectors.

Figure 1: Plans of owner managers on retirement

35

29 29
30

24
25

20
%

15
11
10 7

0
Sell the business Keep it in the Close the No plans at the Don't know
family business moment

Source: SE Business Monitor (November 2006). Base: All respondents who owned or had a stake in the business = 1,152.

As shown in Figure 2 overleaf, owner managers aged 65 and over were the most likely to
anticipate the closure of their business in the next 5 years (35% compared with 11% or less
in other age groups). Interestingly, the oldest owners are among the least likely to anticipate
a full transfer of ownership of their business.

3
These individuals are termed owner managers in this report as they both manage a business and have an ownership interest.
This term should not be confused with the term ‘owner managed’ used in the Business Link segmentation model, which refers
only to business owners who manage their business alone.
4
Calculation based on ONS ABI 2004 which suggests there are 332,500 SMEs in the South East (Businesses with 1-299
employees excluding public sector establishments).

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 Hot Topic Spotlight 10: Succession planning

Figure 2: Anticipation of transfer/closure in next 5 years – age profile

40
35
Transfer of ow nership
35
Closure
30

25
19
20
%

13
15
11 12
9
10
6
4 3
5
2
0
25 - 34 35 - 44 45 - 54 55 - 64 65 or older

Source: SE Business Monitor (November 2006). Base: All respondents who owned or had a stake in the business = 1,152. 25-
34 = 83, 35-44 = 283, 45-54 = 395, 55-64 = 302 and 65 or older = 78. The 17 or younger and 18-24 age categories have been
removed due to small sample sizes. Refused responses are not shown.

The distribution shown in Figure 2 suggests that if owner managers have not arranged for
the transfer of ownership of their business before they reach 65, they are more likely to close
their business on retirement. This suggests a strong link between business closure and a
lack of forward planning. The number of business closures could possibly be reduced with
external advice or support on succession planning delivered to owner managers in younger
age groups.

Over half (56%) of owner managers have a clear financial plan in place for their own
retirement (see Figure 3). However, 50% did not know if their business has a clear
succession strategy for shareholding staff that leave or retire and 31% report that they
definitely do not have one in place.

The results of the South East Business Monitor suggest that SMEs with more than one
manager are more likely to have a succession strategy than those that are run by a single
owner manager acting alone (24% compared with 7%). This makes sense as there will be a
greater need for a formal strategy to communicate what will happen to the business if a
greater number of managers are involved.

There is also a link between the likelihood that a business will have a succession strategy
and use of other business planning tools. Of owner managers with a business plan in place,
19% had a clear succession strategy. This was true of 22% of those with a sales and
marketing plan and 23% of those with a training plan.

Over one third (38%) of owner managers suggested that the value of the business will form a
significant part of their retirement fund. Owner managers of businesses with a turnover of
between £58k - £34m were significantly more likely to agree that the value of the business
would contribute to their retirement fund than those with a turnover of less than £58k and
over £34m (44% compared with 28% and 13% respectively).

Only 16% of owners believe that they need external help with succession planning. If these
figures are reflected across all SMEs in the South East, this could equate to around 53,200

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 Hot Topic Spotlight 10: Succession planning

owner managers requiring help with succession planning from an external source such as
Business Link5.

Figure 3: Owner manager views on statements (%)

Don't
Agree Disagree Know
"I have a clear financial plan for my own
56 30 6
retirement"
"My business has a clear succession strategy for
14 31 50
shareholding staff who leave or retire"
"The value of my business will form a significant
38 45 11
part of my retirement fund"
"We could do with some extra help with
17 60 17
succession planning"
Source: SE Business Monitor (November 2006). Source: SE Business Monitor (November 2006). Base: All respondents who
owned or had a stake in the business = 1,152.

Advice and support for SMEs

The SBS Annual Business Survey 2006 suggests that two thirds (68%) of owner managers
are not aware of what a business transfer plan (succession plan) is. The Federation of Small
Businesses 2006 bi-annual survey of members also suggests that the South East has the
highest number of people who are planning retirement (49% compared with 42% nationally).6

A nationwide survey of Business Link Advisers suggests that the majority believe that
succession planning is not part of SMEs business planning processes. Not knowing how to
plan the transfer of a business was seen as the main challenge faced by owners, followed by
their reluctance to let get go of the business. However, Business Link has recently added a
new tool to their website to help businesses with succession planning. The interactive tool
asks a number of questions about the profile of the business and then provides a number of
relevant options. The tool also points businesses to external advisers7. Business Link also
provides a number of guides to help with the selling of businesses.

Conclusion

The information outlined in this Hot Topics Spotlight paper suggests a need to encourage
more business owners to think about what will happen to their business on their retirement.

Targeting the 55-64 and 45-54 age groups will be particularly important, with these
individuals the most likely to be considering transferring the ownership of their business in
the next 5 years. By age 65, business owners are much more likely to be considering closure
of the business rather than transfer.

Business closure due to a lack of forward planning represents a loss for the South East
economy which could be avoided by increasing awareness of the concept of succession
planning and its benefits. This message needs to reach younger business owners to allow
them sufficient time to consider all the available options and make an informed decision.

5
Calculation based on ONS ABI 2004 which suggests there are 332,500 SMEs in the South East (Businesses with 1-299
employees excluding public sector establishments).
6
Lifting the Barriers to Growth in UK Small Businesses 2006, Executive Summary for the South East, Federation of Small
Businesses 2006.
7
http://www.businesslink.gov.uk/successionplanning – Accessed 18/12/06.

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 Hot Topic Spotlight 10: Succession planning

Annex: Succession planning - Statistics

This Annex sets out four figures which provide more detailed analysis of succession
planning, based on the South East Business Monitor. It should be noted that in some cases
these figures are based on a small number of responses and care should be taken in
interpreting the results.

Figure A1: Future of the business on retirement by area (%)

South Hants &
East Berks IoW Kent MKOB Surrey Sussex
Sell the
business 29 33 26 25 22 35 33
Keep it in
the family 24 27 30 24 26 13 21
Close the
business 7 7 9 8 6 4 5
No plans
at the 29 21 22 33 34 32 30
moment
Don't
know 11 12 10 10 9 16 11
Source: SE Business Monitor (November 2006). Base: All respondents who owned or had a stake in the business = 1,152.
Berkshire = 105, Hants & IoW = 118, Kent = 311, MKOB = 137, Surrey = 126 and Sussex = 355, MKOB = Milton Keynes,
Oxfordshire and Buckinghamshire. IOW = Isle of Wight. Note: Berks = Berkshire, Hants & IOW = Hampshire and the Isle of
Wight, MKOB = Milton Keynes, Oxfordshire and Buckinghamshire

Figure A2: Anticipation of transfer/closure in next 5 years – segmentation

model
7 Full Transfer of Ow nership
Start Up 0 Closure

17
Grow th (Ow ner managed)
4

Steady State (Ow ner 11

managed) 15

Corporate Grow th (Team 17

managed) 1

Steady State (Team 10

managed) 11

5
Other
13

0 2 4 6 8 10 12 14 16 18
%

Source: SE Business Monitor (November 2006). Base: All respondents who owned or had a stake in the business = 1,150. Start
ups = 78, growth (owner managed) = 218, steady state (owner managed) = 282, corporate growth (team managed) = 303,
steady state (team managed) = 220 and other = 49.

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 Hot Topic Spotlight 10: Succession planning

Figure A3: Owner managers who agree with statements below by broad
industry (%)

Retail/ Tourism/
Manufacturing
All industries

Construction
Land-Based

Distribution
Transport/
/Financial
Business

Services
Other
"I have a clear
financial plan for my 56 67 51 55 54 56 73
own retirement"
"My business has a
clear succession
strategy for 14 22 16 11 8 18 19
shareholding staff who
leave or retire"
"The value of my
business will form a
38 50 38 35 45 33 45
significant part of my
retirement fund"
"We could do with
some extra help with 17 13 23 19 17 14 25
succession planning"
Source: SE Business Monitor (November 2006). Base: All respondents who owned or had a stake in the business = 1,146. Land
based = 125, manufacturing = 211, construction = 150, retail, tourism & other = 215, business & financial services = 358 and
transport & distribution = 87.

Figure A4: Owner managers who disagree with statements below by broad
industry (%)
Retail/ Tourism/
Manufacturing
All industries

Construction

/Distribution
Land-Based

Business/

Transport
Financial
Services
Other

"I have a clear

financial plan for my 30 22 34 33 31 30 13
own retirement"
"My business has a
clear succession
strategy for 31 22 32 32 32 30 26
shareholding staff
who leave or retire"

"The value of my
business will form a
45 30 46 57 36 49 47
significant part of my
retirement fund"
"We could do with
some extra help with 60 75 55 56 60 63 57
succession planning"
Source: SE Business Monitor (November 2006). Base: All respondents who owned or had a stake in the business = 1,146. Land
based = 125, manufacturing = 211, construction = 150, retail, tourism & other = 215, business & financial services = 358 and
transport & distribution = 87.