Promotion of business transfers in the Baltic Sea Region E-Book

Max Hogeforster

• Herausgeber: Books on Demand
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 235

Veröffentlichungsjahr: 2021

Beschreibung

The ageing of society does not stop at company owners. More and more companies have to be handed over to the new generation. This process is a challenge for all parties involved. The support of business transfer assistance is just as essential for the European economy as the promotion of start-ups because both are critical to the development of the European economy. Over 450.000 firms with over two million jobs are transferred to a new owner in the EU-28 each year. Around one-third of these transfers fail, and the companies are closed. The future growth and sustainability of innovative companies in the Baltic Sea Region are severely limited by failed business transfers. Furthermore, due to a lack of available and appropriate successors, many firms are liquidated rather than transferred. This publication is part of the project INBETS (www.inbets.eu), highlights the background to the current situation of business transfers in the Baltic Sea Region, and proposes a policy program to promote business successions and open up new target groups of potential successors. Part-financed by the European Union (European Development Fund and European Neighbourhood and Partnership Instrument) within the INBETS project. This publication does not necessarily reflect the opinion of the European Commission.

Leseprobe

Content

Business Start-ups and Business Transfers

Current situations of the promotion in the Baltic Sea Region and their support

Literature review

Results of survey

Conclusions

References

Overview of political strategies

Policy Strategy Program

4.1 | Background

4.2 | Securing the next Generation of Entrepreneurs for SMEs

4.3 | Securing the Qualification of SME Entrepreneurs

4.4 | Securing the Financing of Business transfers

4.5 | Securing a comprehensive Service and Consulting Network for Business transfers

4.6 | Overview and Outlock

Action Plan “Women”

Action Plan “Employees as successors”

Action Plan “Immigrants as entrepreneurs”

Action Plan “Brain drain”

Closing Remarks

Other Publications by the Baltic Sea Academy

Members of the Hanse-Parlament

Members of the Baltic Sea Academy

1 | Business Start-ups and Business Transfers1

Business transfers began to raise special attention in European policy strategies with the launch of the Entrepreneurship 2020 action plan. It was stated that business transfer support is as important for the European economy as start-up support because both are equally important for the development of the European economy. In the EU-28 around 450.000 companies with more than two million employees are transferred to a new owner every year according to the European Commission. Of these transfers, around 1/3 is not successful and the company goes bankrupt. Additionally, due to a lack of available and suitable successors, many companies are liquidated instead of being transferred.2 To ease this process, the INBETS project (www.inbets.eu) was initiated, co-funded by the INTERREG VB Programme of the European Union.

The main reason for a business transfer is the retirement of the owner-manager, but other reasons like the pursuance of other career opportunities or unforeseen events are also existent. An unsuccessful transfer of the business can cause several negative effects:

Job loss of the workers

Domino effects on local enterprises and suppliers

Loss of valuable and specialized knowledge

Negative wealth effects for the owner-managers family assets

Harm to ongoing and future business prospects by unsettling partners, customers and suppliers

3

On the contrary, successful business transfers provide many positive effects for the economy:

Preservation of numerous jobs

Continuity of production processes

Retention of business contacts

Preservation of the value of tangible and intangible assets

Successful business transfer as an opportunity to rethink the strategic vision and the business model and a chance to introduce innovation and new management practices

Opportunity for new entrepreneurs to take over a business

4

The topic of securing successful business transfers is viable for an economy and now the topic is rapidly gaining attention among European policy makers. Surprisingly little country-specific information is available in European databases and a lack of academic studies, exploring business transfers and successions and its outcomes, is observable. The following pages try to fill in the gap regarding business transfers in the Baltic Sea region and aim to provide a more detailed foundation for European policy makers.

Countries in Eastern Europe have not yet developed a business succession environment, mainly due to historical reasons. Business owners in Eastern Europe who established their business in the 1990s and now want pass on their business have no to little support mechanisms available.5

There is also evidence that investments in securing the successful transfer of businesses are more sustainable than start-up investments. Survival rates of start-ups after five years generally ranges between 35-50%, depending on the economic climate, while the survival rates of transferred firms are between 90-96% five years after the transfer.67

The focus on business transfers is enlarged in the analysis in order to include startups and business creations as well. Just as many start-up entrepreneurs could take over an existing business and vice versa, both groups represent the same scare resource “entrepreneurs”. Therefore, country specific information about entrepreneurial characteristics, opportunities and potentials is included as well, serving as a proxy for successors characteristics. In the following country specific information about business transfers and start-ups are presented individually for each country in the BSR.

Analysis of Potential Business Transfers

One purpose of this analysis of business transfers and start-ups in the Baltic Sea region is the approximation of the demand of entrepreneurs in this region. Start-ups and business transfers are the two main areas demanding entrepreneurs. The analysis therefore covers both sides. As little data is available about the total number of businesses to be transferred in the upcoming years, the analysis will work with known business transfer rates and estimates the rates in countries without hard numbers available.

Country

Number of SME (2019 - Eurostat)

Business Transfer Rate

New limited liability businesses (2018 - World Bank)

Total Entrepreneur Demand

Business Transfer Entrepreneurs

BT share on total entrepreneurs

Column 3 / Column 1

Denmark

227.102

3,33%

36.341

43.911

7.570

17%

16%

Germany

2.552.890

3,33%

72.844

157.940

85.096

54%

3%

Latvia

114.131

6,00%

9.864

16.712

6.848

41%

9%

Estonia

76.856

6,00%

19.950

24.561

4.611

19%

26%

Lithuania

197.788

6,00%

6.072

17.939

11.867

66%

3%

Poland Sweden

1.729.233 738.624

6,00% 3,33%

36.879 45.590

140.633 70.211

103.754 24.621

74% 35%

2% 6%

Finland

228.562

3,33%

14.700

22.319

7.619

34%

6%

Norway

293.403

3,33%

29.959

39.739

9.780

25%

10%

Hungary

581.927

6,00%

24.252

59.168

34.916

59%

4%

Russia

1.949.205

6,00%

317.468

434.420

116.952

27%

16%

only EU+BSR countries

6.447.113

266.492

553.394

286.902

52%

4%

BSR Region

8.689.721

613.919

1.027.553

413.634

40%

7%

The numbers of SMEs in each country were extracted from the SBA country reports referring to Eurostat data. The advantage of using Eurostat data is that the statistics are harmonised and comparable across countries. The disadvantage is that for some countries the data may be different from those published by national authorities. In this data the non-financial business economy is included, but no enterprises in agriculture, forestry and fisheries and the largely non-market service sectors such as education and health.

In order to calculate the number of business transfers per year estimates of rates of business transfers per year were used. These estimates were based on the information available about business transfers and the qualitative research within the partner network. Two categories of countries were created to outline the different development paths.

The first category consists of countries without Soviet history, including Denmark, Germany, Sweden, Finland and Norway. For these countries, a business cycle at the upper end of the generation cycle of 30 years was used to estimate the rate of business transfers.8 The calculated number of 85.096 business transfers in Germany is within the range of findings of different German research associations (see Germany). Looking at the Finish numbers the estimate of 7.619 business transfers per year solidly ranges within the numbers of business transfers the Finish SME barometer and other finish researchers calculated (see Finland).

The situation is different for countries in Eastern Europe, which form the second category. These countries were members of the Soviet Union until its collapse in 1991. The collapse came with a change of economic systems. In the Soviet system the companies belonged to the state and a communist system restricted entrepreneurial activities. This changed in 1991 and a new, market-oriented system allowed the people to create businesses, which results in strong entrepreneurial activity.9 Now, almost 30 years after the system change many entrepreneurs of the first hour are close to their retirement. Consequently, a rising number of businesses need to be transferred each year. Numbers from IPOSZ (Hungarian Association of Craftsmen’s Corporations) suggest that 6% of all craftsmen are going to transfer their business per year in the next years. Due to the lack of sound data from other Eastern European countries this rate was adopted for all Eastern European countries. This seems plausible, taking into account the structural similarities and development processes of these countries.

Looking at the BSR a total business transfer potential of more than 413.000 companies per year was identified. These numbers stand partially in contrast to the numbers of business transfers publicized by the European Commission (EC). The European Commission reports that around 450.000 businesses are transferred within the EU-28 per year.10 But, calculating the number of business transfers with a rate of only 3.3% over all Europe with more than 23.5 million SME registered this would mean that almost 800.000 business transfers take place in Europe per year. Due to a lack of statistical data, it is not possible to completely retrace the EC estimates, but the huge difference to the reported numbers by the partner network clearly indicates a need for more data collection and analysis.

One limitation of these calculations is the inclusion of all SMEs. Some researchers argue that SMEs that fall below a certain level of operating profit (e.g. 58.442 € for sole proprietorships and partnerships in Germany or no losses in corporations11) should be classified as not transferable and therefore should not be included in the calculations of potential transfers. But it can also be argued that companies can dispose of tangible and intangible business assets which nevertheless make a transfer economically feasible, that losses can be of a temporary nature and that even companies below certain operating profits can be transferable, if the business prospects are promising.

In the following, more detailed information about business transfers and entrepreneurial activity are presented individually for each country.

Denmark

In 2019, Denmark had a total number of 227.102 SMEs, representing 99.7% of all Danish companies. They employed 1.149.785 employees, this way providing 64.1% of all Danish private jobs and adding 60.8% or 91.0 billion € of value to the Danish economy.12

The entrepreneurial numbers in Denmark are at an all-time high, over 36.000 new SME were registered in 2018, more than ever before. In the area of entrepreneurship and start-up promotion significant improvements were made in recent years, like lowering administrative barriers and costs. Also a special entrepreneurial training is in place. In the school year 2017-2018, 26% of all students ranging from primary school to university received this training in entrepreneurship.13 But, the early stage entrepreneurial activity of women in Denmark is with 3.79% substantially lower than the European average of 5.85%.14

The analysis of potential business transfers shows that, if 3.3% of SMEs are transferred per year, an additional need for entrepreneurs of 7.570 is needed to ensure a successful takeover of the company. Compared to the 36.341 newly registered businesses per year, this indicates that business transfers are responsible for around 17% of the total demand for entrepreneurs in the country. This is the lowest number in the BSR.

Germany

The annual averages of the estimates range between 19.000 and 102,000 potential business transfers per year. The most recent extrapolation is based on 511.000 companies planning to transfer their business between 2018 and 2022.1516

In another study the IfM (Institute for SME Research) assumes 150,000 business transfers in the period 2018 to 2022 (five-year period), which means 30.000 transfers per year. But in these calculations only companies with an annual profit of at least € 58.442 € for sole proprietorships or no losses for corporations are included in the projections. Despite the increased number of companies that are due for handover, the IfM Bonn does not expect a general gap of successors for the period 2018 to 2022 in Germany. However, regional and industry-specific bottlenecks cannot be ruled out. A good half of all German family-owned companies resolve their succession within the family. 18 % of family businesses hand over the business to their employees and the remaining 29 % sell their business to external parties.17

A study about successor in Germany found out that 77.3% of successors of German companies were men and only 22.7% were female. This shows a potential for female entrepreneurs and business successors in Germany.18 This is in line with research about female early stage entrepreneurial activity. This ratio is in Germany with 3.29% clearly lower than the European average of 5.65%.

The estimates of the calculations at the beginning of this work indicate a potential of 85.096 business transfer per year in Germany. This number is a little higher than the total of 72.844 new limited liable businesses registered per year in Germany and show the importance of business transfers in Germany, as business transfers represent 54% of the entrepreneur demand in Germany. These numbers range within recent numbers published by the IfM and the KfW.

Latvia

Latvia in 2019 reported 114.131 SMEs, meaning 99.8% of all companies in Latvia were classified as SMEs. 519.697 workers were employed in these SME, meaning 79.4% of the Latvian workforce was working in SME. They added a total value of 9.3 billion €, which was 71.1% of the total value added that year.

Entrepreneurship in Latvia began to rise almost 30 years ago, similar to other Eastern European countries, marking a path of transition. Almost at the same time as declaring independence the first Law of Entrepreneurship was introduced in Latvia. This marked the beginning of a wave of entrepreneurs starting new businesses.

It strikes out that from 1991 – 1994 around 100.000 new companies were registered, meaning an average of 25.000 businesses per year were registered. A comparison to the 9.864 businesses that were registered in Latvia in 2018 shows the scope of this founding boom. Especially, the businesses from that that are still active have a need of being transferred in the next years, as more and more of their founders are getting close to retirement age. Therefore a higher rate of business transfers for the next years can be assumed.

The calculations made in this work indicate a potential of 6.848 business transfers per year in Latvia and according to the World Bank 9.864 limited liable companies were registered in Latvia in 2018. Meaning that the share of business transfers in the total demand for entrepreneurs was 41%.

Estonia

In 2019 76.856 or 99.8% of all Estonian enterprises were SMEs. These companies employ in total 345.531 employees, representing 79.2% of the Estonian workforce. This is a quite high share compared to the 66.6% European average. 10.6 billion € of value is added per year by Estonian SME, meaning they create 76.7% of the added value in Estonia.19

Traditions of SMEs in Estonia were destroyed during the incorporation of Estonia into the Soviet Union. In past centuries entrepreneurship in Estonia had advanced, but during the occupation period private entrepreneurship was not allowed. After Estonia regained independence in 1991, private entrepreneurship gained a lot of momentum, the first family farms were established and family business started to evolve. People with entrepreneurial spirit started to develop private business as private entrepreneurs. The topic of business transfers is still underrepresented in the political agenda in Estonia, but the entrepreneurs who started their business shortly after the independence are now in the age where they wish to pass the business on to the next generation.20

Nowadays, Estonia is one of the leading European countries in promoting entrepreneurship among its citizen. It has the highest rate of early stage entrepreneurial activity in general and among women in the European Union. Also, entrepreneurship education at basic school levels and at post-secondary levels are among the best in the EU.21

The estimates made in the calculations above indicate a potential of business transfers in Estonia of 4.611 business transfers per year. The number of newly registered limited liable companies in 2018 was 19.950, meaning that business transfers have a share of 19% on the total demand of entrepreneurs. This is after Denmark the lowest share in the BSR.

Lithuania

Lithuania in 2019 reported 197.788 SMEs, so 99.8% of all companies in Lithuania were classified as SMEs. 755.158 workers were employed in these SME, so 75.9% of the Lithuanian workforce is working in SMEs. They added a total value of 14.0 billion €, which was 69.4% of the total value added to the Lithuanian economy that year. 22

Researchers found out that SME business transfers can be a component of regional development concepts, which has only recently been an issue in Lithuania. They indicate that in Lithuania, a priority should be given to the promotion of growth poles with SMEs and that it is important to assess the opportunities that exist for the economic development of SMEs.23 Ensuring the successful transfer of SME is such an opportunity, worth to be assessed.

The calculations of the potential of business transfers in Lithuania resulted in an estimate of 11.867 potential business transfers per year in Lithuania. Its importance is notable, when compared to the number of newly registered liable companies in Lithuania, which was 6.072. This results in a total entrepreneur demand of almost 18.000 entrepreneurs per year willing to overtake or start a business, of which business transfers have a large share of 66%.

Poland

In 2019, Poland had a total number of 1.729.233 SMEs, representing 99.8% of all Polish companies. They employed 6.125.825 employees, this way providing 67.1% of all Polish private jobs and adding 51.4% or 119.5 billion € of value to the economy.24

The analysis for business transfers in Poland indicates that a little more than 100.000 companies need to be transferred per year. Also, 36.879 limited liable companies were registered in Poland in 2018, indicating a total need of entrepreneurs of more than 140.000 per year. In Poland a large share (76%) of these entrepreneurs is needed for the securing of business transfers.

Polish SME are mainly the effect of the functioning of the economy over the last 25 years and their managers are actually the first generation of entrepreneurs after the Soviet time.25 Most of these family businesses want the company to stay within the family (56%), only 18% do not want that and the rest is undecided (26%). Of these transfers within the family the preferred form of transfer for Polish companies is handing over only the management to the next generation (42%). 32% of owner-managers want to transfer the complete ownership and 18% also want to transfer the governance/supervisory board.26 This shows the strong involvement of owner-managers in family businesses and their desire of staying involved. Also, the high preference for transfers within the family indicates a good starting point for entrepreneurial training.

According to the EU Start-up Monitor, the Polish start-up ecosystem has been actively developing over the past few years. Looking at the characteristics of polish founders, the typical Polish founder is male (74.6 %) and holds a university degree (81.7 %). But Poland is also leading the way for European female entrepreneurship, with 23.9 % female founders compared to the EU average of 15.6 %.27

In Poland, the lack of awareness and knowledge of entrepreneurs and governmental agencies about business succession is one of the main obstacles. An additional problem is that Polish family business owners have a distrust of external people (i.e. managers, advisers and experts) and a low interest in external training. Additionally, there are almost no external advisors available in Poland. Also, senior owners do not want to consider succession in their companies as they think they still have time and they want to do everything by themselves. In their point of view, they are still able to work and they postpone the moment of the succession further and further. When the moment comes, it is already too late, because different to their desire the children often do not want to take over the family business in Poland. Stakeholders from Poland criticize their system in regard to business succession. One of the main criticisms is that successors entering the businesses activity must immediately fulfil all legal requirements. This discourages people from becoming successors. The local Polish authorities ask for a reduction of taxes in a specified timeframe, counselling of professionals and support from the EU funds. From conversations with the owners of Polish family firms it appears that even more advanced forms of business (e.g. limited liability company) do not guarantee safe transfer of ownership and power. However, many owners do not take into account rules and mechanisms ensuring the smooth transfer of management. Therefore, Polish companies are neither from the organizational side nor from the legal side prepared for business succession.28

Sweden29

In 2019 738.624 or 99.9% of all Swedish enterprises were SMEs. These companies employ 2.184.295 employees, representing 65.5% of the Swedish workforce. 142 billion € of value is added per year by Swedish SME, meaning they create 61.2% of the added value in Sweden.30

The entrepreneur characteristics in Sweden show that, the female entrepreneurship rate is relatively low (4.02% of female population) and below the EU average (5.65%). Also, the proportion of Swedish women who are self-employed with employees (1.6 % of females) and the proportion of own-account workers (3.8 % of females) are among the lowest in the OECD.31 One reasons for this might be the good labour market, causing a lack of women who want to start a business. Even the improvement of entrepreneurial framework conditions and the high social status of entrepreneurs didn’t lead to an increase in female entrepreneurial activity.32

The potential for business transfers in Sweden is estimated by the previous calculations to a total amount of 24.621 transfers per year. 2018 in Sweden 45.490 companies were registered, meaning that the total entrepreneur demand can be estimated to 70.211 entrepreneurs per year, of which 35% are needed to ensure business transfers.

The reason for this drastic increase in business transfers is that a quarter of all business owners are 55-64 years old (the average age of business owners in Sweden is 52 years old)2. One-sixth is 65 years old or older (the retirement age for Sweden is 65 years old), which corresponds to approximately 47 000 businesses with a total of 310 000 employees. The majority of these business owners are in the mineral exploration and mining industry (29%) or the energy sector (29%). One out of four limited liability companies are also run only by one person, the business owner. One out of every five limited liability companies with more than 50 employees has a business owner that is over 65 years old, which corresponds to about 3 200 companies, with a total of approx. 200 000 employees. Notably, Sweden has the second-highest number of business owners that are over 65 years old in the EU (14,2% compared to the average of 6% in the EU)33. About 25 % of the business owners in Sweden plans to work until they are at least 68 years old (3 years longer than the normal retiring age) because they love their job (50% of them) or they feel like they have to work longer to be able to survive on their retirement plans (33% of them)4. It´s not usual that business owners retire even later when they are 70-75 years old2.

Percentage of Business Owners Over 65 Years Old

There has been a long ongoing discussion about taxes for businesses in Sweden for several years. Taxes for business transfers are high, and until June 2019 the taxes favored business transfers to an external successor, rather than a family member as the successor34. Today the taxes are the same no matter who the successor is. However, there are still other regulations and laws that benefit business transfers outside the family.

Awareness of business transfers among business owners

In 2017, the Swedish Federation of Business Owners carried out a survey2. They asked 1 100 business owners about their business transfer plans. For 6% of the business owners, a business transfer will take place within 2 years, 16% believe it will happen within 5 years and one out four expects a transfer within 10 years. Notably, half have not taken any action to prepare their business transfer yet. Among the ones that have started the preparations, the majority have started discussions with their family or an auditor. Just a few have discussed it with their employees and/or board.

Every fourth business owner will most likely close down the business rather than transferring it. This seems to be the case for business owners who run their business by themselves and the business depends on their skills, knowledge, and network. Hence, the number of employees seems to be crucial, businesses with 10 employees or more are highly likely to carry out a business transfer. Other common reasons for closing down are that no family member or employee can or want to take over the business, difficulties in estimating the value the company, failure to find an external successor, law issues, and uncertainty about how the transfer should happen. The majority plan to retire after a close down or business transfer. Some plan to start a new business, continue to work within the company (new position), counseling other companies, engage more in another company they own, be employed, or carry out board member activities in other companies.

Among the business owners that will carry out a business transfer within 10 years, the majority believe that the most likely one to take over the business is another company or a family member. Some believe that the successor will be a shareholder, private person, or current employee. The majority also think that a business transfer will decrease the competence within the company but will have a positive impact on the number of employees, growth, competitiveness, and profitability. Almost everyone believes it will be difficult to carry out a business transfer and about one out of ten expect challenges with their business transfer. The biggest challenge is that the business depends on the business owner’s competence and network. The fact that many business owners enjoy running their businesses is another limiting factor. Other challenges are difficulties in valuing the company, no successor, taxes, and laws. When it comes to the timeline, the majority (40%) believe it takes 1-2 years to complete a business transfer. About a third think it will be faster, within a year. 12% believe it takes 3–4 years and 4% think 5-10 years.

In 2019, The Confederation of Swedish Enterprise carried out a survey35. 502 companies in the Västra Götaland region in Sweden answered the survey about a possible business transfer. Every third business owner plans to make a business transfer within 5 years. 12% are not sure if a business transfer will happen or not. The main reason (52%) for a business transfer to occur is due to the business owner´s age or health condition. When it comes to the successor, 38% plan to sell to an external buyer. Three out of ten expect a family member to be the successor.

Generally in Sweden, business owners in start-ups love to talk about their businesses for publicity, but when it comes to business transfers the owners tend to be more cautious and reserved about letting others know that they are selling the businesses. It seems business owners are ashamed to sell their company3.

Available support

Several organizations in Sweden offer support during a business transfer e.g. banks, business brokers, auditors, lawyers, business support organizations (e.g. almi.se, foretagarna.se, nyforetagarcentrum.se and connectsverige.se), branch federations (e.g. lrf.se for farming and iuc.se for the industry sector), consultants (e.g. excore.se) and business transfer websites (e.g. blocket.se, objektvision.se, and bolagsplatsen.se). Companies can get support from expert advisors (which give advice within their area of expertise) or process advisors (which have knowledge about the business transfer process including the emotional aspects)2. There are also books available, for example, in 2018 a book about successful business transfers with hand-on tips and guides was published7. In the Swedish Federation of Business Owners survey half on the business owners answered that they will ask an auditor for help with their business transfer. 25% will ask a lawyer or their own network. Others will ask their bank or a business broker and some will not ask for any help.

Finland

Finland in 2019 reported 228.562 SMEs, meaning 99.7% of all companies in Finland were classified as SMEs. 962.785 workers were employed in these SME, so 65.2% of the Finnish workforce is working in SMEs. They added a total value of 63.5 billion €, which was 59.6% of the total value added that year. 36