THE OPERATION OF THE SME

TRANSFER MARKET

Policy Research Team:

Gordon Allinson
Paul Braidford
Maxine Houston
Paul Robson
Ian Stone

Report for BERR and UK partners

Centre for Entrepreneurship

Durham Business School

URN: 07/1691

July 2007
Contents

Executive Summary........................................................................i

1 Introduction............................................................................1
1.1 The research project.....................................................................................1
1.2 Size of the transfer market............................................................................1
1.3 Types of market failure.................................................................................6
1.4 Purpose of study............................................................................................9

2 Scoping business transfer issues............................................11

2.1 Market options for buying and selling.........................................................11
2.2 Factors affecting transfer............................................................................12
2.3 Matching databases....................................................................................15
2.4 The borrowing environment........................................................................16
2.5 Using intermediaries...................................................................................17
2.6 Targeting policy: segmenting the market...................................................19

3 Focus groups findings............................................................21

3.1 Use of intermediaries..................................................................................21
3.2 Routes to selling and purchase...................................................................22
3.3 Policy options to address market failure.....................................................26

4 Survey of exiting owners........................................................30

4.1 Profile of sample..........................................................................................30
4.2 Types of exit................................................................................................31
4.3 Form of Exit.................................................................................................32
4.4 Determinants of exit decision......................................................................33
4.5 Finding a buyer...........................................................................................34
4.6 Employee buy-outs......................................................................................35
4.7 Experience in relation to expectations........................................................35
4.8 Policies for improving transfer.....................................................................36

5 Survey of buyers....................................................................38
5.1 The sample..................................................................................................38
5.2 Why buy?.....................................................................................................38
5.3 Use of intermediaries..................................................................................40
5.4 Finding a business to buy............................................................................42
5.5 Buying the business....................................................................................44
5.6 Experience in relation to expectations........................................................47
5.7 Post-transfer performance...........................................................................48
5.8 Differences by area of the UK......................................................................52
5.9 Policies to improve transfer.........................................................................53
6 Conclusions on market failure.................................................54

7 Policy and further research.....................................................57

7.1 Policy indications.........................................................................................57
7.2 Further research..........................................................................................59

References..................................................................................61

Appendices.................................................................................63

Acknowledgements
The authors would like to thank all business owners, intermediaries and practitioners who
attended focus groups or gave interviews in connection with this study. The report has also
benefited from the helpful comments of David Purdy, Andrew Lincoln and Phil Mercer (of
BERR), and members of the Steering Group, including representatives of the Welsh
Development Agency, Invest Northern Ireland and the Scottish Executive. Andrew Hunt and
Zilia Iskoujina (of DBS) provided, respectively, useful advice on statistical testing and focus
group support.
EXECUTIVE SUMMARY
• One tentative estimate places the incidence of transfer failure at
around 100,000 per year, although many of these ‘failures’ involve
micro businesses, with few assets or employees, and which may not be
viable candidates for transfer. Through a literature review, focus
groups with those buying and selling businesses and intermediaries in
the process, as well as separate surveys of both buyers and sellers this
study aims to provide a better understanding of the operation of the UK
market for the buying and selling of SMEs.

• The research was founded upon the broad economic principles of

market failure: that the commercial transfer market may operate
imperfectly, leading to a lower than optimal number of businesses
being bought and sold. The research project aimed to determine the
extent of failure in the transfer market and suggest possible routes
towards improvements in the market's efficiency and effectiveness.

OPTIMISING TRANSFERS - KEY FINDINGS

Exiting owners’ perspectives
• Size and sector of business appear to be the most significant
determinants of the type of exit planned. Smaller businesses (which in
our survey also tended to have older owners) and manufacturers were
less likely to plan actually to sell than other types of business.

• Although many sellers were nearing retirement age, only 17% had a
detailed exit plan. This limited their options and increased the
likelihood of a low final purchase price or transfer failure. Owners of
larger businesses and those who had already successfully transferred
were more likely to have a plan.

• Over two-thirds of those intending to sell had received an approach to

buy. These often took the form of speculative enquiries from a
business transfer agent. Business agents/brokers, accountants and
network contacts were the three most frequently used sources to find a
buyer and were regarded as the most useful.

Purchasers’ perspectives
• Buyers of businesses were largely motivated by ‘pull factors’ (a new
challenge, a capital gain etc.) rather than ‘push factors’, such as losing
their job. Men were more likely to be motivated by the financial
aspects of a purchase than women. Relatively few (16%) were
completely against starting a business from scratch; those who were
reported they had more managerial than entrepreneurial skills.

i
• Purchasers were generally satisfied with the quality of advice and
support they received. Solicitors, accountants and independent
financial advisers were highly rated and usually already known to the
buyer. Specialist intermediaries, including business brokers, were used
by relatively few and were not highly rated.

• Purchasers reported relatively few difficulties with the transfer process

– 60% thought it ‘easy’ or ‘very easy’. The process also tended to be
rapid - over half of the successful purchasers completed their purchase
within three months of identifying a target business. The smaller the
size of the workforce, the more rapidly the purchase tended to be
completed.

• The majority located their target business through informal means,

usually via a representative of the business itself or existing business
and personal networks. Indeed, around 1 in 3 did not search for a
business at all, either having been ‘offered’ a business or only ever
having a single target business in mind.

• Over half were only prepared to look in their ‘local’ area, with most
purchases occurring within 5 miles of their home base. ‘Formal’ search
methods – advertising or the use of a transfer agent or other
intermediary – were far less used, though use of the internet was
higher in Scotland (17%) and Wales (10%) than in England (3%).

• Overall, only 12% of purchasers found it more difficult than expected to

find finance. The overwhelming majority (75%) used their own savings
and/or a standard bank loan. However, some would-be purchasers
perceive that banks prefer to offer special deals for business start-ups
and they may be deterred from pursuing loans to buy a business by
their perceptions of a lack of such deals.
• Women tend to buy smaller businesses than men, and are more reliant
on loan finance.
• The mean proportion paid in intermediaries’ fees was 7% of the asking
price, in line with targets suggested by specialists. Over one in four said
fees were higher than they had expected, with Scottish and Welsh
purchasers more likely to report both higher fees and that the process
took longer than anticipated.

• The majority of businesses performed well post-handover, indicating that

purchases were worthwhile. Some 28% reported a decrease in
employment following purchase, although a substantial number of those
buying businesses with no employees went on to recruit at least one
additional person post-transfer.

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Why the market fails
• There is no overall failure in communication of the intention to buy or
sell – informal networks and advertised sales work reasonably well for
most buyers and sellers. However, these systems tend to work less
effectively both for female purchasers and in more deprived areas.

• There is greater evidence of market failure related to intermediaries

and due diligence. Buyers and sellers often do not choose the best
qualified intermediaries for transfer; intermediaries’ initial estimates of
time and cost are often too low (particularly among legal
professionals); and sellers may inadvertently fail to reveal all pertinent
information. These difficulties increase the costs and duration of
transfers and the likelihood of the process failing.

• Potential purchasers may be deterred, or scale their ambitions down, due

to perceptions that the fiscal regime and financial institutions treat start-
up more favourably than purchase.

Improving outcomes: policy implications

• Steps should be taken to bolster networking, particularly amongst
groups with less extended contacts – for example women or those in
more deprived areas.
• To produce more realistic estimates of time and costs involved, the
transfer process should be made more transparent and streamlined.
One-stop shops could provide basic information on business transfer,
particularly to sellers, while intermediaries could increase their use of
continuing professional development courses.
• SME owner-managers must be made aware of the need to plan for exit
– and their capacity to do so has to be improved. This could be
achieved via trusted intermediaries, such as accountants.
• Though finance generally was not a problem, the most common policy
suggestions were (i) the tax regime should treat purchases as
analogous to start-ups, (ii) loans could be introduced specifically
tailored for business transfer, ideally backed by government guarantee.
However, there is no evidence that the tax system does discriminate,
suggesting a need for better information, rather than fiscal reform.

• Those with no prior experience of selling were most likely to support

policies designed to address their lack of knowledge, such as one-stop
shops, mentoring, and a self-analysis toolkit.

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Factors which improve the likelihood of successful transfer
• Businesses in unopposed or less competitive markets, with a niche
position or unique assets, are more likely to sell successfully
• The transfer process should be standardised and streamlined as far as
possible.
• The more knowledge a seller has about transfer before initiating a sale,
including their own prior experience, such as research on
intermediaries, tax issues etc., the more likely the sale is to be
successful.
• Sellers need to be realistic and flexible over their asking price, and try
to ensure that their assessment of the value of their business is as
objective as possible.
• Internal disputes need to be resolved before a business is offered for
sale, and should not be allowed to delay or raise the costs of a transfer.
• Effective networking and word-of-mouth are the preferred routes to
selling, and most transfers seem to be initiated via this route.
• Anonymity and discretion during the initial stages of a sale are
important, in order not to jeopardise business performance.
• Sellers should engage intermediaries with business transfer experience
or training,, preferably those recommended by other businesses. They
should be able to place faith in such intermediaries: that they will
perform efficiently and provide accurate information about costs and
projected timescale(s) at the outset.
• Agreed timescales and deadlines then need to be adhered to by
intermediaries, possibly with penalties imposed for lateness.

iv
1 INTRODUCTION

1.1 THE RESEARCH PROJECT

In the view of the European Commission (EC, 2002) the failure of business
succession presents a potential threat to the survival of SMEs and, therefore,
to output and employment growth. This in turn implies that the transfer
market needs to be developed to operate as efficiently as possible. Earlier
work by the Durham Business School team (SBS, 2004), drew attention to the
knowledge gap regarding the operation of the market. This study,
undertaken in 2006 by Durham Business School, on behalf of the Small
Business Service (in collaboration with the Welsh Development Agency,
Invest Northern Ireland and Scottish Executive), is intended to provide a
better understanding of the operation of the UK market for the buying and
selling of small and medium enterprises (SMEs). More specifically, the study
asks whether the commercial transfer market operates imperfectly, resulting
in a lower than optimal number of businesses being bought and sold. It
should be stressed that the policy aim should not be to ensure that every
business is sold, but rather that viable ‘going concerns’, otherwise facing
closure, are successfully transferred to new owners, rather than lost to the
market. In light of this consideration, it assesses whether there is a case for
intervention and, where appropriate, suggests suitable action to address
obstacles to business succession.

This study seeks to provide the first comprehensive picture of the UK

business transfer market, drawing on evidence derived from three main
research stages: (a) a literature review and interviews with relevant
stakeholders and intermediaries to scope the research (see Section 2); (b) a
series of focus groups, held throughout the United Kingdom, to identify key
avenues for investigation (Section 3); and (c) two surveys, one questioning
those who were either in the process of selling or closing their business
(sellers, Section 4), the other focused upon those who have bought a
business (buyers, Section 5).

This section provides background information on the transfer market and its
operation, gauging the scale and characteristics of: (1) businesses for sale in
the market; (2) businesses demanded; (3) completed sales and closures; and
(4) transfer ‘failures’. It goes on to set out the ways in which market failure
can interfere in the process of buying and selling of firms, and also provides a
framework for systematically assessing key aspects of both market processes
and outcomes, distinguishing carefully between successful and unsuccessful
transfers.

1
 1.2 SIZE OF THE TRANSFER MARKET
No definitive estimates exist of the number of business for sale in the UK, the
numbers that find a successor or of viable business that fail to transfer. While
transfers of larger businesses tend to be widely reported, those of smaller
businesses go largely unnoticed. This section brings together fragmented
information from the literature relating to the supply and demand of
businesses, as well as sales and transfer failures.
Supply and demand estimates
Regarding the supply of firms, there is no requirement to notify government
agencies of a sale, nor can a transfer be captured easily, through sources
such as Companies House records. While estimates have been made in a
number of countries, definitions and measurements vary and divergences in
transfer rates result from cultural, legal and political differences (Morris,
2004). Recent estimates of the number of firms for sale have arisen out of
European Union concern about the potential impact of an ageing population
upon succession. It has been argued that an average of one-third of
enterprises in Member States would be subject to succession over the
coming decade (EC, 2002). On reasonable assumptions, this translates to
around 3% of SMEs with employees (equivalent to 40,000 firms annually)
potentially undergoing a transfer of ownership, but – as we have argued
previously (SBS, 2004) - the method by which the EU figure is derived was
relatively crude.

A UK perspective on sales is also provided by the SBS Annual Small Business

Survey (SBS, 2006) which found that 22% of owners wished to sell the
business when they retired, compared with 25% who would try to pass it on
to a family member and 36% who had no current plans. Businesses with
employees were more likely than those without to be planning a sale (26%
versus 20%) and micro businesses were more likely than either small or
medium businesses to be planning to sell (27%, 24% and 22%, respectively),
even though the pattern of actual sales tends to increase with firm size.
Sectorally, services business owners were substantially the most likely to
intend to sell (29% of respondents), followed by production (23%).

In addition to the influence of demographic structure, there is strong

research evidence pointing towards increased commercial (i.e. extra-family)
succession. Studies of family business succession, in Germany, Austria and
the Netherlands, have found that the proportion of businesses passed on to
the next generation is steadily falling, implying another source of growth in
commercial market transfers (SBS, 2004).

On the demand side, purchasers of businesses are often other firms, and the
propensity for acquisition is known to increase with firm size. A recent UK
study showed that under 3% of micro firms had acquired another firm (or

2
firms), compared with 10% of small firms and 23% of medium-sized firms
(Cosh and Hughes, 2000; 2003). The survey data for 2002 showed that 18%
of firms had themselves received a bid or merger proposal in the last two
years; again varying on the basis of size: 9% of micro, 22% of small and 26%
of medium businesses (Cosh and Hughes, 2003). In addition, innovation,
growth and profitability were all found to be positively related to being a bid
target. Innovators (23%) were twice as likely as non-innovators (11%) to
have been a bid target, while high employment growth (25%+ in last 3
years) firms were more likely to have received a bid (24%) than firms with
zero or declining employment growth (14%).

Demand for firms by individuals is restricted by a widespread preference for

start-up over purchase of a going concern. More than six out of ten potential
entrepreneurs in the Netherlands would rather start their own business than
buy one (Netherlands Ministry of Economic Affairs, 2003). Both the SBS’s
Household Survey of Entrepreneurs (2005) and the Federation of Small
Businesses’ Members Survey (2004) indicate that three-quarters of
entrepreneurs start a business from scratch, rather than purchase one, while
fewer than 15% of exiting entrepreneurs go on to buy an another existing
business (Stokes and Blackburn, 2001).

These findings help to explain why demand for firms is considerably below
supply (West, 2004; Meijaard 2005). With substantial numbers of small
businesses for sale, and relatively few potential buyers, purchasers can
cherry-pick the best firms on the market. This tends to work against many
businesses seeking to transfer ownership that are in older, declining sectors,
rather than the dynamic, growing industries preferred by entrepreneurs
(Voithofer, 2002).

Overall, therefore, it seems that the size of a firm is instrumental - the larger
the business, the more likely it is to be the subject of a takeover or merger
bid, and to be actually taken over, as well as to be the purchaser of another
business. The implication is that the transfer market among larger
companies is relatively more efficient, and that efforts to address market
failure might best be directed towards companies at the smaller end of the
scale.

Transfer failure estimates

Passing the Baton (SBS, 2004) defined ‘succession failure’ as a situation
where, other things being equal, the business either closes or is diminished
owing to deficient succession processes. It is distinguished from ‘business
failure’, which refers to closure of the business because it has become
unsustainable as a commercial entity. Thus not every closure represents
succession failure. While some research gives us an idea of the scale of
transfers in relation to closures - e.g. actual transfers in the Netherlands

3
amount to under a third of the number of exits (Meijaard 2005) - it tells us
little about the incidence of transfer failure.

Drawing upon research by Stokes and Blackburn (2001) and Voithofer (2002),
we previously suggested, tentatively, that business transfer failure – i.e. the
closure of a viable business because no suitable successor could be found –
accounted for between 28,000 and 46,500 of the 155,000 closures recorded
in VAT records for 2002 (SBS, 2004). It was further suggested that, including
those not VAT registered, the true number of transfer failures may exceed
100,000. A large number of these failures may actually be one-person
businesses: estimates from the USA suggest that only one in 5.5 businesses
for sale of 9 employees or fewer (less than 4% of the micro-business stock)
will actually sell (West, 2004).

Refining the terms ‘failure’ and ‘success’

Given the range of possibilities inherent in the process of selling, it is helpful
to visualise outcomes relating to succession and how these might relate to
market failure. Figure 1 tracks the process of business transfer from the first
decision made by the seller and the prospective buyer, through to the
completion or failure of the sale. This is a broad outline of the processes
involved, and cannot be a comprehensive representation of all relevant
factors. For example, if a buyer learns of a business for sale directly from the
seller or via a trusted network, both parties could make the leap from
‘decision to buy/sell’ to ‘initial contact’ without any intervening steps.
Similarly, such factors as the general economic context of the area in which
the business is located, the level of interest rates and whether the target
business is in a declining or growing sector, will also have an effect on the
course and outcome of the transfer process.

Of the six options presented at the bottom of the diagram, the only one that
represents a market ‘success’ is Outcome 1, the business selling for a true
and fair price. Here, neither the buyer nor seller lose out, having fairly
exchange the business at its true value.

4
Figure 1The process of buying or selling a business

Decision to sell Decision to buy

Contacts one or more sources

Contacts one or more sources
No Yes

Accountant Bank Lawyer Approaches broker to buy business

Suppliers Customers Brokers

Trade/professional Local Chambers of

association authority Commerce
Views online Views press
Business Link Public body Consultants adverts adverts

Yes
Approaches broker to sell business Extra costs Extra costs

No

Advertises business online Advertises business in press

INITIAL CONTACT

Confidentiality agreement Deposit requested Due diligence/negotiation

Yes
Price and conditions of sale agreed

No
No 
Finance in place? BUSINESS DOES NOT SELL Keep business going


Yes Redo process

SALE COMPLETED
Correct, true and fair price paid 
Close business

Price above true and fair price


Price less than true and fair price

5
Outcomes 2-4 offer the greatest scope for analysis of why, how and at what
point the process could fail, summarised in Table 1.

6
Table 1 Possible reasons for failure of business transfer process

7
2 Price above fair 3 Price below fair 4 Keep business going
value value
• Result good for seller, • Result poor for seller, • Lack of availability of
poor for buyer good for buyer finance from banks etc
• Failure to carry out • Seller may not have • Due diligence raises
due diligence properly sought advice from unanswered questions
- by buyer and/or by private/public sources about strategy, growth,
agents? prospects and,
especially, staff
• Failure to take advice • Broker may not have • Buyers and sellers not
in process by buyer been used by seller flexible enough
• Poor job by buyer’s • Seller may not have • Seller not ready to sell,
advisers acted on advice or not prepared to
devote enough time to
process
• Poor job by buyer’s • Adviser or broker did • Time and resources
broker or agent not perform job spent with no return, by
properly both parties
• Insufficient number of • Market worked?
buyers?
• The market ‘worked’ – • Failure to ask permission
therefore the initial to talk to key
asking price was too stakeholders could
high! cause tensions
• Seller did not have • Seller did not have
sufficient knowledge sufficient knowledge of
of process of buying process of buying and
and selling selling
• Buyer did not have • Buyer did not have
sufficient knowledge sufficient knowledge of
of process of buying process of buying and
and selling selling
• Too many (un-needed)
assets included?
• IP industry? – problems
with value and sale of IP
assets
• Person-specific industry?
– so, of little value to sell
• Declining industry?

8
 • Too much competition
and/or easy entry

Outcome 5, repeating the selling process, would lead to more expense for
the seller, threatening jobs, investment and growth, and could damage the
viability of the business because of its apparent lack of attractiveness in the
judgement of other prospective purchasers. Outcome 6 can be seen as a
relatively straightforward business failure, not a transfer failure – the owner,
having exhausted all means of keeping the business going, decides to close.
However, Outcome 6, as noted previously, may not in fact be indicative of
the failure of the transfer market, but rather may be a sign that the market is
operating efficiently and that the business is unviable.

It is also possible that Outcome 3 could be seen as a form of ‘success’ from

the point of view of the economy as a whole, if it releases resources and
allows value gains which benefit economic performance in subsequent
periods. However, over the longer term, this outcome still might be
damaging to the economy in that it might discourage those who make a
practice of forming companies specifically for market-based disposal.

1.3 TYPES OF MARKET FAILURE

As well as the difficulties of accurately estimating the size of the UK business
transfer market (and that of related failures), there is a lack of knowledge
about the transfer process itself. Research has been lacking in the
functioning of the market with respect to succession, even though studies
(such as that of several northern European countries by Geerts et al., 2004)
reveal that some two-thirds of owners experience problems with commercial
transfers - particularly takeovers and management buy-outs (MBOs)
compared with family successions. In fact, much of the extant literature on
business transfer concentrates on intra-family succession, even though only
a minority (and falling) share of transfers occur via this route (e.g. 30% in the
USA, 22% in the Netherlands) (van Teeffelen et al., 2005; Howorth et al.,
2004). If the market is indeed found to function ineffectively, this presents
an additional problem, as it may send discouraging messages about the
prospects of eventual exit to those considering start up.

Market failure, as used here, refers to imperfections in the market resulting in

a lower than optimal number of businesses being traded. Optimality here
does not mean that every business on the market has to be sold (akin to
market clearing); indeed an efficient market should weed out those which are
uncompetitive or commercially unviable – and the failure of some businesses
to find a buyer may not be market failure, but rather market ‘success’.
Indeed the market would be deemed to ‘fail’ if an uncompetitive business
finds a buyer, but is forced to close shortly after the sale. As well as

9
achieving the ‘optimal’ number of sales, a successful market would also
ensure that if a business transfer occurs, it does so at the optimal price – i.e.
one which reflects the true value of the business, ensuring that seller and
buyer receive a fair deal. Morris (2005) goes further. Noting that fewer than
10% of start-ups achieve meaningful growth, and only 4% will ever create
100 jobs or more, he concludes that, even if a business is viable, ‘converting
exits to transfers may not offer much promise’ (p. 45).

There are two main areas in which the business transfer market can ‘fail’,
focused around (1) information flows and (2) ‘principal/agent’ problems.

Informational aspects
• Difficulties in signalling the intent to buy or sell. With no central
database of businesses for sale or registry of buyers, the methods to
match buyer to seller can be somewhat haphazard, potentially expensive
and time-consuming, and the opportunities available to both parties are
restricted. There may also be difficulties in identifying an appropriate
source of advice or information, and/or in judging the skills or the value of
advice given by an intermediary or agent. Many buyers and sellers lack
experience in the business transfer market, often only ever being
involved in a single such transaction, which may also make it difficult for
them to communicate their requirements effectively. There are three
types of possible failure here: (a) that a seller will fail to locate any
suitable buyers, and thus be forced to close; (b) that a seller will locate a
sub-optimal number or type of buyers, and may be forced to sell the
business at a price lower than its ‘true value’; and (c) a buyer will fail to
locate a suitable business to purchase, and settle for a sub-optimal
purchase, abandon search altogether or opt to start a business from
scratch.

• Once a target business has been found, the biggest problem faced by
buyers and sellers is that of information asymmetries. Essentially, the
seller knows more about the business than the buyer, and it may be in
the seller’s interest to not fully disclose certain details about their
business (beyond minimum legal requirements) in order to maximise the
selling price. While it is possible for buyers to inspect the business
accounts, the quality of the stock, building fabric, fixtures and fittings
etc., less tangible indicators of value may remain more obscure, and may
possibly be concealed or distorted by the seller (e.g. goodwill of clients,
prevailing or prospective competitive climate). Alternatively, the seller
may exaggerate the value of ‘intangible’ aspects of the business, which
may be difficult for a potential buyer to verify. Information asymmetries
may also affect availability of finance to potential purchasers, since
lenders are trying to assess the suitability of the borrower to run a
business and the business itself as a sound investment, both of which

10
 contain intangible aspects which may be hard to communicate to a third
party.

• There are similar issues associated with the valuation and transfer of
tacit knowledge. Though not necessarily withheld purposely, in very
small companies especially, the skills and knowledge underpinning
business success may be embodied in the owner-manager themselves.
The tacit knowledge of the owner can comprise a large proportion of the
company’s assets; this can only be passed on via a potentially lengthy
and intensive handover period. As National Underwriter (23.2.04) put it:
‘A lot of times, what entrepreneurs do is create a job only they can do…
So, when they are looking for a successor, the only person who can do the
job is them.’ Placing a value on such knowledge is difficult and can cause
problems in selling the business. A similar problem may arise with
companies based around intellectual property (IP) assets. Issues of
copyright and ownership can make such firms tricky to value and sell; as
also applies where valuation is based on nebulous concepts, such as
‘reputation’, ‘goodwill’ or ‘potential’, rather than a more concrete asset
base.

• The accounting regime, future projections and planning of small business

owners are often less focused, more idiosyncratic - or simply non-existent
– compared with larger firms with a more defined management structure.
Similarly, the drive to maximise profits among such firms can be less
pronounced, with the owner-manager content to settle for making a
comfortable living, rather than maximising business potential. These so-
called ‘lifestyle’ businesses’ may fit well with the owner’s (and their
family’s) way of life and financial needs, and relatively little thought may
be given to passing them on to another owner. Indeed, research has
found that the main objective of businesses transferred intra-family is
often simply continuity of business, while external transfers emphasised
increasing growth (Geerts et al., 2004). Therefore, when the time comes
to sell, ‘lifestyle’-oriented owner-managers tend not to have prepared a
succession plan, and find it difficult to make the business ‘market-ready’
in the time available. These ‘failures’ in management commonly render
such businesses relatively more difficult to sell.

• As well as incomplete or distorted information, there exists the possibility

that there may be systematic misperceptions relating to certain
aspects of the business transfer process. For example, potential
purchasers may have a distorted impression of the availability of finance
for business purchase, the length of time it would take to buy a business
or the typical price, which may deter them from even thinking about
purchase. Similar issues (relating to starting a business) are explored in
more depth in SBS, 2005.

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Principal-agent problems
At many stages in the business transfer process, the buyer or seller (the
‘principal’) is likely to engage an intermediary (the ‘agent’) to act on their
behalf – e.g. specialist business brokers through to lawyers, accountants etc.
However, it is difficult for the principal to monitor the actions of the agent,
and the incentives of the agent may well differ from those of the principal.
For example, a broker may seek to maximise his commission from a sale,
recommending a business which may not always represent the best
opportunity for the buyer or may be some distance from their ideal target
acquisition – especially given that repeat business is unlikely.

As already stated above, many buyers and sellers lack experience in the
business transfer market, often only being involved in a single such
transaction in their lives, making it difficult for them to effectively evaluate
the skills or the value of advice given by an intermediary or agent. There
may be concerns about the qualifications of some of those involved in
business transfer, and straightforward incompetence or malpractice could
lead to a failure in business transfer. It should be noted that difficulties exist
for owner-managers in the assessment of the competence, accreditation and
qualifications of intermediaries, given that they only rarely use such services,
and may have a limited number of choices in the locality.

In other words, as well as the potential market failures inherent in the

business transfer process itself, there are additional problems in the market
for obtaining advice, support and services from intermediaries. Therefore, to
address difficulties in ‘the market for buying and selling businesses’, the
problems in two separate markets must be investigated – the market in
businesses themselves, and the market for services ancillary to buying and
selling.

Other forms of ‘market failure’

Succession outside the family tends to be the less preferred option of many
family business owners (who do not want to part with ‘the family silver’), and
commercial transfer is viewed as the next best (i.e. suboptimal) option.
There is some evidence however, that this attitude is changing (SBS, 2004),
and that the concept of an inter-generational family business is not always as
attractive as it used to be. Non-family succession in SMEs in fact appears to
be more favourable to economic development and growth, although the
actual transfer process itself tends to be more complicated and prone to
failure (Geerts et al., 2004).

For larger businesses taking over a small firm, the situation may be
somewhat different – an interviewee noted that when smaller firms become
part of a larger corporate structure, they may not be able to be run ‘in the
same penny-pinching fashion’ as applied to the original owner. ‘They may

12
even have to comply with legislation that has formerly been evaded, so that
the acquired firm does not improve its performance to the degree expected’.
In such cases, the seller may well receive the ‘true value’ of the company to
another individual or small firm, but the small firm’s ultimate value to the
larger buyer is somewhat lower. This represents a market failure in the
sense that an identical product is worth different amounts to different
categories of buyers – what could be referred to as a ‘segmented market’.

Other reasons for the value of a business differing between individuals, relate
to more intangible aspects – for example, the seller of a small, profitable local
retail outlet may not attract many potential purchasers, as they may not wish
to work the long hours typical of the sector.

1.4 PURPOSE OF STUDY

While the preceding discussion implies that the marketplace for business
transfer is not perfect, this does not imply a prima facie case for government
intervention. As has been pointed out (SBS, 2004; Martin, 2005), there has
been relatively little evaluation of government initiatives aimed at the
transfer marketplace. Policies to date have tended to be based on relatively
small-scale studies, and estimates of the increased number of transfers are
vague and not backed up by hard evidence. Similarly, there has been no
attempt to comprehensively track the quality of transfers under various
official schemes and projects. This distinction is important. For instance,
while it is asserted (by those operating it) that a government-initiated
German matching database has increased the number of transfers by 10-
15%, there is no information on: how successful these transfers have been;
whether the transferred companies have survived in their original form or
have simply been asset-stripped; whether any external economic factors may
have played a part in the increase in numbers; or whether the transfers
would have gone ahead anyway, without the database. In effect, in many
cases, it is plausible that only the route of the transfer has been slightly
altered, to be brought under the auspices of official statistics.

On a wider, macroeconomic scale, ensuring that business transfers succeed

and contribute to economic growth is clearly a worthwhile policy objective.
Research by Geerts et al., (2004) showed that businesses which are
successfully transferred to new owners experience growth in turnover, profits
and customer base, and to a greater extent than intra-family successions.
Employment, however, tended to fall slightly, as new owners undertook
restructuring for efficiency reasons, which family successors seem less likely
to do. Mandl (2004) also reported positive results associated with business
transfer, finding that 96% of transferred Austrian businesses were still
operating after five years, compared with just 75% of new start-ups (which
survive for five years). She also noted similar findings to Geerts et al. about

13
efficiency and turnover improvements, but also found that employment tends
to increase. It would be instructive to discover through this research the
factors that influence the success of transfers, as reflected in subsequent
business performance, since any policy interventions might then take these
into account.

14
2 SCOPING BUSINESS TRANSFER ISSUES
This part of the study allowed the range of issues associated with the success
or failure of business transfer to be distilled, for exploration with focus groups
and in the surveys which followed. Evidence was drawn from an extensive
literature review and interviews with experts – intermediaries in the business
transfer process. Those interviewed (12 in total) included representatives of
most major intermediary groups: brokers, bankers, accountants and business
support agencies.

2.1 MARKET OPTIONS FOR BUYING AND SELLING

Drawing on the broad view of commercial transfer presented in Figure 1, and
the analysis found in the literature and stakeholder interviews, the possible
methods used in the commercial transfer of businesses are summarised
below.

• Advertised sale. The seller advertises the business publicly, either in

print (in a specialist business transfer publication such as Daltons, a
trade publication or the local press), online (mostly through specialist
websites) or, less commonly, through a third party such as an estate
agent. While this ensures that a wide audience is aware of the sale,
the main disadvantage is that a publicly advertised sale may be
damaging, leading customers, competitors and potential purchasers to
conclude that the business is in financial trouble. Initial indications are
that this method works well for certain types of business, in particular
micro retail, hospitality and catering businesses.

• Sale through informal network. Instead of revealing that the

business is for sale to a wide audience, sellers may prefer to inform
trusted personal and business contacts that they are selling, or pass
word along a reasonably confidential grapevine to find a potential
purchaser. Similarly, once purchasers have decided on a type of target
business, they can make discreet inquiries to locate a match. This
restricts the number of potential matches, and may lead to a purchaser
settling for a close, rather than perfect, match or a seller to obtain a
lower than optimal price. However, transactions costs can be lower
and the transfer may be accomplished relatively quickly.

• Employee or management buyout. Rather than try to find an

external purchaser, a seller may offer their business to (or be
approached with an offer from) the workforce. This circumvents the
need to find a buyer, but is mainly (though not exclusively) suitable for
larger businesses.

15
 • Using a transfer agent. Brokers offer a complete service - obtaining
valuations, attempting to find a buyer etc. – but their fees can often be
expensive. While some specialist business brokers and transfer agents
do operate on behalf of purchasers, the majority represent sellers, for a
fixed fee upfront and/or a percentage of the final selling price. They
tend to use specialist transfer lawyers and accountants, leading to a
more rapid and thorough process, but may struggle to find appropriate
buyers, due to their lack of specialist knowledge of sectors or individual
businesses.

2.2 FACTORS AFFECTING TRANSFER

2.2.1 The range of issues
The survey of transfers carried out by Geerts et al. (2004) found that, on
average, around two-thirds of entrepreneurs experienced problems with
commercial transfers, particularly with takeovers and MBOs. Difficulties
tended to centre on financing and cultural issues, while legal issues, lack of
information from the seller, and unexpected shortfalls in finance were of
lesser concern. It must be noted that these are the problems identified by
successfully transferred businesses – so those which stop a transfer going
ahead at all, such as those caused by a lack of information from sellers, are
less likely to figure.

Van Teeffelen et al. (2005), studying employer organizations, agencies, SME

research centres and consultants in the Netherlands, found that amongst
most frequently cited problem was the lack of knowledge on the part of the
buyer, the seller, or both, particularly on financial matters and the valuation
of the business. Complexity of legislation did not figure, implying it does not
pose a substantial problem.

Geerts et al. (2004) point to the importance of the availability of risk bearing
capital, which current providers do not seem prepared to meet, at least to a
sufficient extent. However, the SBS Business Transfer Review (2005)
submissions do not concur entirely, arguing that financing for taking over a
well-established business is (or should be) relatively easy to obtain and that
there are other factors which constrain the transfer market – most notably
the prevailing attitude in favour of start-up.

Mandl (2004), looking at Austrian businesses, identified three key factors

inhibiting post-transfer success: a lack of specific planning; failure to use an
external consultant; and a successor’s lack of experience, in terms of both
general knowledge of the sector and specific knowledge of the particular
company’s work practices. She also points out that larger businesses are
more able to successfully meet the challenges than smaller ones, particularly
in sectors where the average firm size is fairly small (e.g. personal services).

16
In sectors more reliant on technology (e.g. chemicals or publishing), the size
of company is less pivotal.

2.2.2 Gender related issues

According to Marlow and Carter (2005), women are less likely than men to
consider selling their business, and to buy into or inherit a business.
Women’s businesses tend to be lifestyle-oriented, and more likely to be
operated from home (i.e. entirely dependent on owner-manager) and thus
more difficult to both value and to sell. Yet, despite conventionally low
valuations (from banks and other lenders) for such businesses, they may be
of greater value to other women, who also seek a lifestyle business, and
Marlow and Carter suggest that policy should develop this angle.

Marlow and Carter examine whether there are ‘gendered presumptions’

about female-owned businesses, noting that women tend to face greater
financial barriers, receiving around one-third of the start-up funding given to
men. However, there are sound business reasons why this may be the case:
- women tend to be more risk-averse than men, they are more likely to use
informal sources of finance, such as credit cards, and to own fewer assets to
offer as security, leading to women asking for lower amounts of finance and
banks being prepared of offer them less.

While women’s experiences are not homogeneous, these stylised facts

clearly pose questions about the ability or willingness of women to buy
businesses, and the sort of business they may look for (particularly in terms
of real or perceived financial barriers), and gendered characterisations on the
parts of intermediaries, agencies and even female entrepreneurs themselves.

2.2.3 The importance of planning

Virtually every contributor to the SBS Transfer Review agrees that successful
SME business transfer is, in the majority of cases, limited by a lack of
succession planning – and this is the only constraining factor for which there
is overwhelming consensus. The existence of an exit plan, and the
forethought demonstrated by its existence, make a successful transfer more
likely. The lack of planning, fairly typical amongst sellers, often leads to an
underestimation of the amount of time required for selling, and the optimistic
assumption that a sale can be achieved more quickly than is the case.

Sharma et al. (2001) and Kommers and van Engelenburg, (2003) examined
the transfer process, from the perspective of seller rather than buyer. In
terms of laying the groundwork for sale, they indicate that the outlook of the
seller is key – they have to be ready to sell and to formulate a plan - a
process which (according to EC estimates) can take as long as five years.

17
The importance of being prepared and recognising the need to plan is also
emphasised by Martin (2005), who notes that many accountants’ clients did
not think about succession until some ‘trigger’ – a change in circumstances –
made it a matter of imminent importance. Such events often occurred to
clients in their fifties, but lack of preparation meant the opportunity to
behave strategically and seek maximum possible advantage, have already
been lost.

Some companies, wanting to achieve a good price, attempt to make

cosmetic changes to their business practices prior to sale – a process known
as ‘grooming’. This is described by one experienced transfer broker as ‘one
of the least productive activities of accountancy practices’. There seems to
be no correlation between the time spent grooming and the price paid or
eventual success of the transaction, making the process a waste of
resources. One expert commented:
if you change your credit control because you think you can change the
numbers… the buyer may have been able to do this better than you.
You don’t really get your money back on doing such things and the
buyer loses an opportunity for value-added gain and getting their
money back more quickly

How long and what form should planning take? The form a plan should
take seems fairly open. Some authors (e.g. Morris, 2005) suggest it does not
have to be a written plan - it may be fluid, unstructured and open to change;
the process and preparation it represents are what is important. However,
the amount of time allowed for planning does attract scrutiny: Risak and
Nagy (1999) find a positive correlation between planning duration and
transfer success. When the SBS Transfer Review asked contributors to
suggest ways to ease transfer, most proposals centred around an increased
programme of advice and support to SMEs and, in particular, the need for a
5-year succession plan, accompanied by the resources and expertise to
facilitate this.

While not proof that stakeholders are pulling in opposing directions, there is a
lack of consistency on advice about how long it takes to prepare for sale,
between those directly advising business owners and those researching and
formulating policy. Government advice tends to emphasise medium-term
planning (in the region of five years), while business consultants, presumably
with an eye on commission, assert that with their assistance, all necessary
steps can be completed in less than a year.

2.2.4 Using intermediaries

Corporate Acquisitions Inc (2005) suggests the lack of knowledge amongst
buyers and sellers is the biggest obstacle. As most people go through
transfer only once, early consultation with intermediaries, such as brokers,

18
accountants or lawyers is strongly recommended. While this increases the
associated costs (a broker may charges up to £30,000 upfront, and 5-12%
commission on completion) it is considered worthwhile given the increased
likelihood of a successful transfer. Several propose that Business Link and/or
other support organisations could take a more active role, and develop their
independent brokerage services, paid for by both parties.

Blackburn (2005) proposes that micro enterprises may find the cost of
intermediary services for transfer expensive and therefore try to minimise
use – often starting too late and thereby increasing the likelihood of
succession failure. Intermediaries may have to consider offering their
services, at least initially, at a lower profit or even at a loss, to attract micro
businesses at prices they deem affordable.

2.2.5 Unique features – blessing or curse?

There are specific characteristics of businesses and/or the ways in which they
are managed, which may facilitate or hinder transfer.

o Experts indicate that tacit knowledge, where a firm relies on the

skills of particular people, is hard to value, making the business
difficult to sell. On the other hand, if a business has an obvious
growth path, based on existing capital assets and a solid
management and technical team, it should be relatively easy.
o A business with some form of special or unique assets, as long
as these are readily translated into commercial opportunities, is
likely to be easy to sell, e.g. an armaments manufacturer, moving
away from their original line of business, but retaining approvals to
supply armed services worldwide, would probably obtain an easy
sale. This line of reasoning also applies to companies developing
innovative products or services, and accounts for the premium
attached to the valuation of such businesses.
o In a similar vein, in a niche market there may be very few
companies supplying a particular product and the sale of such
firms should be straightforward. This is true even in declining
sectors, where the last remaining businesses are likely to continue
production (and be of value) as long as some demand persists.
o In sectoral terms, the most difficult businesses to sell are those in
declining sectors or in sectors with low barriers to entry. In the case of
the latter, an entrepreneur would probably rather start a new business
than buy an existing one, as only a business either with a unique asset
or where there are unexploited opportunities for development would be
worth more than the basic cost of entry as a start-up.

19
2.2.6 Getting the offer right
The total amount of assets included can also affect smooth progress - if too
many superfluous assets are included (e.g. unnecessary land attached to a
property for sale) a buyer may be unwilling to commit to the higher price.
Alternatively, a business with low assets relative to turnover may represent
an unacceptably high risk to lenders.

Human capital-driven businesses, particularly small ones, are also difficult to

value, a caveat that applies equally to IP-driven businesses, though some
contend that this difficulty is derived as much from the asset-driven attitudes
of banks and lenders, as from the business itself. UK research shows that
many small businesses do not register their intellectual property (Kitching
and Blackburn, 2003), and lack knowledge in this area (Bezant and Punt,
1997) leading to problems of undervaluation and in establishing clarity about
exactly what is being sold.

2.3 MATCHING DATABASES

Databases alone, without a full range of additional support measures, are not
thought to work particularly well at matching buyers and sellers. Our
interviewees expressed scepticism about their value, particularly those which
(unlike Dalton’s Weekly, the UK market leader) do not charge for listing (for
example, those administered by government agencies). Some believe that
the firms on offer are the ‘less better’; while others are easily sold, only those
which cannot find a buyer through other channels resort to such a listing.

In addition, in free ‘matching’ databases, interviewees considered that, while

around 80% of users were genuine sellers, and 10% potential buyers, some
10% were ‘fakes’: an agent will contact a seller, pretending they have an
interested client, and offering to put the two in touch. Only when a deal is
established will the agent actually attempt to find a potential buyer, aiming
then to collect fees from both parties.

Even discounting these concerns, matching databases have a relatively low

rate of success, with figures of between 3-10% quoted as the proportion of
sellers managing to find a buyer and complete a transfer. A detailed analysis
(EC, 2006) of nine matching databases throughout Europe was carried out,
the majority had been in existence for three years or less, and listed a
combined total of 11,000 businesses, equivalent to, on average, 0.2% of all
companies in each country and around 7% of ‘transferable’ companies.
Many of those studied claimed a relatively high rate of success, typically
between 10-30% of businesses listed being transferred; but subject to the
following caveats:

o The small number of businesses helped.

20
 o The limited representation of micro businesses.
o Screening processes, listings are often limited to members of particular
business organisations, excluding certain firms at the outset.
o Success rates are often estimated by database hosts, rather than
based on hard data.
o The lack of systematic follow up of transferred firms on post-transfer
performance or even continued operation, implies lists could be used
as sources for asset-stripping, rather than for transfer.
The same report (EC, 2006) recommends:
o Low initial entry costs to ensure a critical mass of diverse users.
o Impartial and trustworthy host organisation - probably a large business
federation.
o Systematic follow-up to determine success rates.
o Marketing and dissemination activities, aimed at smaller businesses, in
order to create a critical mass
o Diverse range of search criteria
o Anonymity
o Limited matching service (e.g. an email notification in response to a
buyer’s saved ‘wish-list’) and filtering of out-of-date and poor quality
listings
o Integration into a wider suite of transfer-related intermediary services
and advice and support provision.
o Where large national commercial listings organisations already exist
(as in the UK), signposting these databases via a general transfer
information portal, rather than developing a rival database.

2.4 THE BORROWING ENVIRONMENT

Arbitrary rules and criteria
The attitudes of banks can exert a significant effect on the success of
transfers; regardless of the individual merits of applications for finance:
The targeting of the large corporate lenders is psychotic. They tell their
staff that they want to lend as much as possible in tranches of £1m,
but, by the way, here are the lending criteria – which effectively leave
almost everyone out.... So [the staff] spend all their time looking for
people to whom their bosses will let them lend.

Banks also tend to impose seemingly arbitrary rules, based on particular

reference points, rather than assessing the needs of each application, and if

21
rules are not (or cannot be) followed, they demand higher collateral. Thus, for
example, in an MBO in a relatively untried or unique sector, a bank might
require a larger team, with greater assets as collateral. This may discourage
the prospective buy-out, or the (imposed) larger team may actually prove
unwieldy or unmanageable. One lender only approves loans where the
purchaser has an established track record in the same sector (backed up by
two years of accounts) thereby excluding those wishing to go into business
for the first time.

Favouring start-up?

Many argue that the financial environment reinforces the privileging of start-
up over transfer. While the websites of most High Street lenders provide
information on start-up, loans to buy commercial property, and business
expansion loans, few mention the purchase of existing businesses, and none
directly advertise a specialist product for the purpose. While most do offer
loans for purchase, publicity concentrates on other areas, in particular start-
up, possibly contributing to a perception that the latter would be easier to
finance than the former and, as SBS (2005) shows (mis)perceptions can be
highly important determinants of the actions of entrepreneurs - often as
much so as the actual facts.

2.5 USING INTERMEDIARIES

There is a range of intermediaries that can be consulted by both buyers and
sellers of businesses. Of necessity, virtually all transfers (except perhaps the
very smallest) involve a solicitor to complete the legal handover of title to the
business and undertake due diligence, and the majority also involve an
accountant examining the books. While some lawyers and accountants
specialise in transfer, most are generalists performing a wide range of legal
or accounting services, and may rarely encounter a business transfer
situation. Other intermediaries who can be directly involved in the process
and influence its outcome include banks or other lenders, specialist business
transfer agents, estate agents, and financial advisers.

According to a survey conducted in Germany, Belgium and the Netherlands,

only 20-30% of acquirers hire a business broker, regardless of the type of
change in ownership (Geerts et al., 2004). This is, by far, the lowest
proportion among the range of different advisors; between one-half and
three-quarters use an accountant, bank, lawyer or tax specialist. Informal
means of seeking a target business and/or the uses of databases (such as
Daltons Online) seem more popular than employing professional specialists.

22
Banks as advisers
Banks are currently more distant from the transactional parts of the deals
than accountants, but would like to become more involved at earlier stages.
Van Teeffelen (2005) concludes that bankers (and accountants) mostly take
into account transactions at a relatively late stage in the process, and fail to
fully appreciate the importance of long-term planning in successful transfer.

Legal professionals
Lawyers are an integral part of transfer. They are needed to prepare
contracts and to ensure that the deal which is signed and fulfilled is
acceptable to their client. However, legal work takes many shapes and
forms, and many lawyers are not transfer specialists – which can impede the
process. As with bankers and accountants, lawyers are usually engaged
relatively late in the process, when buyer and seller have already been
brought together. Legal professionals need to be flexible in negotiating
terms and conditions of contracts; otherwise the selling party can easily walk
away to find a less intransigent buyer. The cost of legal services ranges from
£50 to £300 per hour but is typically around £200ph. Given that the process
takes up, on average, 10-20 hours, expected legal costs of transfer would be
£1K - £5K.

Accountants
Chartered accountants fulfil a number of statutory legal requirements on
behalf of small businesses and possess a great deal of skill and knowledge
concerning business, particularly the financial dimensions. According to our
interviewees, accountants operate more frequently on behalf of sellers than
on behalf of buyers. They also deal with relatively low numbers of sales –
around ten per year, on average, thus limiting their capacity to develop
expertise. As well as only being approached a few times a year for such
advice, many small practices are reluctant to get involved in broad-based
financial advice, often referring clients to local specialists.

However, if a chartered accountant assists in business transfer, there are

potential problems. Since accountants tend to serve only local markets,
buyers seeking a business in a different geographical location may be lost as
clients. Accountants may also be reluctant to inform clients of the full range
of opportunities available, concentrating on those in the local vicinity for fear
of losing business – thereby courting market failure.

Contributors to the SBS Business Transfer Review argued that use of an

accountant is vital, but only for financial services during the actual buying
and selling process (valuation, advice on tax issues etc.). Accountants, they
feel, are not generally qualified to take a more involved role in negotiations,
provide broader business advice or proactively match buyers and sellers.
Martin (2005), in a full-scale review of accountancy practices in succession,

23
finds that most practices do not offer standalone succession advice, but
rather, especially for larger clients (with turnover in excess of £500,000),
embed it in their normal business relationships, as part of a package,
incorporating specialist, external sources of knowledge. For medium-sized
practices, around 10-20% of advisory fee income is derived from services
related to succession advice, although this figure is substantially lower for
smaller practices or sole practitioners. Small clients are generally more likely
to use accountants simply for accountancy services, rather than seeking
additional advice.

In other countries, the role of accountants is broadly similar, but more in-
depth; in a study of 40 Dutch intermediaries (a mixture of accountants and
bank officials), van Teeffelen (2005) found that, in 75% of transfers in which
they are involved, accountants co-ordinate the whole process. They tend to
work from the perspective of the buyer, rather than the seller; i.e. ensuring
that the transfer is transparent, and helping to ensure the viable future of the
business.

Business brokers
In the UK there are no statutory licensing requirements for those wishing to
become a business broker1 – anyone can set up as a business transfer
intermediary. Our search indicated that there are no registries of brokers, so
quantifying their number can only be through a search of business directories
(e.g. Yellow Pages) and estimating the total number at best, can only be an
educated guess. On the whole, submissions imply that there are significant
regional and sectoral variations in the numbers and use of brokers. Evidence
supplied to the SBS Business Transfer Review of business brokers (and
transfer agents) is mixed about how much business they get from SMEs, the
sectors they are involved in or how useful they are.

Because brokers usually represent sellers, they have a strong financial

interest in completing the sale, leading to potential market failure, due to
principal/agent problems. Therefore, the information provided by a sellers’
broker should be treated with caution - an important caveat to potential
buyers.

When a broker is contracted to represent a would-be buyer, they typically

request a retainer of £1,000-£30,000 and, in addition, a commission of 5-12%
of the purchase price on completion. The contract would specify the buyer’s
target industries (typically one or two), types of businesses and locations.
Once a potential acquisition is identified, the broker would contact the target
business and such an approach can be attractive to a seller, avoiding the
costs associated with advisors and advertising if they were to initiate the sale
1
Nor are there any definitive terms for the practice – the terms business broker, business
agent and business transfer agent are used in the literature and by focus group participants
interchangeably.

24
themselves. However, it should be noted that the use of a broker by a
potential buyer to find a target business seems to be relatively uncommon,
according to our interviewees, with most purchasers preferring to find a
business by themselves. Therefore, brokers tend to make use of
intermediate methods (in particular advertising, both in Daltons and the
trade press) to find a purchaser, the costs of which come out of their fee.

A ‘brokers’ network’ also exists, whereby buyers’ details can be forwarded to

other brokers in particular areas of interest, alerting them to buyers’ needs
which may match the characteristics of existing sellers. Again, however, a
broker needs to complete an acquisition to obtain the maximum
remuneration, leading to a potential market failure.

2.6 TARGETING POLICY: SEGMENTING THE

MARKET
While the SBS Transfer Review suggests an overall refocusing of policy to
take more account of transfers and less of start-ups; Morris’s (2005) analysis
leads him to suggest that policy-makers should seek to ‘add value’ to the
quality of transfers, rather than trying to increase the absolute numbers,
(which should be decided by the interplay of supply and demand in the
market), segmented them by type and addressed their needs in appropriate
ways. His proposed categorisation is fivefold:

(1) Form of disposition (internal transfer, sale etc.)

(2) Valuation/performance – the exit of high-growth firms would be a loss

to the economy, but they do tend to sell relatively easily. Policy should
therefore seek to ensure that the momentum of growth is continued post-
transfer. If, for example, such a firm is absorbed by a larger enterprise,
this could lead to the loss of jobs, products or important assets.

(3) Motives for transfer – concentrating on push vs. pull motivations for
the seller. The former includes age, ill health, competitive factors etc.,
while the latter tend to be driven by alternative opportunities opening up –
e.g. a proactive buyer, taking advantage of tax change etc.

(4) Key industries. For strategic reasons, the government may wish to
promote transfers in certain sectors. Examples might be: national defence,
preservation of culture, exploiting global competitive advantage,
developing technology.

(5) Lifecycle. Rather than strictly in terms of the age of the firm, business
life stages can be defined as: start-up; early growth to stability; rapid
growth; maturity. Each stage has different implications in terms of transfer
support needs.

25
26
3 FOCUS GROUPS FINDINGS
Sixteen focus groups were undertaken across the UK, principally with owners
of small and micro businesses. Groups of 5-10 participants each were held –
ten in England, and two in Scotland, Wales and Northern Ireland, with the
purpose of determining whether the transfer market operated differently
across different parts of the UK. Locations were chosen to reflect a diversity
of settings, including major urban centres, market towns and rural areas.
Membership of each group comprised those who had previously bought or
sold a business, and those who were currently either considering or actively
pursuing the purchase/sale of a business. Some intermediaries in business
transfer were also included. The 115 owner participants varied in terms of
age, family/non-family business owners, gender (31% female) and business
sectors/legal forms. Details of these groups and participants are shown in
Tables A1-2. The focus group discussion framework consisted of topics
identified by the literature review and stakeholder interviews. It embraced
potential transfer obstacles, causes for concern and important positive
elements during the transfer process.

3.1 USE OF INTERMEDIARIES

It was found that intermediaries are considered to have an important role at
the very start of the transfer process, when the knowledge of both buyers
and sellers is fairly rudimentary, as most have no prior experience of
business transfer. Even for those who have bought or sold a business
previously, changes in rules and regulations may mean that their prior
experience is not as useful as initially thought. Therefore, they tend to rely
on intermediaries to quickly bring them up to speed.

However, relatively few lawyers and accountants seem to be specialists in

business transfer, and some focus group participants have encountered
delays and confusion through using non-specialists. This has been especially
true of transfers involving larger sums or slightly unusual transactions, or
where the business occupies a particular niche. For smaller, more
straightforward ‘one-off’ transfers, participants were less critical of
intermediaries, and often preferred to stay with their own trusted advisers
and professionals, not only because they knew the details of the business up
for transfer, but also because they assumed that the costs of a specialist
would be higher. In many cases of small transfers, clauses which would be
regarded as essential in larger transactions were omitted, such as warranties
about the business for sale. In such cases, the solicitor’s job was almost just
to ‘rubber-stamp’ the transfer, which had been agreed on a friendly basis
between the vendor and purchaser. If a specialist was sought, businesses
outside major financial centres had the choice between a small local firm,
where they would often gain the services of a senior partner, or a more

27
geographically remote, and more expensive, ‘big city’ firm, where they would
tend to get a more junior member of staff.

Solicitors, however, were also frequently identified as a main cause of delay,

due to the time taken over due diligence, which clients are often not warned
about in advance. Frequently, it appears, only a vague timetable is specified
at the outset, and ‘unforeseen’ problems often extended the process. This
makes the time and total cost somewhat unpredictable, especially for those –
both sellers/buyers and intermediaries - with no prior experience of transfer.

The bespoke nature of many transfers also increased the time and cost
devoted to intermediaries, and meant that the experiential learning of those
who had previously bought and sold was often of less use than they
expected, especially if they were moving into another sector. Lease
arrangements were singled out in several groups – participants responded
positively to the idea, referred to by business agents, of using highly
standardised US-style commercial leases as a means of simplifying
negotiations. The desire for standardisation and streamlining also extended
to the seller compiling a ‘selling pack’ for prospective buyers, detailing
financial and other relevant information. Some objections to the latter idea,
on the basis of cost, were voiced by micro business participants. It was
questioned whether the pack, and the valuations therein, would be
universally accepted – given extra costs of seeking a ‘second opinion’ for
buyers (and for sellers unhappy with their initial assessment).

Few participants had used business brokers, and there was some cynicism
concerning their capacity to deliver a sale and the need to pay upfront fees.
There was also concern that a generalist broker would not necessarily have
the specialist sectoral or geographical knowledge needed to sell some
businesses, and that they may recommend a less than optimal business to a
potential purchaser, just to clear that business from their books. Participants
indicated they would be more likely to use a broker if some form of licensing
or accreditation was introduced, although this would have to be government-
backed, rather than through an independent association. In some sectors,
(e.g. public houses) where there are clearly defined routes to sales and
valuations, business transfer agents are more highly regarded, as the
process is more transparent, and their role in the transfer more established.

The main obstacle identified relating to banks related to their view of

independent valuations. In participants’ experience, bank valuations are
generally lower than those of other experts, affecting the amount they will
lend the prospective purchaser. Some participants expressed distrust of
banks, primarily because of the banks’ self-interest and risk-aversion, but
recognised that there were few other sources of finance for small business
transfers. On the whole, however, finance for buying a business did not
figure as a prominent issue, with most participants finding that raising the

28
necessary funds was relatively straightforward. Most relied on banks for
finance – one group strongly recommended business angels, but surprisingly
few participants had even heard of them. It should be noted that few FG
participants had attempted to buy a business and failed. Lack of funding
may be a more acute problem among this cohort, and may constitute one of
the reasons for failure of purchase failure.

3.2 ROUTES TO SELLING AND PURCHASE

Exit planning
Most owners admitted that they did not have a written exit plan, and, if they
had sold in the past, this event was triggered by personal circumstances,
rather than in response to strategic concerns. Common triggers included ill
health, a bereavement or a desire to have a more amenable work/life
balance after years of long hours as an owner-manager. Younger owners
were the most likely to have planned an exit, mostly having decided on this
course of action at start-up. Some participants were actively hostile to the
idea of an exit strategy, stating that they would be wary of any company
which had a written plan which included this aspect, partly through suspicion
of the owner-manager’s motives, and partly through scepticism about the
value of such detailed planning in a changing business environment. At best,
most participants had only a vague idea of how they would go about selling
their business, and would deal with the matter when it arose. Support aimed
at business planning for succession would likely have little take-up; most
owners prefer to seek advice only once they had firmly decided to sell.
Grooming of businesses pre-sale tended not to be undertaken, as there was
relatively little that needed to be upgraded or ‘hidden’. Most businesses
could not envisage succession by their children or other family members, and
very few stated that they had considered selling to an employee – this
seemed to be an option mostly limited to MBOs or EBOs in slightly larger
businesses. Participants were not averse to the idea of an EBO in principle,
but most could not envisage it taking place in their specific business. Most of
those considering selling thought that the capital raised would substantially
provide an income for their retirement.

Timetables for selling/buying are rarely specified in detail in advance, and

often tend to drift out of control, due to the lack of planning or the sudden
nature of the decision to sell. For larger companies, there is scope for a more
detailed and schematic timetable to be devised, especially where the
businesses involved are multifunctional and have several layers of
management. Smaller companies, engaging in perhaps the only transfer
activity of the owner-manager’s career, would be more likely to leave the
timetable in the hands of external professionals.

29
Planning to buy
For buyers, it often seemed to be the case that the decision to buy was
catalysed by the awareness that they had the money available to purchase a
business. They may have always had the idea in mind, but the availability of
funds comes before the firm decision to buy, rather than vice versa.
Preparation time needed for purchase can be reasonably high - especially for
a first-time buyer compared with a serial entrepreneur or a small firm looking
to add another business to their portfolio. One estimate was 4-5 hours per
night for 6 weeks.

Virtually no buyers or potential buyers indicated a preference for acquiring a

poorly performing business with the intention of turning it around. The
majority sought a profitable, growing business. Indeed, several participants
noted that, although being wary of an advertised business in the first place,
they would be even more wary of an undervalued business - unless there
were clear reasons, such as the owner needing a rapid sale for obvious
personal reasons.

Marketing options
Once the decision is taken, sellers usually try to find a buyer by word-of-
mouth, using local and/or sectoral networks (and many also use these same
networks to obtain general advice about buying/selling). For small, generic
businesses (e.g. corner shops), the market is mostly local, while some
industries (e.g. care homes) have highly standardised national transfer
markets, where valuations are calculated by a strict, well-known formula.

The role of sectoral networks in matching buyers and sellers is substantially

larger in some sectors than others. Niche businesses (e.g. event planning,
pottery), for example, are more likely to undergo vertical/horizontal
integration in a friendly merger or be taken over by a competitor, which may
possess the only people with the expertise to continue in the same line of
business. The competitor is often a larger firm seeking to expand into new
territories. Public houses are also frequently sold via this route, as large
corporate chains buy-out independent owners. There was relatively little
concern about this trend – for most owners, the only real issue was the final
selling price. A small minority expressed concerned about either the
subsequent fate of their company or preserving a thriving independent SME
sector. In several cases, in fact, a speculative offer by a larger company was
a ‘dream scenario’, as it usually guaranteed a high price, and enabled a sale
to go through with few obstacles.

Many participants outside London were opposed to advertising their business

for sale, particularly if they could not do so anonymously; advertising was, on
the whole, most accepted among small independent high street retailers and
personal services businesses trading away from city centre areas. There is

30
some suspicion that businesses advertised are poor performers, which only
choose this route as a last resort, although this stigma is less marked among
those sectors mentioned above, and/or if a good reason is given for the sale
(retirement, health reasons etc.). One owner noted that their sales had
dipped when the business was for sale but had recovered when the new
owner was in place. Some had placed classified adverts, but mostly in the
local press, rather than online or through a national publication such as
Dalton’s Weekly. Few, if any, of these adverts had actually been decisive in
finding a purchaser. Participants who were aware of Dalton’s mostly
belonged to those sectors which were more likely to advertise therein –
retailers, hotels etc. Other sectors (e.g. professional services, construction)
were mostly unaware of the magazine, and awareness was also lower away
from its main geographical ambit (e.g. in Scotland and Wales), where, it
could be argued, sales tended to be even more biased towards local contacts
due to the lower business density. Thus, although the business agents
asserted that Dalton’s occupies a monopoly position, there may be scope for
a similar service for sectors/areas which tend not to use this selling route –
although it is worth noting that market failure often lies in areas other than
matching.

Obstacles to sale
At least one person in every group identified internal disputes as an obstacle
to sale. These involved, for example, acrimonious buyouts of partners and
division of the proceeds of the sale among more than one owner. Such
disputes can delay the sale, lower the selling price, and force up costs (e.g. if
each partner hired separate solicitors). This suggests some role for an
arbitration or counselling service, although participants largely resisted this
notion, partly because of the perceived costs. The minority of owners who
admitted they suffered some stress during the transfer, did so because of
obstacles, rather than any emotional stress inherent in selling a business. In
a relatively small minority of cases, sellers had encountered fraudulent or
criminal behaviour during the sale, or had been forced to sell due to being
victims of crime.

The groups included only a small number who had unsuccessfully attempted
to buy a target business. Most participants asserted that finding a business
to purchase was easy. The groups were thus unable to throw light on any
deficiencies in matching mechanisms leading to failure to sale for lack of a
purchaser. For the most part, the obstacles encountered by buyers were
similar to those found by sellers, revolving around delays and cost overruns
by intermediaries.

Location considerations
On the whole, purchasers maintain an open mind with respect to the location
of a target firm. There is no evidence of inherent bias against buying a firm

31
in a particular area and rational business criteria are applied to all potential
target firms. For example, the business context and climate of the area are
highly relevant – for example, buyers would look in Llandudno for a guest
house, not a professional services business. For generic small retail firms,
the market was highly localised, but for niche businesses, or those with
unique IP or a well-known brand name, the location was largely irrelevant to
the buyer. Others noted that may not want to move outside their home
region for personal (rather than business) reasons.

Local competition can also render it difficult to find a buyer; this was a
common experience among small retailers and personal service firms. For
many of these, business difficulties, associated with competition from larger
companies (major supermarkets being the most frequently cited), meant
that, by the time they came to sale, either their profits were so low that
purchasers were deterred, or it was obvious that their retail neighbourhood
was in decline due to the number of closed outlets. Participants argued that
that the most effective form of help for selling a business would be
supporting its growth in the first place (e.g. grants to facilitate development,
curtailing the expansion of larger companies), thus enabling the business to
be in a stronger position to attract purchasers. While, from a market-based
point of view, these businesses may not be viable - and thus in the prevailing
circumstances, closure rather than sale may be the optimal route – the issue
of externalities (the effect upon others of closures and empty commercial
space) needs to be recognised.

Difficulties of valuation
Valuation was not thought to be an exact science, and rules of thumb varied
by sector. The tendency was recognised for sellers to overestimate the value
of their firm (e.g. aiming for 6-7 times net profit), while buyers generally aim
for 2-3 times net profit (plus asset value), more in line with actual final price
for the sale of a viable business. Exceptions were those with unique assets
and/or IP, or on the leading edge on an under-exploited area, which could
command far higher selling prices, although valuation of IP could be confused
or overlooked.

The value of the intangible asset ‘goodwill’ tended to be downplayed, as

owners considered that it depended on the personal characteristics and
customer relationships of the owner and thus could not easily be passed on
along with the firm. Guarantees of continued goodwill post-transfer were
often seen as meaningless. Several participants had bought a business, only
to find that contracts/bookings etc. included in the sale were provisional,
rather than confirmed.

32
Factors in successful transfer
While each transfer is unique, focus group discussions allowed the
identification of factors which commonly contribute towards the success of
transfer.

• The seller should engage specialist intermediaries, preferably

recommended by other businesses. He/she should be able to trust that
the intermediaries will perform well, and should be made aware of their
costs and projected timescale at the outset.

• The seller should be realistic and flexible over the asking price, and
honest and objective in their assessment of their own business.

• The process should be standardised and streamlined as far as possible.

• Anonymity during the initial part of a sale is important to protect

performance.

• Good networking and word-of-mouth are the preferred routes to selling,

and most transfers seem to be initiated via this route.

• Internal disputes need to be resolved before a business is offered for sale,

nor should they delay or raise the costs of the transfer.

• Businesses in unopposed or less competitive markets, with a niche

position or unique assets are more likely to be sold successfully.

• The deal needs to adhere to agreed timescales and deadlines, which

includes ensuring that intermediaries provide a reasonably fixed
timetable (with possible penalties for lateness)

• The more knowledge the seller accumulates about the transfer process
(or possesses from prior experience) before initiating a sale, including
research on intermediaries, tax issues etc., the more likely the sale is to
be successful.

3.3 POLICY OPTIONS TO ADDRESS MARKET FAILURE

Information and advice
The initial level of knowledge of participants entering the transfer process for
the first time was not high, suggesting that suboptimal decisions may be
reached in terms of choosing a business, entering into negotiations or
selecting appropriate agents. In fact, intermediaries were seen as the major
factors delaying a sale and raising costs, with many successful transferees
complaining about aspects of the service they received (although many

33
would obviously be reluctant to admit that their own ignorance may have
been a factor in delays). This implies that there may be fairly large principal-
agent problems, surrounding both the choice of intermediaries and the work
carried out on behalf of buyers and sellers. There may also be issues with
distorted misperceptions surrounding certain aspects of the process, such as
the likely cost or time involved in a transfer. These topics were explored
further in the telephone surveys.

Information asymmetries between buyers and sellers were mentioned as

problematic, but not insurmountable. In virtually all cases where the seller
failed to disclose some information about the business (often inadvertently),
the due diligence process had functioned effectively, any relevant
undisclosed information had been uncovered, and either the sale price had
been altered to take account of the new information or the transfer process
had been terminated. However, the initial expenditure on due diligence, and
the buyer’s time spent on the process, can be seen as a waste of resources,
particularly if the sale does not go ahead.

As well as testing reactions to possible solutions to these market failures

from the best practice literature, several were suggested by focus group
participants themselves. While signposting towards specialists may alleviate
some of the burden, there are good arguments for making the process of
transfer more standardised, including overhauling laws relating to leases and
requiring a seller to compile a ‘selling pack’ including all relevant information
about the business, subject to the cost of the package being acceptable
(definitions varied from 2% of the selling price to ‘well under £1,000’), and
preventing it becoming simply another layer of ‘pointless bureaucracy’.
Licensing or accreditation of business brokers was also widely supported,
although it is debatable to what extent this would increase the proportion of
sellers using them.

An alternative route would be to provide more and/or better information to

potential buyers and sellers, so they could make more informed choices.
While there was some support for information being more readily available,
participants’ previous encounters with government support agencies tended
to colour their views to a large extent – thus, those who had received prompt,
useful advice from Business Link were more likely to support the idea of a
one-stop-shop giving out information on all aspects of transfer and
signposting people on to relevant intermediaries. There was a perception
that Business Link (or Business Eye/Small Business Gateway) was not
actually equipped to help established businesses, and relatively few had
consulted (or were planning to consult) Business Link for signposting or
advice during the transfer process. A more passive role, such as the
compilation of a directory of transfer intermediaries, recommended and rated
by other sellers and/or buyers, was more enthusiastically welcomed, with
participants generally (although not exclusively) preferring the private sector

34
as a source of advice. Some responses from participants seemed to indicate
that they were unaware of changes to Business Link in recent years,
including such aspects as the online provision of information on business
transfer.

Those who had bought and sold businesses previously found that regulations
changed relatively frequently, and the learning process for each
sale/purchase was unique, given the multidimensional nature of transfer.
While there is an argument that some of these opinions may be based on
misperceptions or lack of recall of details, rather than actual changes in
regulations , the frequency with which this contention arose suggests that it
may contain some truth. However, the lack of specifics about exactly which
regulations had changed tends to suggest that misperceptions (and/or faulty
recall) outweigh actual changes.

Arbitration and counselling services would also be useful, but mostly for
disputes internal to the seller (e.g. between partners who had fallen out, or
between owner and employees), rather than to mediate between buyer and
seller.

On the issue of matching databases, participants were not averse to their

use, but were still far more likely to rely on word-of-mouth to find a buyer. As
with a loan guarantee scheme, their general opinion was that it would be no
harm to try it, as an extra tool for selling, but that there was no guarantee
that it would be any more effective than the current system. In that sense,
there was not a feeling that there was a large market failure in signalling the
intent to buy or sell.

One of the biggest challenges was often seen to be marketing policy

initiatives, not only in terms of making people aware of new (and existing)
schemes, but also to convince business owners that (a) it was worthwhile
investing time in accessing government support – i.e. they would get
something out of it; (b) it was suitable for their firm in particular; and (c) that
it was better than the private services on offer.

Financial issues
Loan guarantee schemes exclusively to purchase a business were also
thought to be a constructive tool to facilitate the acquisition of finance –
although most had obtained the necessary funds to buy a business,
participants felt that there was no harm in making it easier to obtain a loan.
On the other hand, opinions of the current Small Firms Loan Guarantee
Scheme were generally not favourable, and many participants were unaware
that it even existed, suggesting both a careful scrutiny of the criteria for any
future scheme and more effective promotion. In Northern Ireland,
enthusiasm for guarantee schemes seemed to be higher, at least partly
because of the perceived current lack of support (see below).

35
As well as issues about loans, focus groups also generated suggestions for
tax reforms. There was a perception that the tax regime (and, to a lesser
extent, banks and other lenders) discriminated against purchase and in
favour of start-up. Participants thought this unfair, arguing that both
purchasers and new start-ups risk their own money, and the financial and
fiscal conditions faced by both should be identical. As with regulatory
changes, these opinions may be based more on perceptions than fact, again
suggesting systematic misperceptions on the part of buyers and sellers
which, if corrected, would reduce the level of potential market failure.

Differences within the UK

The policy situation in Northern Ireland seems to be different to the rest of
the country, with business support perceived as more fragmented and
participants having a more negative view than those elsewhere in the UK.
Their general opinion was that they were unsure who to approach for
support, did not regard Invest NI as suitable for their particular businesses,
and that support itself would be prohibitively expensive. As such, few
participants had any experience of seeking official advice and support and
those who had reported feeling they had been ‘passed from pillar to post’
with little gain at the end of the process.

Several expressed perceptions that support is primarily geared towards

larger businesses, and that Invest NI was ‘out of touch with the needs of
[small] business’. It should be noted that this may be influenced by a
relative lack of experience in trying to access support, especially in the
recent past. Others unflatteringly compared the NI situation with that in Eire,
although this may be a case of the grass appearing greener on the other
side. When the idea of a one-stop-shop was presented, participants said the
concept had never been tried in NI and expressed enthusiasm. There were
some complaints about the introduction of business rates several years ago,
which had not previously been imposed in the region, and led to some
distortions in the market.

In Scotland and Wales, on the other hand, participants’ opinions on policy

seemed to be fairly close to those in England. Differences in attitude and
support could be explained more by the economic, sectoral and social
context of the places visited than any ‘Welshness’ or ‘Scottishness’ – for
example, the extra time that intermediaries and support professionals could
dedicate to businesses in Llandudno iwas a function of the relatively low
business density in the area, and the fact that it is dominated by retail and
services firms.

36
4 SURVEY OF EXITING OWNERS
The findings of the literature review and focus groups informed the
drafting of two in-depth questionnaires, one aimed at buyers, the other at
sellers. Surveying was carried out by telephone by BMG Research in July-
August 2006, using samples derived from the SBS Annual Small Business
Survey
This section is based upon a sample of those responding affirmatively to
the question: ‘Do you anticipate a full transfer of the ownership, or
closure, of your business in the next 5 years?’ Of these 1,985
businesses, 416 owners were successfully interviewed (a response rate of
21%). In a further 10% of cases, the business was recorded as closed
(which may include relocation or relaunching the business, rather than
just business failure), while the majority of the remainder could not be
contacted – this latter group will include a number of closures, but we
cannot say how many.
As with the buyers’ survey (section 5), there are restrictions on what can
be discovered through a survey of sellers’. To determine why a business
closes rather than sells would require either tracking the business and its
owner prior to closure (an impractical option) or surveying owners of
closed businesses. In practice, the latter are very difficult to locate – at
least in part because they lack a business address. Many may also be
unwilling to delve deeply into the reasons behind closure, or may,
retrospectively, be less than objective, in particular about whether the
closure was due to the business being unviable, or represented a failure in
the transfer market.

4.1 PROFILE OF SAMPLE

The sample of owners wishing to exit is sectorally fairly representative of the
business population (Table A3). A survey purely of sellers might be expected
to have an inherent bias, since unattractive businesses would be more likely
to close than sell. However, due to the difficulty of contacting owners who
have sold and exited their business, this survey mainly covers owners
intending to exit their business in the future and, therefore, includes both
viable businesses with potential buyers, and less attractive businesses for
which there may be little demand. Scotland and Wales are somewhat over-
represented in the sample, allowing a greater chance to generate
comparisons with English figures.

The businesses in this survey are smaller than those in the survey of buyers.
More than one-fifth had no employees (see Tables A4-A6 for full details), while
among those businesses with employees, the mean size of the workforce was
12.9 (median=4). This is to be expected, as our preliminary findings suggest
that, generally, larger businesses tend to be easier to sell than smaller ones.

37
Only one-third of exiters surveyed were younger than 55, while nearly half
were aged 55-65, suggesting that their exit may coincide with retirement.
The sample was predominantly (five-sixths) male, corresponding to the lower
likelihood of older women being business owners. Female respondents were
also significantly younger (mean age of 56.1 years vs. 57.8 for males),
reflecting the typical difference in retirement ages by gender2.

4.2 TYPES OF EXIT

Among the 416 respondents, only 56 had actually exited their business,
through sale, family transfer or closure - despite the sample having been
drawn from those who registered an interest in transferring or closing their
businesses within five years. Some 88% of owners had not yet made this
transition, although many reported, nonetheless, a precise date for their
eventual planned exit.

Therefore, this section will attempt, where possible, to distinguish between

two groups: (a) those with known outcomes i.e. respondents who have exited
the business, whose answers are based on past experience; and (b)
respondents still trading but intending to exit, whose answers are based on
their (usually limited) experience of the transfer process thus far, and their
predictions and preferences about the future course of this process.

1. Completed exits. Of the 56 exiters, 34 had sold their business (with

seven sales to employees and 37 to outsiders), three had transferred to a
family member and 19 closed. Those owners who achieved exit were
younger than those still in control of their businesses, and tended to employ
larger workforces (discussed in more detail below). In addition to the 37
businesses transferred, a further 54 respondents had some previous
experience of selling a business. Having experience of the transfer process,
the opinions of these 91owners are given more weight when considering
efficacy of the policy suggestions.

2. Future exits. Of the 360 respondents who had not yet exited their
business, 220 were planning a sale or transfer, 90 intended to close, 40
planned to remain open in the immediate future (although some planned to
shed employees) and 10 were, as yet, undecided as to their eventual means
of exit. Several businesses, while not proactively forming an exit strategy,
did specifically state that they would be open to offers to buy.

The survey is unable to identify definitively the characteristics distinguishing

those businesses which are successfully sold from those which fail to sell,
those which may be forced to close and those which deliberately choose to

2
According to Meadows (2003), effective retirement ages are 59.7 for women and 62.7 for
men.

38
close rather than sell, as the majority of respondents have not yet actually
exited. The responses do, however, help in understanding the thought
processes of owners wishing to exit, in particular the rationale and timing
relating to decisions concerning sale or closure.

4.3 FORM OF EXIT

Of owners still in control of their business, those intending to sell planned to
do so in the near future, with half hoping to exit within 6 months, and the
overwhelming majority within two years. Those intending to close were
found to be working to a slightly longer average time horizon: just over one-
third hoped to exit within 6 months. Without other information, such as how
long the business has been on the market, it is difficult to determine the
extent to which businesses wanting to close have been discouraged by a
failure to sell.

Owners are open to changing their minds on this topic; a decision to close is not
irrevocable - the owner may get a good offer, or may simply change their mind.
Indeed, most focus group participants agreed that the vast majority of owners
would sell their business if they received the right offer. According to data drawn
from the SBS Annual Small Business Survey (ASBS), nearly one-third of
respondents have changed their mind regarding the means of their eventual exit
(Table A7). The most striking pattern is that 54 (of the 416) owners intended to
close their business according to the SBS Annual Survey; yet twice that number
(109) had closed or intended to close by the time of our survey (between 1-2
years later). This supports the notion that, over time, owners can become
discouraged by failure to readily find a buyer.

In addition to investigating the intent of the owner with respect to selling,

transferring or closing the business, the SBS Annual Survey also enquired
whether owners had a formal exit plan. Those businesses that
had successfully transferred were three times as likely to have had a plan
and those that intended to close were the least likely (Table A8).

Owners of the 19 businesses which had already closed, and the 90 intending
to close rather than sell, were questioned on the reasons behind their
decision (Table 2). The most common reason given (by 37%) was that they
had nothing tangible to sell (‘I am just a one-man-band’ and ‘goodwill is the
only asset of the business’). Taken together, the three most popular answers
indicate that the decision to close is the natural outcome for these
businesses, rather than the result of negative influences compelling closure,
rather than sale.

39
Table 2 Reasons for actual or planned closure (n=98)
Nothing tangible to sell 36.7%
Don’t think a buyer could be found 23.5%
Planned to close rather than sell 19.4%
Personal reasons 17.3%
Adverse business performance 13.3%
Financial and other sale costs would be 8.2%
too high
Tried to find a buyer and failed 4.1%
Other 13.3%
Note: Multiple choice; 11 respondents did not supply a reason for closure rather than sale

There is some evidence of poor trading performance (‘too many debts’ and
‘empty order book’) contributing to a failure to sell, although this is more
indicative of business failure than failure in the transfer market. The two
least popular answers provide only scant support for market failure,
indicating that transactions costs and the matching market have an adverse
influence on outcomes in only a minority of cases.

4.4 DETERMINANTS OF EXIT DECISION

Several factors were found to influence the decision on whether to sell or
close the business. Age of owner(s), firm size and sector are found to be
significant, the latter because it influences chances of sale via the relative
ease of start-up and the possession of tangible business assets. Focus group
participants thought there may be difficulties in selling a business in a
deprived area. However, an examination of IMD rankings reveals no
significant difference between prosperous and deprived areas in terms of the
decision to sell or close. However, while deprivation would appear not to
influence the decision-making process, it cannot be said definitively not to
affect the actual outcome of the transfer.

4.4.1 Age-related issues

By far the most common personal motivation for exit was retirement or early
retirement, cited by two-thirds of respondents (Table A8), especially those in
the older age brackets which are prominent in the sample. The motivation to
achieve a better work/life balance was mentioned by just over a quarter of
respondents – made up especially of the younger owners, who are seeking
exit to make a capital gain or find a new job or challenge.

40
Age also influences the decision about the type of exit, with older owners
more likely than younger ones to report that they intend to close (Table 3).
Generally, the survey revealed that business owners who intend to close are
slightly older than those intending to sell, and, in turn, older than the
successful exiters. The mid-50s is the age when many micro business owners
begin to consider that they want to sell their business (SBS, 2004), and this
corresponds with the average age of owners that sold their businesses.
However most of the owners have deferred their retirement and sustain the
belief that they will continue to work productively in later life, although this
fails to recognise that exit itself is often prompted by an unexpected change
in life circumstances (SBS, 2004).

Table 3 Age and exit outcomes/intentions (n=411)

Exit Intend to Intend to Undecide Remain Overall
achieved sell close d open
Mean age 55.4 58.2 59.5 56.6 52.1 57.5

4.4.2 Size of business

The decision over whether to sell or close is also related to size of business.
Firms that had already been sold were found to be larger, with, on average,
34 employees and a turnover of £1-1.5m, in comparison with those that had
closed, which had one-third the number of employees and around a tenth of
the turnover (Table A9). A similar pattern exists for businesses planning to
exit. Those intending to transfer had an average of 12 employees and sales
of £250-500,000, while the corresponding figures for those planning to close
were just 5 staff (and highly likely to have no employees) and sales of £58-
100,000.

4.4.3 Business sector

The exit intentions of businesses in the financial intermediation and real
estate sectors are notable for displaying much higher proportions intending
to close or undecided between selling and closure. Businesses in these
sectors are rarely offered in the commercial marketplace, often because they
are consultancies based on the personal knowledge of the owner(s) and with
few tangible assets. By contrast, hotels and catering businesses are the
most likely to intend to transfer, corresponding with the large numbers of
such businesses bought. Despite being larger, manufacturing and
construction businesses are less likely to intend to sell, owing to issues such
as declining markets.

41
 Table 4 Sector and intention to close (percentages by sector) (n=221)
Transferr Closed Intending Intendin Undecided Tot Employees
ed to g to / remain al Mea Media
transfer close open n n
Manufacturing 12.9 5.9 49.4 20.0 11.8 85 22.5 10
& construction
Wholesale & 8.0 2.7 60.7 18.8 9.8 112 7.9 3
Retail
Hotels & 2.0 - 82.4 9.8 5.9 51 7.9 5
catering
Business 8.7 7.0 35.7 33.0 13.9 115 14.8 3
services
Others 11.3 5.7 50.9 17.0 15.1 53 8.5 2
All sectors 8.9 4.6 52.9 21.6 12.0 416 12.9 4

4.5 FINDING A BUYER

In addition to proactively searching for a buyer, many of the businesses (70%
of those planning a transfer) had received an approach from a potential
purchaser. Each of these approaches represent the ‘initial contact’ (see
conceptual diagram, Figure 1), although it is not possible to ascertain
whether this approach failed or negotiations with the potential purchaser
were still ongoing when the survey was conducted.

Owners with prior experience of selling a business were slightly more likely
than those without to use an external source to find a potential purchaser.
However, inexperienced owners who used external advice consulted the
same number of sources as experienced owners, albeit with different
preferences regarding type of consultant. In particular, experienced sellers
are more likely to use their business networks and solicitors to find a buyer
(Table A9).

Different sectors accessed noticeably different levels of advice. All but three
of the hotels and restaurants had consulted an external party to try to locate
a buyer, whereas one-third of production businesses had not used any
external sources (Table A10). Hotels and restaurants were also more likely to
consult a larger number of sources (nearly twice as many as production
businesses). This probably reflects the size and regularity of the market for
such establishments, revealed in the earlier analysis of databases of
businesses for sale. The heavy use of estate agents by the hotels & catering
sector is indicative of the fact that the business property is - to a much
greater extent than in other sectors - also the place of residence of the
owner. Retail outlets were conspicuous in tending not to use of business
contacts to find buyers, whereas accountants were referred to by all sectors.

42
The three most frequently used sources of advice on finding a purchaser
were also considered the most useful. Inexperienced sellers rated
accountants as the most useful source, overall, but the accounting
profession received a far more modest assessment from experienced sellers,
attracting the highest proportion ‘least useful’ responses (Table A11).
Business agents attracted a high rating from both groups of owners – in
contrast to the reception given to them by focus groups and purchasers (see
below), although neither of the latter groups had extensive experience of
transfer agents, and may be basing their opinions on perception, rather than
reality. It is also the case that business transfer agents are accepted and
rated more highly as a source by some types of sellers than others (e.g.
hotels and restaurants), suggesting that their use is more accepted as
normal practice in particular sectors. Business contacts were also highly
rated as a source of help in finding a buyer - albeit mostly by those who had
already sold a business, since inexperienced sellers rated their networks
much lower.

4.6 EMPLOYEE BUY-OUTS

Almost one-third of owners intending to sell their business had considered
selling to their workforce (Table A12). A variety of benefits were identified:
notably the employees’ knowledge of the business and their self-interest in
its continued success. While many owners were prepared to trust their
workforce to put together a suitable bid package, numerous others were
sceptical about the capability of their workers to do so. Around one-third of
owners believed a transfer to employees was more complicated than other
forms of transfer, while around one-quarter considered it less complicated.

The biggest influence on offering an EBO appears to relate to sector, with

manufacturers the most likely (44%) to be interested in selling to employees,
and hotels & catering the least (12%) (Table A12). Interestingly, the buyers’
survey shows that the order of interest by sector corresponds to that for
sectors where EBOs actually occurred. The actual proportions of completed
sales to employees correspond quite well to the intentions, implying that the
owners assess the potential for selling to their employees relatively
accurately.

4.7 EXPERIENCE IN RELATION TO EXPECTATIONS

Owners taking steps towards transfer (or who have already sold), report two
main obstacles: the process takes longer than expected, and finding a buyer
is harder than expected (Table 5). Also causing concern, but of less
importance were three other factors: the negotiated price (or valuation) was
lower than expected; the amount of tax was thought to be too high; and it

43
was taking more of the seller’s time than expected. These findings concur
with those from focus groups, and are indicative of an initial lack of
knowledge on the part of sellers and unwarranted optimism about how much
their business is actually worth.

The high proportion indicating that the process is going on longer than
expected may also reflect a lack of knowledge, or at least an underestimate
of the likely duration of the process, on the part of the intermediaries. This
was a very common complaint among focus group participants, and is also
found among respondents to the survey of purchasers. The relatively low
percentage of respondents who stated that the fees were higher than they
expected may be indicative of the fact that the process is still ongoing for
most of our sample (i.e. their fees have not necessarily yet been paid), rather
than their not being a problem.

Table 5 Expectations of the process (n=229)

Proportion answering
‘yes’
The process went/is going on longer than I 59.8%
expected
It was/is proving more difficult to find a buyer than 50.6%
I expected
I had/have to pay more tax than I expected 42.2%
The negotiated price was/is lower than I expected 41.0%
It was/ is taking more of my own time than I 38.5%
expected
The fees were/are higher than I expected 31.7%
The negotiated price was/is higher than I expected 15.0%

Nearly a quarter of owners indicated that none of the above issues applied to
them – i.e. that the sale process went as they expected. This group was
significantly less likely to consult a wide range of sources of advice to find a
buyer, their businesses tended to be more profitable, and they were more
likely to have received an approach to buy - all factors likely to ameliorate
the issues listed above. In other words, and unsurprisingly, it is likely that
the more attractive a business is to a potential buyer, the smoother the
transfer process is likely to be.

4.8 POLICIES FOR IMPROVING TRANSFER

Overall, owners with experience of selling a business offer similar views on
possible policies to those without. However, in several instances, the
preferences of the inexperienced reflect their lack of knowledge and their

44
 greater openness to guidance (e.g. the higher ratings for one-stop
information shops, mentors and self-analysis toolkits). The most popular
suggestion, as among the buyers, was for reforms to the tax system, with
high levels of support also apparent for both one-stop shops providing basic
information on transfer issues, and government guaranteed loans for
purchase (Table 6). Predictably, those intending to close were less
enthusiastic, registering a lower score for every option except transfer to
employees.

Table 6 Response to policy suggestions

Policy is ‘crucial’ or ‘important’ to
make the transfer process easier
Sellers
Prior No prior Other
experienc experience intention
e of of transfer
transfer
A tax system that treating purchases as equivalent to 73.0 72.0 64.7
start-ups
A one stop shop to provide information on all aspects of 49.4 61.5 43.5
transfer
The establishment of a loan guarantee scheme for 55.1 46.9 44.0
purchasers
Specialist loans for business transfer in addition to 44.9 47.6 40.8
standard bank loans
A mentoring system for owners wanting to sell their 38.2 46.9 39.1
business
A self analysis toolkit to identify potential issues and 37.1 43.4 31.5
analyse approach
Local/national/online directory of all specialist 33.7 37.8 32.6
intermediaries
Licensing/accreditation of brokers 38.2 40.6 31.5
Standardised way of getting information about business 38.2 35.7 35.3
across via ‘seller’s pack’
Training on transfer for owners and their potential 41.6 37.8 26.6
successors
Schemes to inform and support transfer to employees 39.3 28.0 34.2
Total 89 143 184

On the whole, there are relatively few differences between the four main
spatial divisions of the UK in the responses to the survey, indicating that the
difficulties faced by sellers are not substantially affected by location. The
most obvious differences are in the response to policy suggestions (Table 7).

45
Scottish businesses were significantly more supportive of self-analysis
toolkits and policies to support employee transfer, and both Wales and
Scotland had greater preference for one-stop shops to impart information
about transfer. (The Northern Irish sample is very small, making direct
comparisons with other areas difficult).

Table 7 UK area-specific response to policy suggestions*

All Englan Wales Scotland Northern
d Ireland
One stop shop to provide information on 55.6 52.4 64.8 67.5 52.9
transfer
Self analysis check up toolkit to identify 40.5 37.1 43.4 53.7 52.6
potential issues and analyse approach
Schemes to inform/support transfer to 36.8 35.9 34.5 50.0 26.3
employees

*Percentage saying policy ‘crucial’ or ‘important’

46
5 SURVEY OF BUYERS
The survey of owners described at the top of section 4 included a sample
of buyers. This consisted of those in the SBS Annual Small Business
Survey responding affirmatively to the question, ‘Has there been a
change of ownership of the business in the past three years?’ It is
important to recognise that the sample for the purchasers’ survey consists
entirely of people who have successfully bought a business. The survey
may thus help to improve understanding of factors contributing to
successful business transfer from the purchaser’s viewpoint, but it does
not provide direct evidence of those causing a transfer to fail. It is
possible that transfers may fail because of (a) an entirely different range
of problems; or (b) obstacles which successful purchasers regard as minor.
The buyers’ survey, therefore, provides insights into conditions
contributing to transfer success, rather than problems inherent in the
market.

5.1 THE SAMPLE

The survey of successful purchasers of firms achieved 383 responses (40%),
incorporating a wide range of businesses located throughout the UK (see
Appendix, Tables A13-16 for details). Since respondents were all purchasers
of businesses, the sample is biased towards those businesses most often sold
on the open market, in particular hotels, catering and retail establishments,
while business services firms - less frequently commercially transferred - are
under-represented. It should be reiterated that, since there is no definitive
measure of the extent or details of the UK market for businesses, it cannot be
said how closely the sample corresponds to actual sectoral proportions of
businesses bought/sold. There are roughly twice as many men as women
and, among both genders, just over half were aged 45 or above, and very
few under 25. While this profile may reflect that of those who are successful
at buying a business, it is not possible to say whether it reflects demand or
the wish to buy more generally.

5.2 WHY BUY?

The motivation for seeking to purchase a business can be divided into
overlapping areas, including personal reasons (to increase income, lack of
other work opportunities etc.), applicable to all purchasers and business
reasons, as well as the decision to purchase as opposed to starting a
business from scratch.

47
Personal motivation
Virtually all respondents supplied at least one personal motivation for buying
their current business (Table 8). The reason most frequently given was that
the purchase was ‘a new challenge’ (65%), followed by ‘fulfilling an ambition’
(56%), to increase their income (53%), to make a capital gain (45%) and to
have more control over their circumstances (also 45%). Interestingly, few
respondents were pushed into buying a business through, for example, losing
their previous job or the lack of other employment opportunities in their
locality, suggesting that the pull factors of income and control predominate
over the more negative push factors for purchase. Purchasers were relatively
indifferent between purchase and start-up: only 16% of respondents bought a
business because they did not want to start one from scratch.

Table 8 Personal motivations for purchasing business (n=380)

Respons %
es
A new challenge 247 65.0
Fulfilled an ambition 212 55.8
To increase income 201 52.9
To make capital gain 169 44.5
Control over personal and work circumstances 169 44.5
For family/ community status 107 28.2
To prevent the firm closing 103 27.1
Did not want to start a business from scratch 60 15.8
Lack of desirable/ appropriate employment 57 15.0
opportunities
Loss of previous job 16 4.2
Other 16 4.2

Some of these motivations are also influenced by the characteristics of the

purchaser. In particular, the motivations of men and women appear to be
somewhat different. Men are more likely to act for financial reasons, with
56% citing a desire to increase income (45% of women); similarly, for
‘making a capital gain’, the proportions are 48% and 35% respectively.
Women, on the other hand, are more likely to report purchasing for family or
community status (36% against 24% of male respondents) or because they
lacked alternative opportunities (20% vs 13%). The age of the purchaser
also has an influence on their motivation: younger purchasers (aged 25-34)
are more likely to be motivated by an increase in their income and the lack of
other desirable employment than older buyers (aged 45+).

48
Among the relatively small group of those who currently own more than one
business (18 owners), the primary motivation for adding to their portfolio of
ownership was to increase their turnover, followed by identifying acquisition
of assets or facilities or diversification. Other business-related reasons
attracted a negligible response.

Purchase vs start-up
Of reasons buyers gave for choosing to purchase rather than start up, the
most important factor was the established markets of the existing business
(cited by 51%), followed by the lessening of the perceived risk (48%) and the
existing organizational structure of the business (47%) (Table 9). Other
identified factors included the team-working attributes of the business (31%)
and, lagging well behind, Intellectual Property (10%) - reflecting, at least in
part, the lack of revenue from IP among SMEs generally.

It is interesting that some 64% of those owners not wanting to start from
scratch (around 16% of the total sample) felt that their skills were ‘more
managerial than entrepreneurial’, compared with just 37% of other
respondents. In general, those deliberately not wanting to start from scratch
gave more weight to all factors listed than the rest of the group, suggesting
that they undertook a greater degree of research and reflection before
purchase than those more indifferent to the choice between start-up and
purchase.

Those not wanting to start from scratch were also more likely to purchase
businesses with a larger workforce (mean number of employees 22.6 vs 14.9
for others). Business size was also a significant factor in influencing
individual motivations – the larger the workforce, for example, the more likely
it was that their skills and knowledge, the business’s established reputation
and the customer network were a motivating factor.

49
Table 9 Why purchase rather than start from scratch? (% of those giving at
least one reason)

Did not want Other All

to start from s respondents
scratch (n=55) (n=226) (n=281)

Established markets 60.0% 48.2% 50.5%

Less risky 56.4% 45.6% 47.7%
Existing organizational structure 52.7% 45.6% 47.0%
It accelerated the process 50.9% 44.7% 45.9%
Existing reputation/established 60.0% 40.7% 44.5%
name/brand
Workforce skills and knowledge 52.7% 41.2% 43.4%
Skills are more managerial than 63.6% 36.7% 42.0%
entrepreneurial
Customer network/supplier relations 54.5% 38.5% 41.6%
Team working/human relations 47.3% 27.4% 31.3%
Intellectual property (copyrights, 20.0% 8.0% 10.3%
patents)

5.3 USE OF INTERMEDIARIES

Given that intermediaries were identified as a potential source of market
failure by focus group participants, the survey probed the types of
intermediaries used, and the usefulness of their support. The majority of
purchasers (87%) consulted at least one source for general information on
transfer, most commonly an accountant (72% of those who had used
external advice), solicitor (65%) and bank manager (49%) (Table 10). The
next most used sources – business contacts and friends/family – were
consulted by a substantially smaller proportion of respondents (around 30%
for both), with all other sources consulted by only a small minority. This
suggests that purchasers were most likely to be seeking general technical
advice about the purchase process, particularly concerning legal and
financial issues, with personal support and practical know-how from business
contacts trailing some way behind this.

50
Table 10 Sources consulted for general advice on buying a business
(n=334)

% finding services
Respons % Useful Not
es useful
Accountant 241 72.2 84.7 3.7
Solicitor 217 65.0 78.4 6.0
Bank manager 163 48.8 72.4 10.4
Other business contacts 110 32.9 61.8 7.3
Friends and family 103 30.8 70.7 9.1
Independent financial adviser 47 14.1 76.4 8.5
Business Link or similar 41 12.3 58.5 19.5
A business transfer agent 35 10.5 43.8 25.0
Suppliers and/or customers 32 9.6 53.1 3.1
Employees 30 9.0 53.3 16.7
Estate agents 25 7.5 58.4 12.5
The internet 22 6.6 40.9 18.2
Trade associations 22 6.6 71.4 9.5
Trade journals 20 6.0 35.0 30.0
Specialist business transfer 10 3.0 70.0 20.0
publications
Any other source of advice or 10 3.0 43.8 -
information

It is clear that relatively few respondents, when considering or embarking on

a business purchase, consult either sources specialising in business transfer
or sectoral organisations. This supports the focus group findings, that
participants preferred trusted sources of advice (their own accountant,
solicitor etc. and personal contacts) over potentially expensive ‘unknowns’,
such as business transfer agents. For similar reasons, few respondents (7%)
used the internet as a source of advice, possibly deterred by their
perceptions of its unreliability and inability to give information or feedback
relating to their specific situation.

On the whole, respondents were satisfied with the quality of the advice and
support they had received. Averaging the scores across all the sources
consulted, some 72% of the sample had found them either ‘quite useful’ or
‘very useful’ (from here, these categories will be merged and referred to as
‘useful’), and only 9% ‘not very or not at all useful’ (merged into ‘not useful’).
The most positive assessment was of accountants, found to be useful by 85%

51
of those consulting them, closely followed by solicitors (78%) and
Independent Financial Advisers (IFAs; 76%). While IFAs were found to be
used by only 14% of respondents, the highly positive regard for their advice
suggests that such advisers might usefully play a more prominent role.

The lowest satisfaction ratings were attracted by trade journals (rated as ‘not
useful’ by 30% of those who had consulted them), business agents (25%) and
the internet (18%). Relatively few respondents actually used these sources
for general advice, however. In terms of publicly-funded support, Business
Link (and similar organisations) came in the middle of the satisfaction
rankings; 59% of the relatively small number of respondents who had used it
rating it as ‘useful’. Thus, the general perception of purchasers seems to be
that Business Link is a relatively minor source of advice on transfer, possibly
due to misconceptions about its role, rather than a quality judgment – those
who did use it found it a useful resource.

Distinct gender differences were found in the pattern of consultation and

support. Women were significantly more likely than men to use advice at all
(93% against 84%). The mean number of sources consulted was also
significantly higher among women (3.35 sources vs 2.75).

5.4 FINDING A BUSINESS TO BUY

The survey of purchasers confirmed the focus group evidence indicating that
matching buyers and sellers was fairly straightforward, and that any market
failure in this area was small. It was relatively uncommon for purchasers to
experience difficulties in finding a business – only 15% reported that it was
more difficult than they expected. It must be reiterated that these are
successful transfers, and that potential purchasers may become discouraged
if they fail to find a business for sale within a relatively short time-frame.

Identifying a target business

Buyers were asked how they initially became aware that the business they
purchased was for sale (Table 11). The most common means was via a
member of the business itself informing the buyer, cited by 46% of those who
specified a method. The second most frequently identified method was also
informal, with 30% stating that they learned about the potential sale through
a business or personal contact. Substantially less common was the use of
formal search methods, with only 9% using a dedicated transfer agent, and
16% having seen the business advertised for sale, either in print or on a
website. Of the two advertising routes, print remains more popular than
online advertising, echoing the findings from the focus groups.

52
Table 11 Means by which buyers initially became aware the business was
for sale (n=351)

Was approached by a member of the 45.8

business itself %
A mutual business or personal contact 30.2
%
Was actively searching for a business 23.7
%
Advertised in print 10.7
%
Business transfer agent 9.3%
Advertised on a website 5.9%
Other 9.0%
Note: 29 respondents did not know/could not recall how they initially became aware that the
business was for sale.

Whether this means that there is scope for government intervention to

establish a comprehensive matching database is an open question. Buyers
may not be making significant use of online methods either because (a) they
do not like, trust or understand them, or (b) the online transfer market is
undeveloped. Both of these positions are supported to an extent by the
focus groups. Equally, buyers appear actively to prefer using personal
contacts rather than the anonymity of online search in making this important
and expensive decision. In particular, the larger the business, the more likely
it will be sold through personal contact, rather than advertising – small,
‘generic’ businesses (e.g. corner shops) are the most likely to be advertised.

However, there are some significant gender differences. Women were more
likely to have seen the business advertised in print (16% vs. 7% of men) and
less likely to have been approached by a member of the business itself (34%
vs. 46%). For all other methods, including online advertising, there was no
significant gender difference. This suggests either that women are less likely
to be seen as potential purchasers by those who are selling, and/or women’s
relatively lower level of engagement in business ownership may limit their
contact with business owners.

For advice and support, only two-fifths of respondents consulted an external

source in order to find a business to purchase, suggesting that many prefer
to rely on their own resources3. Of those who made use of external advice to
find a business, the most common sources were their own business contacts
(18%), trusted intermediaries (accountants, solicitors and bank managers,

3
Well over half of those who did not consult externally were, in fact, previously employees of
the business which they purchased - i.e. they did not need help to find that business.

53
11-13%) and friends and family (13%). Other sources attracted negligible
responses.

Range of search
The purchased business was located, on average, 44 miles from the
purchaser’s home base, although this is significantly positively skewed by a
small number of ‘long distance’ purchases, mostly relocations to Scottish
Highlands & Islands region (where the purchased business was 500-800 miles
from the purchaser’s base). In this case, the ‘average’ distance is more
accurately represented by the median of the data, equal to just 5 miles from
the purchaser’s base. This relatively short distance of purchase is typical,
both in the literature and the focus groups, and again emphasises the local,
informal, network-based nature of many transfers.

This pattern is also reflected in the distance over which respondents were
prepared to search. Just over half of respondents (54%) stated that they
were only prepared to search for a business in their (self-defined) ‘local’ area,
with a further 28% desiring to remain within their home region. The
unusually high rate of non-response to this question (30% coded ‘not
applicable’) seems to imply that these respondents had only wished to buy a
particular business, rather than actively searching for one meeting target
requirements (i.e. they had no ‘search radius’ per se). Many may thus have
learned the business was for sale, and then resolved to buy it, rather than
making the decision to purchase, and then finding the business. Similarly,
the purchaser may simply have been made an offer to purchase by the
owner of the business - as suggested by the proportion of ‘not applicables’
for this question being far higher among internal purchasers (i.e. former
employees, 42%) than external ones (20%).

Only 21% of women implied that they did not have a search radius,
compared with 35% of men, while 46% of women would only search locally,
compared with 34% of men. This does not suggest that women are less
likely to search over long distances; the proportions whose search radius was
regional or national were similar for each. In fact, women seem generally
more likely to search for a business, instead of having a target business in
mind from the start, or being informed about one being for sale. When
actually buying a business, however, women are more likely to purchase one
closer to their home (median of 3 miles vs. 5 for men).

The majority of the successful small business transfers would thus appear to
be initiated in a relatively informal manner, with the purchaser typically
based near their target business, and finding out about it being for sale
through business or personal contacts, including the seller of the business
him/herself. A relatively small number of target businesses are identified by
more arms-length, anonymous methods – e.g. advertising or via a business
broker - suggesting that access to networks and local groups is important.

54
 5.5 BUYING THE BUSINESS
Time taken
One area of difficulty highlighted by focus groups, was related to the time
taken to sell a business – the longer the transfer process lasts, the more likely
it is to collapse. The sources of this lengthening of the process are most
commonly the result of market failures – incomplete disclosure of all relevant
information by the buyer, or delays originating with intermediaries (principal-
agent problems). As expected, the majority of the successful business
transfers were accomplished fairly rapidly – for half of respondents (51.6%) the
total transfer process, from identifying the target business to completion of the
purchase, took three months or less, while only 3.6% of transfers took longer
than a year. This suggests that steps to make the process as smooth and rapid
as possible are likely to improve the rate of transfers.

Examining the factors which relate to more rapid transfer, the only
characteristic of a business that was systematically linked to the length of
the process was number of employees. In general, the smaller the workforce
size, the shorter the transfer process – 58% of transfers of micro businesses
were completed in three months or less, compared with 47% of small and
33% of medium businesses. This fits with the hypothesis that the process of
transfer will be most rapid in micro businesses, which tend to be the least
complex and command the lowest selling price. As long as they are viable
going concerns, therefore, it is reasonable to suggest that micro businesses
require a lower degree of support than larger businesses.

Financing the purchase

The most common sources of finance to purchase a business were personal
wealth/savings and standard bank loans; no other source of finance (equity,
investments by friends/family, mortgages etc.) was used by more than 5% of
the sample. Looking solely at the two most common sources, 34% of
purchasers used just their own wealth/savings, while 26% took out a bank
loan, and 9% used some combination of the two (Table 12). The low take-up
of alternative forms of finance is a fairly common theme among small firms
generally, not solely restricted to raising funds for transfer. This reflects both
an unwillingness to lose control of the firm and the lesser availability of
equity finance for the relatively small amounts of money typically involved.

55
Table 12 Type of finance used for purchase, by gender
Savings/weal Loan Savings/weal Any other None/unsur Total
th alone alone th + loan combinatio e/ can’t
n recall
Male 39.1% 25.7% 6.1% 19.9% 9.2% 261
Femal 23.0% 27.0% 15.6% 24.6% 9.8% 122
e
Total 33.9% 26.1% 9.1% 21.4% 9.4% 383
Note: (1) percentages sum across rows; (2) ‘any other combination’ also includes those who
had used savings, loans or both alongside another form of finance.

Table 13 Mean number of employees in purchased business, by gender

and type of finance
Savings/weal Loan Savings/weal Any other None/unsur Total
th alone alone th + loan combinatio e/ can’t
n recall
Male 12.7 17.6 25.1 17.7 10.2 15.5
Femal 9.9 5.6 10.4 13.4 28.3 11.6
e
Total 12.0 13.7 17.3 16.1 16.4 14.3
Note: ‘any other combination’ also includes those who had used savings, loans or both
alongside another form of finance.

There are distinct differences in the size of business bought, both by type of
finance used, and by the gender of the purchaser; on average men typically
buy larger businesses than women (Table 13).4 If there is market failure, the
literature suggests that it may be based on 'gendered presumptions' about
the types of business men and women choose to operate and, more
pragmatically, their respective financial resources.

However, our data, while suggesting that there are clear gender differences
in purchasing patterns, does not allow us to identify market failure – it is not
possible to say whether the observed differences are due to (a) women’s
preference for smaller, ‘lifestyle’ businesses; (b) women's preference for
informal, rather than formal, sources of finance; (c) discrimination by funders
based on gendered characteristics; or (d) lower levels of personal wealth and
savings held by women (Marlow and Carter, 2005). For
example, among those using bank loans, women purchased, on average,
smaller businesses than men, but we do not know if this was
4
The literature tends to use employment numbers as a measure of the size of the business,
rather than the purchase price, which is influenced by too many factors to be a useful proxy.
Sector may also have an influence here, but the data collected, based on one-digit SIC
bands, is too broad to be useful.

56
because banks’ lending criteria favour men in some way, because women
chose to purchase smaller businesses or because they had lower levels of
collateral on which to draw. In all likelihood, these factors interact to a
degree, and more in-depth research on this topic would be needed to
disentangle their effects on the purchase process.

Few respondents stated that they experienced any problems in obtaining the
requisite finance for purchase. Only 12% of respondents found it more difficult
than they expected, and only 26 (6.8%) reported any specific difficulties, of
which the most common was an inability to obtain any finance at all. This
largely eliminates overt discrimination towards women by funders as a factor
in the purchase decision, and endorses the view that it is individual
preferences and/or initial capital that determine the amount and source of
funds sought.

Thus, as indicated by the focus groups, there appear to be relatively few

failures in the market for financing business transfer – the majority of
respondents obtained the funding they desired. However, that does not
eliminate the possibility that some would-be purchasers are asking for less
than they may have wished because of their perceptions relating to funders
and their own financial capacity. Similarly, this survey cannot take account
of the numbers of transfers which fail as a result of the purchaser not being
able to obtain sufficient finance, although no respondents to the sellers’
survey indicated that this caused a potential sale to fall through.

Transactions costs
Failure can arise in the market for advice and support, in the form of the fees
charged to purchasers; focus group participants commonly remarked upon
the surprisingly high level of such transactions costs. In our survey, the
mean proportion of the purchase price that went on fees to intermediaries
was 7.1%, while the median cost of transfer is 5% of the purchase price.
Although these figures do not appear to be excessively high, relatively little
information is available about an ‘ideal’ figure to aim for, in part because
each transfer is unique. There is also some question as to how respondents
interpreted the question - whether they all included the same items in their
definition of ‘fees’. Our best guide to a typical or target level of fees would
be based on the experience of the relatively small number of business agents
and other intermediaries interviewed, and ‘best practice’ guides, such as
Corporate Acquisitions Inc (2005). Bearing these health warnings in mind,
intermediaries reported that they typically worked towards a target of 7-9%
of the purchase price, although this was at the high end of the scale, as they
worked entirely on commission – if a business did not sell, they did not get
paid. For a small business employing solicitors, accountants etc. on an
individual basis, the total target fees should be closer to 5-7%, a figure
agreed on both by business transfer agents and those who had substantial

57
experience in actually buying/selling businesses. They blamed ignorance by
buyers and sellers, and poor choice of intermediaries, for fees being above
this level. In light of this, the averages for fees paid derived from the survey
appear reasonable.

However, half of the respondents felt that the transfer process had gone on
longer than expected at the outset and/or the fees paid were higher than
expected, indicating the degree of ignorance under which potential
purchasers operate. Again, bearing in mind that these were successful
transfers, it is possible that these percentages were higher for unsuccessful
transfers, and could have contributed to their failure.

This suggests that intermediaries may need to be more explicit about their
charges (rather than necessarily reducing them per se), and steps should be
taken to make the transfer process run more smoothly and quickly. For
example, several focus group participants complained of the unforeseen red
tape involved with what they perceived to be relatively minor issues, such as
transferring leases or obtaining licenses, which lengthened the transfer
process. Another possibility promoting greater use of accountants and
solicitors specialising in transfer (as opposed to business transfer agents,
who tended to garner a low satisfaction rating from survey respondents).
Most participants used their own accountant or solicitor because of issues of
trust surrounding the engagement of an unknown intermediary, despite the
fact that this may have cost them more (in extra hours or the encountering of
problems unanticipated by the intermediary) than if they had hired a
specialist. Indeed, one business transfer agent noted that,. while it was not
uncommon for a solicitor to target 3-6 months to perform due diligence, for
the majority of small business sales, this could be accomplished in six weeks.

5.6 EXPERIENCE IN RELATION TO EXPECTATIONS

Respondents were asked how their experience of the transfer process
measured up to their initial expectations in a variety of areas. Responses
indicated that the process had generally gone on longer than expected
(39%), and took up more of their own time than anticipated (36%), both
consistent with views from focus group participants (Table 14). Perhaps
more importantly, in about a quarter of cases (23%), crucial information had
not been revealed by the seller to the purchaser. Working on the reasonable
assumption that this figure is higher in unsuccessful transfers, it is, therefore,
likely that failures of due diligence are among the more important reasons for
transfer failure (or rapid post-transfer closure).

Cases where the purchase price was higher than expected were uncommon
(13% or respondents); indeed, it was slightly more common that the
purchaser paid an unexpectedly low price (16%), suggesting that around

58
one-third of purchasers incorrectly estimated the final purchase price, but
that, generally, expectations on this front reflected market reality reasonably
well. If this were to hold true for failed transfers, the assumed price may
discourage prospective buyers (or sellers), or lead to disagreements with
funders over the amount of finance available.

Table 14 Comparison of actual transfer process with initial expectations

(n=383)

No. %
The process went on longer than I expected 150 39.2%
It took more of my own time than I expected 138 36.0%
The fees were higher than I expected 104 27.2%
Important information was not revealed 86 22.5%
The purchase price was lower than I expected 61 15.9%
It was more difficult to find the business to buy
58 15.1%
than I expected
The purchase price was higher than I expected 51 13.3%
It was harder to raise finance than I expected 43 11.2%

5.7 POST-TRANSFER PERFORMANCE

Assessment of performance
Market failure is not restricted to the purchase process, such as a sale falling
through or a sub-optimal price being paid. If a transferred business does not
perform as well as expected (at least as well as pre-transfer, and preferably
better), or fails shortly after the transfer, this can also be characterised as a
form of market failure. Therefore, the survey asked how the transferred
business had performed under the new owner, compared to the point of
purchase.

To help rate the performance of the business, respondents were asked to

give their own subjective assessment of performance (output and profits)
against their initial expectations. These results are not necessarily a
definitive view of post-transfer performance since (a) there has been a
relatively short time period since the transfer – the earliest transfer in our
sample occurred in 2001, and just over half had been in the hands of the new
owner for under thirty months; and (b) the sample could only capture
transferred businesses which were still trading, and which were therefore
always likely to be among the better performers.

Turnover. The majority of businesses (59%) reported an increase in

turnover since they took over the business, while only 7% reported a

59
decrease. For the most part, increases have been fairly small – of the 164
owners who supplied an estimate of their turnover increase, just over half
(52%) had witnessed a rise of 20% or less, although 26 owners (15%) stated
that their turnover had nearly doubled. As would be expected, there are
some sectoral effects on turnover changes, with hotels & restaurants and
health & social work businesses most likely to report an increase in turnover
post-transfer, and production and retail least likely.

Profit margins. Just over half the respondents (52%) reported an increase
in the business’s profit margins since they took over, while only 10% reported
a decrease. Some 126 respondents also provided data on the precise change
in their margins. Among those who reported an increase, the average
magnitude of the change was 12.7 percentage points, with the average
margin almost doubling from 17.5% to 30.2%. The sector of the purchased
business also had some effect on profit margin changes. In a similar pattern
to turnover changes, hotels & restaurants and health & social work
businesses were the most likely to report an increase in profitability post-
handover, with retail and production businesses among the least likely.

Of the 263 respondents who provided information on both turnover and

profits, the largest group (45%) reported increases in both measures, with a
further quarter reporting that they both remained largely the same. Only 2%
of respondents indicated that they had experienced a downturn in both
turnover and profits after they took over the business (Table A17).

Therefore, it seems to be the case that the businesses which have been
transferred have been viable going concerns, and, on the whole, have thrived
under their new owners. If these businesses had not found a buyer, and
been forced into closure instead, there would have been a significant loss to
the economy. It also implies that there is not a significant market failure in
this area, since the owners of these viable businesses have managed to
locate a suitable buyer.

Self-assessed performance change. Despite the highly positive results

reported above, just 43% of respondents considered that the business
performance post-transfer was better than their original expectations, and
14% considered that it had performed worse than they expected (Table A18).
However, this may simply reflect the inexperience of purchasers, many of
whom had never owned a business previously.

Employment. A substantial number of purchasers of businesses with zero

employees at the handover reported that they had subsequently recruited one
or more employees. Some 20 purchasers (out of 383) moved from zero to one
employee, and a further 32 recruited more than one person.5 Overall, however,
5
Although there was a prompt on the questionnaire that owners and partners should be
excluded from the employee headcount, it is possible that some owners did include
themselves.

60
post-handover performance in employment was somewhat less positive than
the performance of profit margins or turnover: some 28% of purchasers
reported a decrease in the number of employees. However, very few of this
group also experienced a decrease in turnover, with the majority reporting
either an increase or no change. The same pattern also applies to changes in
profit margins (Table A19-20).

Arguably, therefore, change in employment alone is not the best measure of

post-handover performance, and needs to be considered in conjunction with
changes in profit margins and turnover. In terms of overall change, the
number of jobs created by expanding businesses outweighed the number
shed by contracting businesses by a large margin, resulting in a net post-
handover expansion of employment among the sampled firms. From the
macro point of view of preserving or increasing employment in an area,
therefore, the results suggest that the commercial transfer of viable existing
businesses is likely to have beneficial effects in aggregate.

Post-transfer performance in deprived areas

There are some indications that the relative deprivation of an area, as
measured by its ranking in the Index of Multiple Deprivation (IMD), has an
effect on the post-transfer performance of businesses. In particular, at first
glance, those businesses which are located in the most deprived areas
(bottom 25%) are more likely to report a poorer performance in terms of
post-transfer turnover, being the least likely to experience an increase in
turnover (Table A21).

However, further analysis reveals that post-transfer turnover performance

may be derived from the deprivation of the business location taken in
combination with the broad sector of the business. In less deprived areas,
the sector of the business makes a significant difference to post-transfer
performance, in particular among hotels & catering, personal services and
transport & communication businesses. In more deprived areas, the sector
of the business is not significant, implying that, in such areas, transferred
businesses are more likely to struggle to raise turnover regardless of their
sector. Furthermore, given that respondents indicated that the search
process in deprived areas is at least as intense as elsewhere, it is reasonable
to assume that these successfully transferred businesses are the best
performers among the stock of businesses available for transfer. However,
while deprived areas perform poorly in comparison to less deprived areas, it
is still the case that relatively few businesses experience an actual decrease
in turnover post-transfer, indicating that transfer is still a good option to
pursue in these areas, at least for the better-performing businesses. It
should also be noted that this analysis is based on relatively small numbers –
while the differences are statistically significant, further research would be
needed to confirm findings and determine the underlying reasons.

61
Several other characteristics of transfer in more deprived areas are also
notable. In particular, it seems that potential purchasers of businesses in
such areas are less likely to be approached by a member of the business
seeking to sell, and less likely to learn of a potential target business through
business networks or contacts. They are also somewhat more likely to only
be prepared to look in the local area, rather than regionally or further afield.

The evidence thus suggests a greater degree of market failure in more

deprived areas, with deficiencies in networking to find a business and in the
post-transfer performance of businesses, providing support for the notion
that policy efforts in these spheres might be targeted at deprived localities.
However, there may be a risk that a greater proportion of businesses in
deprived areas are not good candidates for transfer, and that policy efforts to
stimulate the transfer market may lead to an increase in such non-viable
businesses being purchased.

Work-shadowing and performance

A smooth handover and good post-transfer performance can be facilitated by
the new owner spending some time working in the business pre-handover
and/or the former owner staying on in some capacity (employee, advisor
etc.) post-transfer, in order to pass on tacit knowledge about the business. In
practice, according to the survey, these arrangements turn out to be fairly
common - 51% of business transfers included one or both of these forms of
shadowing, with the most popular form being the new purchaser working in
the business prior to transfer, and the owner not staying on post-transfer
(25% of respondents) (Table A22). There is no significant difference between
internal and external purchasers in terms of the work-shadowing
experienced; in particular, the proportions of the two groups who stated that
they shadowed the owner-manager pre-transfer are almost identical.

However, it is not clear to what extent, if at all, either form of shadowing

benefits post-transfer performance. In fact, there is some tentative evidence
that shadowing has a mildly negative effect - those businesses which
experience some form of shadowing are less likely to experience increases in
profit margins and turnover, and the mean increase in profit margins is lower.
There is also an indication that the situation where the purchaser shadows
the owner pre-handover, but the owner does not stay on, is the most positive
form of work-shadowing, in terms of its impact on performance, and that
younger purchasers gain more from shadowing than older ones.

This largely seems to confirm the impression gleaned from the focus groups,
that there is not a major market failure in the passing on of tacit knowledge,
implying that work-shadowing only has a marginal impact in the majority of
transferred businesses.

62
Innovation and performance
One of the benefits of the sale of an existing business is thought to be the
infusion of ‘new blood’ that the purchaser will bring. As well as potentially
saving the business from closure, the buyer would introduce innovations
which the former owner, or an ‘inside’ buyer, may not consider. Gauging the
extent of innovation is not easy without an in-depth qualitative study. It is
hard to determine how thoroughgoing new procedures and processes are,
and respondents’ self-assessment is relied upon to identify innovation in any
given functional area. Therefore, this is a fairly blunt tool to assess the
changes made to a business by the new purchaser, but it provides indicative
results as to the extent and effects of innovative activity.

The majority of respondents (71%) stated that they had introduced a

‘significant innovation’ into at least one of the six functional areas specified
(Table A23). The average number of areas in which a change was made was
3.3, implying that new purchasers do indeed tend to make what they regard
as significant innovations. The most common innovation activity was the
introduction of new products and services, undertaken by around half of
respondents, followed by changes to suppliers or supplier relations (43%).
The least common area in which to innovate was production processes
(30%), although it is arguable that many owners did not regard this area as
applicable to their business.

There is some evidence that post-transfer innovation has positive benefits on

profits and turnover. Those purchasers who introduced any innovation were
significantly more likely to experience an increase in both measures,
suggesting that purchasers should be encouraged to innovate in order to
reap the full benefits of the change in ownership (Tables A24-25).

External purchasers are no more likely to introduce any innovations than

internal purchasers, nor are they likely to innovate in a greater number of
functional areas. The only significant difference in the pattern of innovation
is that insiders are more likely to introduce change to production processes;
in every other functional area, the proportions of the two groups which
innovate are roughly similar.

However, an external purchase is more likely to be associated with an

increase in profit margins and (less significantly) an increase in turnover,
regardless of whether or not the purchaser introduces any innovations. A
tentative explanation may be that outsiders are more effective in the
introduction of innovations, or may innovate to a greater extent within each
functional area. As with the issue of work-shadowing, this merits further in-
depth investigation.

63
Employee/management buyouts and performance
One method of attempting to avoid market failure in the transfer of tacit
knowledge is an employee buy-out. Of the 383 purchases covered by the
sample, 7% were characterised as (all) employee buyouts and a further 15%
as management team buyouts, with significant differences by sector and
sizeband (which tend to be interrelated) and age of business. As would be
expected, those firms purchased by EBO or MBO have a significantly higher
average number of employees (21, compared with 12 for other types of
transfer), and they tend to be older – just over 70% of both EBOs and MBOs
had been in businesses for over ten years, compared with 58% of other types
of transfers. Both MBOs and EBOs are most likely in manufacturing &
construction businesses (which also tend to be the largest), and least likely
among the relatively small businesses found in the hotels & catering sector,
where they account for under 10% of all transfers in this sector (Table A26).

These results suggest that the prime determinant of the likelihood of various
types of transfer is the interaction of the sector, size and age of the business,
which, in turn, influence the nature of the management structure. EBOs are
more common than MBOs in sectors with a small average workforce per
business, but both EBOs and MBOs are significantly less common than
commercial sales to outsiders in every broad sector.

The evidence on the post-transfer impact of EBOs/MBOs, compared with

other types of transfers, is mixed, with statistically significant conclusions
hampered by the relatively small numbers of EBOs and MBOs in some
sectors. There is some evidence that EBOs and MBOs are slightly more likely
to be associated with better performance post-transfer in manufacturing and
construction businesses, but less likely to lead to improved performance in
other sectors.

5.8 DIFFERENCES BY AREA OF THE UK

There were very few significant differences in purchasers’ responses between
England, Scotland, Wales and Northern Irelands, suggesting that the business
transfer regime is fairly similar throughout Great Britain. The three major
areas of difference concerned use of the internet, and the fees charged and
time taken for transfer.

Compared to England, Scottish respondents, in particular, and Welsh

respondents to a lesser extent, were more likely to have found that the fees
were higher than they expected, but less likely to report that the process
went on longer than expected (Table 15). The reverse was true in Northern
Ireland. However, there was no significant difference in the average level of
fees, nor in the length of time taken to purchase. Therefore, it is possible to
conclude that the Welsh and Scottish expectations of the level of fees were

64
lower than in England (possibly because of the generally lower price levels
there), while their initial estimate of the length of time the process would
take was higher.

Table 15 Significant differences between countries (percentages answering

affirmatively)

All Englan Wales Scotlan Northern

d d Ireland
The process went on longer than I 39.2 40.9 38.3 22.2 53.8
expected
The fees were higher than I expected 27.2 24.5 33.3 38.9 23.1
Initially aware of business via website 5.5 3.3 10.0 16.7 0
Use of the internet to find business 2.9 1.5 6.8 8.3 0
Totals 383 274 60 36 13

The other major difference was that the internet was more extensively used
to find a business in both Wales and, in particular, in Scotland than in
England. One likely explanation for this is the lower level of business density
in these areas – purchasers are less likely to encounter a target business by
word of mouth or through networks, simply because there are fewer potential
businesses for them to choose between.

5.9 POLICIES TO IMPROVE TRANSFER

Respondents generally reported that there were few problems with the
transfer process. Over half (57%) rated it as either ‘easy’ or ‘very easy’ and
none rated it as ‘very difficult’ (although it must be emphasised again that
these are all successful transfers). Respondents were also asked about how
important a variety of policy measures would be in terms of their potential for
making the transfer process easier. The list was largely derived from EC
(2003), modified and augmented by findings from the focus groups.
Respondents reacted most favourably, by a considerable distance, to the
proposal to modify the tax system, such that small business purchases are
treated analogously to start-ups, ranked as ‘important’ or ‘crucial’ by 73% of
respondents (Table A27) Next most frequently cited, and the only other
suggestions to gain more than 50% support, were the establishment of loan
schemes for purchase, either simply a specialist loan tailored for transfer or
one guaranteed by government (both ranked as ‘important’ or ‘crucial’ by
54% of respondents). The policy suggestions which attracted the lowest
level of support were a training course on transfer issues (rated as ‘crucial’ or
‘important’ by 34% of respondents), a self-analysis toolkit (38%) and
schemes to inform and support EBOs (also 38%).

65
It is noticeable that the three favoured proposals were the only ones purely
related to financial issues – the remainder were mostly based on providing
information or streamlining/quality assuring the transfer process itself.
However, as previously noted, relatively few respondents stated that financial
issues per se were difficulties. Therefore, the issue at hand is more likely to be
the participants, reflecting with hindsight, on the amount of finance
respondents felt they could obtain, or the terms on which it was advanced.

The high level of support for fiscal and financial reforms may also derive from
misperceptions of the relative favourability of start-up versus purchase of a
business - SBS (2005) showed that business owners are still prone to some
misperceptions, albeit to a lesser extent than non-owners. In particular, the
tax system does not discriminate in favour of start-up to the extent that
respondents appear to believe.

Responses from the survey of sellers are fairly similar, with reforms to the tax
system again being the most frequently cited. The major difference is that
sellers tend to rate the importance of a one-stop shop more highly than
buyers, suggesting that deficiencies in the informational aspects of the
selling process are greater than in the buying process.

66
6 CONCLUSIONS ON MARKET FAILURE
This section sums up the analysis presented above in terms of the various
different types of market failure outlined in Section 1.2. We indicate the
types of business or stages of the process where each market failure seems
most likely to occur, and offer some indication of the likely severity and
degree to which they may hamper or halt the transfer process. No attempt is
made to offer an estimate of the numbers of businesses which could be
affected, because of the lack of robust data on the number of transfers or
types of businesses transferred.

Difficulties in signalling the intent to buy or sell

While many European countries have established a government-funded
matching database, there are few signs that such an initiative is warranted in
the UK. The majority of focus group participants and survey respondents
indicated that finding a purchaser or a target business to buy was not
excessively difficult, citing personal/business networks and contacts and/or
advertising the business for sale, in print or online. Similarly, the final selling
price was usually considered satisfactory, even if it was below their original
(often unrealistically high) estimate.

It is, of course, possible that the use of networks – overall, the preferred
method for matching – may restrict the number of potential matches, which
may then, in turn, place limits upon the potential asking price, or lead to
transfer failure. Similarly, the majority of purchasers live within a very small
radius of their purchased businesses, and many are only prepared to look in
their own locality, thereby limiting their choices. It is worth noting that a lack
of complaints concerning people’s own experiences of transfer does not
necessarily imply that the process had been optimal for all parties, but
merely that it had been satisfactory, within a context (in many cases) of a
lack of any prior experience of or knowledge about transfer.

Nevertheless, while the market for matching is not necessarily optimal, there
is no evidence, in the aggregate, of a substantial market failure per se in
matching. The majority of both buyers and sellers seem able to find a
satisfactory match, and the evidence in favour of a government-sponsored
matching database to correct flaws is not sufficiently compelling to justify
support for such a scheme, particularly given the existence of an extensive
private sector matching facility (Daltons). Plus, while it is true that not all
businesses are suitable for listings in the Daltons database (mainly valuable
for retail and hotels & catering businesses), the evidence suggests that
businesses in other sectors would prefer not to use such databases at all.
Even in the business services sector, for example, where few businesses
appear to be transferred commercially, it is arguable that the ‘transfer
market’, though not formal or codified, works efficiently in transferring

67
assets, being well adapted to a sector with high numbers of small and micro
businesses based on tacit knowledge.

In terms of socio-economic factors related to location, although successful

purchasers did not experience more difficulty in finding businesses in
deprived areas, focus group participants implied that a relatively high
number of potential business transfers in such areas failed because of a lack
of buyers (which our survey of course could not pick up). The key difference
between more and less deprived areas in this respect seems to be the less
intensive use of networking, possibly reflecting relative social and/or
economic exclusion, and indicating that there is a more serious case of
market failure here. Ultimately, however, it remains difficult to distinguish
businesses which fail to find a buyer because of deficiencies in the matching
process from those which fail to do so because they are not good candidates
for transfer (and therefore indicative of the market working efficiently).

Information asymmetries
From the evidence of focus groups, and what can be inferred from the
surveys of purchasers and exiters, the transfer process is frequently
lengthened because of delays in the due diligence process. These tend not
to be deliberate attempts to conceal information on the part of the seller, but
rather omission of information due to oversight, and/or intermediaries taking
longer than expected to complete the diligence process. This increases the
costs and duration of the transfer process, in turn increasing the chances of
the transfer failing; less frequently, the uncovering of negative information
results in an increased likelihood of potential purchasers pulling out of a
transfer.

This form of market failure appears fairly widespread, covering a range of

sectors and size-bands, with the exception of simple, non-niche micro
businesses (e.g. a small corner shop or similar retail or catering
establishment), where transfers can often go through with only a cursory
examination of the books by an accountant. In other businesses, according
to focus group participants, the fault seems to lie with legal professionals
(and, to a lesser extent, accountants), rather than the business owners
themselves (although, clearly, there is an understandable tendency to avoid
self-criticism here). Some felt that this was due to intermediaries increasing
the amount of work in order to increase their fees (a market failure due to
principal-agent problems), but the majority view was that intermediaries
probably simply underestimated the work that would be involved.

There are, therefore, two distinct market failures involved in this area: (a) a
purchaser choosing an unattractive business on the basis of misleading initial
information, and abandoning the transfer partway through, having incurred
expense; and, on a more widespread basis, (b) an unanticipated increase in
the cost of the transfer, due to the inefficiencies (intentional or unintentional)

68
of intermediaries. Potential ways of tackling these problems would be to be
more prescriptive in terms of the information that sellers must provide to
potential purchasers, and/or greater clarity at the outset in setting out
intermediaries’ terms. This would cover their charging structure and the
services they will provide, and a more binding estimate or quotation for the
length of time that will be required for the transfer to be effected.

Misperceptions
There is some evidence of misperceptions surrounding financial issues, which
could contribute to a lower proportion of people opting to purchase a
business (both at all, and as opposed to starting a business). In particular,
there are perceptions that the conditions of both the fiscal regime and
lending institutions are more conducive to start-up than purchase, which, on
the whole, are not justified by the reality of the situation.

Tacit knowledge
The extent of failure linked to the transfer of businesses based on tacit
knowledge or IP is difficult to gauge. As noted above, the ‘market’ for small
consultancies seems to work reasonably efficiently, and in a way that
minimises transactions costs (one measure of the efficiency of a market).
However, the surveys did not allow us to identify such companies in detail,
and too few participants in the focus groups fell into this category to enable
us to draw firm conclusions with any level of conviction.

Principal-agent problem
As noted above, some focus group participants felt that intermediaries
artificially inflated the volume of work involved with transfer, in order to
enhance their fees and that detecting such inflation was difficult, due to the
way in which intermediaries initially (mis)estimated the amount of work
involved, and the way final accounts are presented. What is clear is that a
substantial number of survey respondents also indicated that the process
took longer and/or was more expensive than they had initially assumed.
However, evidence of deliberate malpractice of this sort is entirely anecdotal
and extremely hard to verify. Very few respondents in fact suggested that an
intermediary had steered them towards a less than optimal business to
purchase, or to a buyer who may not be offering the best price, although this
is due more to the lack of use of intermediaries in the matching process than
any market failure.

Similarly, there does not appear to be significant market failure in the finance
arena. Few focus group participants or survey respondents mentioned
difficulty in raising finance. However, it is the case that a substantial number
of purchasers only thought about buying a business once they felt they had
sufficient savings or resources to do so, rather than attempting to borrow the

69
full purchase price. This may, by implication, point to some deficiencies in
the borrowing market, but we should be wary in drawing conclusions from
this, bearing in mind that misperceptions of financial institutions, as well as
actual deficiencies, may both have very similar effects. There also seem to
be differences in the types of financing used by men and women to purchase
businesses, but it is unlikely that this is due to discrimination by financial
institutions, and cannot be assessed definitively as evidence of market
failure.

Therefore, the main form of failure in the transfer-market associated with

principal-agent problems appears to be the lack of experience of generalist
intermediaries in dealing with the specialist challenges of business transfer,
and the poor ability of under-informed purchasers and sellers to choose
appropriately qualified intermediaries at the start of the process. This
appears to be a widespread form of market failure, touching on all sectors
and sizes of small business.

70
7 POLICY AND FURTHER RESEARCH

7.1 POLICY INDICATIONS

Networking
Although this study set out principally to examine failures in the market for
commercial transfers of small businesses, it is clear from the focus groups
and surveys of purchasers and (prospective) sellers that transfers often
proceed relatively smoothly. There are some common facilitating factors –
the use of word-of-mouth and local networks of business contacts to initially
match buyers and sellers often works well, for example, among a wide range
of businesses, as such contacts can act as a filter, their prior knowledge of
both parties ensuring a ‘good match’. Focus group participants indicated
that the markets for specific types of businesses, such as hotels, public
houses, care homes or garages, with well-defined characteristics and clear
market and valuation indicators, also functioned relatively efficiently. In
addition, the UK has some of the most developed private sector matching
databases in Europe, suggesting relatively little need for government
intervention in this area. These patterns suggest that one method of
improving the transfer market would be to encourage a greater degree of
networking, especially among those groups who currently fail to make
extensive or effective use of such opportunities.

Our research suggests, for example, that men seem to be more likely than
women to find a target business through some form of networking, including
being offered a business to purchase by a representative of the business
itself. There are indications that the type of businesses owned and bought by
women may be a factor here. ‘Lifestyle’ businesses are more likely to be
female-owned, and tend to be more difficult to transfer, usually having a
smaller asset base and being more personal- than business-oriented in their
management and strategy. The research suggests that women are more
likely to buy smaller businesses than men, although whether this is a function
of discrimination, preference or a lack of networking opportunities is unclear,
and merits further research (see below).

Intermediaries
Several common factors were found which hinder the transfer process, or
raise the transactions costs above initial expectations, even in the smoothest
transfers. Several specialists noted that generalist accountants and solicitors
rarely deal with business transfer, and are liable to underestimate the
amount of work needed, not least for them to get up to speed on the relevant
regulations or legislation. Therefore, while solicitors and accountants were
generally rated as performing well, there is some scope for streamlining and
regularising the transfer process, making intermediaries’ initial estimates of

71
fees and/or duration more transparent and, thereby, hopefully more
accurate. Another possibility would be to promote the use of specialists
more heavily, although many focus group participants stated that they would
rather use their own, trusted intermediaries than engage an unknown
‘outsider’. However, there are exceptions – for example, in the efficient
markets mentioned above, particularly hotels and restaurants, sellers rate
specialist transfer agents more highly for their skills in actually finding a
purchaser in the first place. However, many of these businesses would
probably still prefer to use their own accountants and solicitors during the
actual transfer phase.

For sellers of smaller businesses, therefore, improving both their own

knowledge of the transfer process and the knowledge of solicitors and
accountants (via CPD modules) would also seem to be a useful
recommendation. Indeed, a ‘one-stop shop’, providing information on
transfer issues was the second most popular policy suggestion amongst
sellers, implying that lack of knowledge and access to information proved a
major stumbling block when they decided to sell.

Planning
Not surprisingly, those selling their business tended to be at or near
retirement age. Previous research among family businesses (SBS, 2004)
indicated that a root cause of age-related succession difficulties was a lack of
a formal exit strategy. Our survey points towards a similar conclusion, with
the majority of sellers or prospective sellers not having a formal plan for
either closure or sale (although many, if questioned, would counter that they
had a rough idea of how they would exit, and that, for a micro business, may
well be sufficient – see Morris [2005]). Martin (2005) points towards the idea
of exit often being a response to a sudden change in life circumstances, such
as ill health or a family crisis. In such circumstances, an owner would seek to
rapidly sell his business; without a plan, they would find it more difficult to
weigh all the relevant options open to them and make a fully-informed
decision. Furthermore, the need for a rapid sale may well make a business
more susceptible to one or all of the following difficulties:
• the business not being ‘ready for sale’. Many businesses can improve
prospects of sale by ‘grooming’: reviewing leases, pension issues, legal
disputes etc.; ensuring accounts are accurate and up-to-date; formalising
any informal deals with customers or suppliers. The more smoothly a
business is running, the more likely it is to sell.
• a deliberately low asking price, below the fair market value of the
business, which benefits the buyer but disadvantages the seller.
• a viable business closing, if a buyer cannot be found in the short
timeframe available.

72
Therefore, it is worthwhile encouraging owners to adopt more forward-
looking attitudes, and develop an exit plan in their own interests. Such plans
do not necessarily need to be detailed or lengthy, but should be developed
well before a possible exit (e.g. by an owner’s early 50s) and take into
account a wide range of circumstances and possibilities for exit. However,
the idea of using self-analysis toolkits, training or mentoring schemes to
impart such information received a lukewarm reception among sellers, who
seemed wary of an outsider questioning their capability to manage their own
business. A more effective approach would be the use of more informal
methods, through accountants and business support agencies encouraging
existing clients to undertake some planning, with the help of consultants, as
part of or as an adjunct to other activities. This would also capitalise on
business owners’ receptivity to a ‘trusted source’, and would have other
positive benefits for the business beyond simply planning for succession.

Financial issues
The policy suggestion to which both buyers and sellers were most receptive
was a change in the tax regime such that, in areas where start-ups receive
preferential tax breaks (and possibly other benefits and allowances),
purchased businesses should be treated in an identical manner. This
suggestion was first mooted in the focus groups, based on the rationale that
both the start-up entrepreneur and the purchaser are risking their own
money to contribute to the economy of the locality, and there are no grounds
to discriminate between starting and saving a business. Focus group
participants also saw no reason for banks and other institutions to similarly
discriminate in business bank accounts – while start-ups were perceived to
receive preferential conditions, those purchasing businesses were thought
not to qualify for these deals.

However, the question of whether or not start-ups actually receive

preferential treatment over purchased was never raised in the focus groups –
participants generally believed it to be true. Certainly, it seems highly
unlikely that a purchaser would not receive a good deal in the current
competitive banking market, especially if they carried out research and
shopped around. Therefore, it is arguable that at least some of the obstacles
to improving the efficiency of the transfer market may be perceptual – if a
would-be purchaser believes that they will get ‘a better deal’ by starting their
own business than by purchasing an existing one, they may not even
investigate the possibility of purchase.

In our survey, a small minority of purchasers (16%) stated that they did not
want to start a business from scratch, mostly due to the managerial (rather
than entrepreneurial) nature of their skills. By implication, therefore, the
remaining 84% faced a choice between start-up and purchase, ultimately
choosing the latter option. It is on this large group that policies to increase

73
the rate of transfer should be targeted. Their reasons for choosing purchase,
rather than start-up, will provide information on the factors which are
important in the start-up/purchase decision, and these can then be
emphasised by advice and support. In order, the four most popular reasons
for choosing an existing business to purchase were: established markets; less
risk; existing organizational structure; acceleration of the transfer process.
However, none of these garnered the support of more than half the
respondents, indicating that the attractions of purchase are highly variable
and individual to each purchaser.

As noted earlier, high street lenders tend not to heavily advertise financial
instruments for business purchase, concentrating on loans for start-up or
purchase of commercial property. This, in itself, is likely to have some
negative impact on those thinking about buying a business, while the fairly
restrictive conditions that are commonly imposed on such loans are likely to
deter those at the stage of applying. This goes some way to explaining the
popularity, among both buyers and sellers, of loan schemes specifically
designed for transfer, either guaranteed by government or wholly private.
Several such schemes are operating around Europe - see EC (2003) for more
details - although, again, some of these have restrictive applicability and
security criteria attached.

7.2 FURTHER RESEARCH

This study, while going further than previous research relating to the UK, is
still limited by the nature of the data collection process. To obtain a
comprehensive view of obstacles to business transfer, an ideal sample would
include a sizeable number of both owners forced to close because of an
inability to sell their business, and potential purchasers who abandoned the
process before completion, since the obstacles which delay a successful
transfer may be significantly different to those which lead to a collapse of the
transfer before it is completed. However, neither of these groups is easy to
contact. A former owner will most likely no longer own the premises from
which they ran their business, and cannot reply to surveys directed to this
location. Similarly, there is no systematic way to contact ‘failed’ purchasers.

Therefore, one potential avenue for future research is a more in-depth study
of a number of business transfers, preferably conducted during the period
that the transfer is ongoing, in order to more accurately capture a full range
of experiences of transfer success and, in particular, of failure. This
‘narrative’ approach is a more subtle tool to investigate the complexities of a
lengthy process involving a multitude of actors.

Several other findings from the current study also lend themselves to more
in-depth research. Our findings on work-shadowing suggest that, for most

74
businesses, a period where the former owner works alongside the new
owner, either before or after the handover, does not seem to influence
performance. This finding goes against the prevailing wisdom that the
transfer of an owner’s tacit knowledge can be the key to the business
remaining successful. The finding may be an anomaly of this particular
sample; nevertheless, it merits further consideration, raising important issues
relating to the nature of the work-shadowing/mentoring process.

Another area is the links between gender and transfer. In particular, the
influence of the types of business that women choose to buy, their access to
finance, choice/impact of intermediaries, and gendered presumptions by
lenders, intermediaries and sellers. Our findings largely concur with some
broad stylised facts about female-owned businesses – i.e. that they are
smaller and more under-capitalised than male-owned ones. Female self-
employment research overall is considered underdeveloped, in that it lacks
overarching explanatory theories about the role of gender within broader
socioeconomic contexts of entrepreneurship (Carter and Bennett, 2005).
Within this, research into female buyers of businesses is rare, and our
findings suggest a deeper exploration of underlying drivers affecting this
group would be valuable.

Other possible research includes:

• Closer investigation of determinants of post-transfer performance,

which the study suggests is sensitive to particular influences about which
our current knowledge is limited.

• What drives post-transfer innovation, particularly the differences

between employee-led and external purchasers in the extent and impact
of their innovative strategies.

• Work on exactly what different types of intermediaries can contribute

to the transfer process, especially why IFAs were rated so highly by those
purchasers who had used their services.

75
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Bezant M and Punt R (1997) The Use of Intellectual Property as Security for
Debt Finance, Arthur Andersen and the Institute of Intellectual Property,
London [summarised in: Bezant M (1997) ‘The use of Intellectual Property as
security for debt finance’, Journal of Knowledge Management, 1:3, March,
237-63]
Blackburn, R (2005) ‘Business succession and planning: overview of trends’,
presentation given at ACCA/SBS Conference on Succession Planning, 7th June
Carter, S. and Bennett, D. (2005) (second edn), ‘Gender and Enterprise’, in
Carter, S. and Jones-Evans, D., Enterprise and Small Business Policy (London:
Prentice Hall)

Corporate Acquisitions Inc (2005) The United Kingdom’s Buying and Selling
Business Manual, Corporate Acquisitions Inc, Halifax, Canada.
Cosh, A.D. and Hughes, A. (eds) (2000) British Enterprise in Transition,
University of Cambridge, ESRC Centre for Business Research, Cambridge,
England
Cosh, A.D. and Hughes, A. (eds) (2003) Enterprise Challenged, University of
Cambridge, Centre for Business Research, Judge Institute of Management,
Cambridge, England
European Commission (2002) Final Report of the Expert Group on the
Transfer of Small and Medium-Sized Enterprises, Office for Official
Publications of the European Communities
European Commission (2003) Helping the transfer of businesses — A ‘good
practice guide’ of measures for supporting the transfer of businesses to new
ownership, Luxembourg
European Commission (2006) Report of the Expert Group: Markets for
business transfers- fostering transparent market places for the transfer of
businesses in Europe, forthcoming
Geerts A, Herrings W and Peek M (2004) Change of ownership creates new
prospects in SME sector, SME Special 2004, ING Economics Dept, Amsterdam
Howorth C, Westhead P and Wright M (2004) ‘Buyouts, information
asymmetry and the family dyad’, Journal of Business Venturing 19, 509-34
Kitching J and Blackburn RA (2003) ‘Innovation, intellectual property and
informality’, in Blackburn RA (ed.) Intellectual Property and Innovation
Management in the Small Firm, Routledge, London
Kommers J and van Engelenburg R (2003) Ruimte in Bedrijfsoverdrachten in
Nederland, RZO, Den Haag
Mandl I (2004) Business Transfers and Successions in Austria, Austrian
Institute for SME Research, Vienna

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Marlow S and Carter S (2006) Access to finance: women’s enterprise and the
role of the accountant, ACCA Research Report No. 90 [forthcoming]
Martin, C (2005) Accountancy Practices and the Provision of Ownership
Succession Advice, ACCA Research Report no. 85, Certified Accountants
Educational Trust, London
Meadows, P (2003) Employment Relations Research Series No. 18.
Retirement Ages in the UK: A review of the literature, DTI
Meijaard J (2005) ‘Business transfer in the Netherlands’ in Entrepreneurship
in the Netherlands, report compiled by EIM Business & Policy Research for
the Netherlands Ministry of Economic Affairs
Morris MH (2005) ‘Policy implications of business transfer patterns in a
developed economy’ in Entrepreneurship in the Netherlands, report compiled
by EIM Business & Policy Research for the Netherlands Ministry of Economic
Affairs
Risak J and Nagy R (1999) Generationenfolge in Familienunternehmen.
Übergaben erfolgreich gestalten. [Changing Generations in Family
Businesses. Successfully Conducting Business Transfers], Service Fachverlag,
Vienna
Sharma P, Chrisman JJ, Pablo AL and Chua JH (2001) ‘Determinants of initial
satisfaction with the succession process in family firms: a conceptual model’,
Entrepreneur Theory and Practise 25:3, 17-35
Small Business Service (2004) Passing the baton – encouraging successful
business transfers: Evidence and key stakeholder opinion, SBS, London
Small Business Service (2005) Myths surrounding starting and running a
business, SBS, London
Small Business Service (2006) Annual Survey of Small Businesses: UK 2005,
Final Report, SBS, London
Stokes, D. and Blackburn R. (2001) Opening up Business Closures: A Study of
Businesses that Close and Owners‘ Exit Routes, Report for HSBC, Small
Business Research Centre, Kingston University
Teeffelen L van (2005) ‘Involvement of accountants and bankers in SME
transfers: perspectives and witnessed difficulties’, paper presented at RENT
XX conference, Brussels, November
Teeffelen L van, Meijaard J and Geerts A (2005) ‘Business succession:
economic disaster or blessing in disguise?’, paper presented at 50th
International Council for Small Business World Conference, Washington DC,
15-18 June
Voithofer, P. (2002) Business Transfers and Successions in Austria, Austrian
Institute for Small Business Research, Vienna.
West T (2004) Business Reference Guide, Business Book Press, Niantic CT

77
 APPENDICES
Table A1 Composition of focus groups by location, size and transfer
experience
Past Considerin
No. of Micro*: experience g
Grou Date
Locality participan Small: Bought: Buying:
p no. conducted
ts Medium Sold: Selling
Closed†
1 27 01 2006 Durham 8 4: 4: 0 3: 5: 1 1: 1
2 22 02 2006 Aldershot 8 5: 3: 0 3: 1: 1 4: 2
3 27 02 2006 Glasgow 8 6 : 2: 0 2: 2: 1 6: 2
4 01 03 2006 Liverpool 7 7: 0: 0 5: 3: 3 3: 5
5 02 03 2006 Central London 6 2: 4: 0 6: 7: 1 2: 3
6 13 03 2006 Stoke on Trent 10 8: 2: 0 5: 5: 2 5: 0
7 16 04 2006 Llandudno 8 8: 0: 0 4: 4: 1 0: 2
8 09 03 2006 Edinburgh 8 5: 3: 0 5: 4: 1 1: 2
9 27 03 2006 Port Talbot 9 5: 4: 0 5: 5: 3 2: 1
10 03 04 2006 Hull 3 1: 0: 2 3: 4: 3 1: 1
11 10 04 2006 Newcastle (NI) 8 4: 4: 0 2: 1: 3 0: 2
12 11 04 2006 Belfast 8 5: 3: 0 2: 1: 2 3: 5
13 27 04 2006 Wymondham 7 3: 2: 2 4: 4: 1 3: 3
14 18 04 2006 North Yorks 5 1: 4: 0 3: 5: 2 2: 2
15 25 05 2006 Penrith 6 4: 2: 0 4: 6: 1 1: 4
16 25 06 2006 Newcastle u 6 3: 3: 0 2: 3: 0 2: 1
Tyne
Tota 115 71: 40: 4 58: 60: 26 36: 36
l
Note: This table excludes the seven intermediaries who attended focus groups
* ‘Micro’ includes businesses with no employees; † ’Closed’ signifies a failure to sell; totals
may add to more than number of participants due to some participants’ experiences of both
buying and selling businesses.

78
 Table A2 Focus group participant businesses by sector and legal status
Sole Partnersh Limited Other legal Considering Total
proprietorsh ip form purchase
ip
Primary 3 3
Manufacturing 7 1 17 1 26
Construction 2 1 3 6
Retail/wholesale 5 3 6 1 15
Catering/hotels 7 6 3 1 2 19
etc.
Transport & 3 3
comms
Business services 6 4 10 1 1 22
Education & health 2 1 1 1 5
Personal & other 7 3 3 3 16
svces
Total 36 22 46 4 7 115

Table A3 Location and sector of owners wanting to exit their business

(sellers’ survey)
Primar Manufacturing/construc Retail/hotels Other Total
y tion etc. services
England 7 62 102 120 291 70.0%
Wales 3 11 25 21 60 14.4%
Scotland 0 9 26 11 46 11.1%
Northern Ireland 0 3 10 6 19 4.6%

UK total 10 85 163 158 416

2.4% 20.4% 39.2% 38.0%

79
Table A4 Current number of employees and legal status of respondent
businesses (sellers’ survey)
Limited Partnershi Sole Total Sample frame
company p proprietorshi
p
Zero 32 21 36 89 21.4 305 15.4%
%
Micro (1-9) 75 37 71 183 44.0 789 39.7%
%
Small (10-49) 61 26 27 114 27.4 615 31.0%
%
Medium (50- 25 1 4 30 7.2% 276 13.9%
249)
Total 193 85 138 416 1,98
5
46.4% 20.4% 33.2% Response rate:
21.0%

Table A5 Distribution of turnover (n=347)

Turnover band Sample Sample SBS Annual
(£’000s) no. % survey %
<58 68 20 9
58-100 35 10 9
100-250 63 18 22
250-500 38 11 20
500-1,000 50 14 17
1,000-1,500 25 7 9
1,500-2,800 21 6 7
>2,800 47 14 8

Table A6 Age and gender of owners

Mean Unde 25- 35- 45- 55- 65+ Refuse Tota
age r 25 34 44 54 64 d to l
say
Male 57.8 0 6 39 64 156 78 3 346 83.2
%
Femal 56.1 0 1 11 19 27 10 2 70 16.8
e %
Total 57.5 0 7 50 83 183 88 2 416
1.7% 12.0 20.0 44.0 21.2 1.2%
% % % %

80
Table A7 Changing exit intentions over time (n=221)
2006 intention Transferre Closed Intendin Intendin Undecide SBS
d g to g to d survey
Past transfer close (2004/5)
intention
Sell the business 28 5 163 36 33 265
Keep it in the 3 3 19 10 6 41
family
Close the 2 8 10 33 1 54
business
No plans/ don’t 4 3 28 11 8 56
know
DBS Survey 37 19 220 90 50 416
(2006)

Table A8 Reason for exit by age (percentage answering affirmatively)

All 25- 50- 60- 65+yrs
49yrs 59rs 65yrs
Retirement/ early retirement 67.1 17.5 40.9 83.0 90.9
Work/life balance 26.0 35.1 32.5 27.3 12.5
Business performance issues 20.4 24.6 33.7 14.8 18.2
Capital gain/ raise capital for other 19.0 40.4 24.1 15.8 8.0
purposes
New job/challenge 15.4 29.8 30.1 10.4 3.4
Family reasons 11.3 22.8 8.4 9.2 9.1
Ill health 9.1 0.0 8.4 9.8 13.6
Management issues (staff/management 5.3 12.3 8.4 4.9 1.1
problems)
Other reasons 12.3 28.1 18.1 9.3 3.4
Totals 411 57 83 183 88
Note: Multiple answers permitted

81
Table A9 Sources used to find a purchaser (n=229)
Experience of No experience of
transfer transfer
Other business contacts 39.5% 29.4%
Accountant 33.7% 37.8%
A business agent 32.6% 33.6%
Solicitor 23.3% 16.8%
Suppliers and/or 19.8% 16.8%
customers
Friends and family 14.0% 10.5%
Business transfer 14.0% 10.5%
publications
Estate agent 11.6% 18.9%
Business Link or similar 11.6% 18.9%
The internet 7.0% 8.4%
Bank manager 5.8% 2.8%
Other 5.8% 6.3%
Trade journals 4.7% 8.4%
Trade associations 3.5% 5.6%
Independent financial
adviser 2.3% 8.4%
None 24.4% 21.0%
Total 86 143

Table A10 Most frequently used sources to find a purchaser, by sector (%)
(n=231)
Productio Retai Hotels and Financial Others
n l restaurants intermediation &
real estate
A business agent 20.4 35.7 50.0 31.7 29.0
Contacts 30.6 1.4 35.0 46.3 29.0
Accountant 40.8 40.0 32.5 39.0 25.8
Solicitor 10.2 15.7 32.5 22.0 19.4
Estate agents 4.1 14.3 45.0 7.3 16.1
None 32.7 21.4 7.5 19.5 32.3
Average number of 1.8 2.3 3.1 2.2 1.8
sources
Total 49 70 40 41 31

82
Table A11 Usefulness of sources of advice in selling business (n=180)
Most useful
Least
Source of advice experienc inexperienc useful
ed ed
A business agent 16.4 17.7 2.7%
Other business contacts 11.9 10.6 4.4%
Accountant 10.4 16.8 4.9%
Solicitor 7.5 3.5 2.7%
Suppliers and/or 2.7%
customers 7.5 8.0
Estate agents 6.0 10.6 0.5%
Friends and family 6.0 - 2.7%
Other 3.0 0.9 -
Trade journals 1.5 - 0.5%
Business transfer 1.5 0.9 0.5%
publications
Business Link or similar - 1.8 1.6%
The internet - 2.7 0.5%
Independent financial 1.1%
adviser - 2.7
Bank manager - - 2.7%
Trade associations - - 0.5%
None 28.4 23.9 70.8%
Total 67 113 180

Table A12 Interest in selling to employees by sector (n=246)

Interest in selling to Number of
employees businesses
Manufacturing & 43.6% 55
construction
Business Services 38.1% 63
Retail 31.9% 69
Others 12.0% 25
Hotels & catering 11.8% 34

83
Table A13 Current number of employees and legal status of respondent’s
businesses (buyers’ survey)
Limited Partnershi Sole Total Sample
company p proprietorship frame*
No employees 1 4 1 6 1.6% 128 (13.3%)
Micro (1-9) 50 63 72 185 48.3 340 (35.3%)
%
Small (10-49) 90 44 16 150 39.2 328 (34.1%)
%
Medium (50- 26 6 - 32 8.4% 167 (17.3%)
249)
Unknown 1 5 4 10 2.6% -
Total 168 122 93 383 963
43.9% 31.9% 24.3% Response rate:
39.8%

*Based on past, rather than current, data on sizebands. It should be noted that some 52
respondent businesses actually had zero employees at or near the time of purchase (the
timeframe to which the sample criteria relate), but have since expanded into larger
sizebands.

Table A14 Age and gender of respondents to buyers’ survey

Under 25 25-34 35-44 45+ Refused to Total
say
Male 7 30 83 136 5 261 68.1
%
Female 2 18 39 61 2 122 31.9
%
Total 9 48 122 197 7 383
2.3% 12.5 31.9 51.4 1.8%
% % %

84
Table A15 Location and sector of purchased businesses (buyers’ survey)
Primar Manufacturi Wholesale/ret Other Total
y ng & ail/hotels etc. services
constructio
n
England 7 63 119 85 274 71.5%

Wales 2 15 30 13 60 15.7%

Scotland 0 3 27 6 36 9.4%

Northern Ireland 0 1 8 4 13 3.4%

UK Total 9 82 184 108 383

2.3% 21.4% 48.0% 28.2%

Table A16 Turnover bands of respondents to buyers’ survey

Turnover (£ Sample Sample SBS Annual survey
’000) no. % %
<60 39 15.0 9
58-99 20 7.7 9
100-249 51 19.6 22
250-499 32 12.3 20
500-999 37 14.2 17
1,000-1,499 29 11.2 9
1,500-2,800 19 7.3 7
>2,800 33 12.7 8
Note: excluding don’t knows/refused

85
Table A17 Change in turnover and profit margins post-transfer

Turnover post-transfer Total

Increas Decreas No change
ed ed
Profit margin post-transfer

118 3 16 137
Increase 44.9% 1.1% 6.1% 52.1
%
Decreas 12 6 7 25
e 4.6% 2.3% 2.7% 9.5%
32 5 64 101
No
change 12.2% 1.9% 24.3% 38.4
%
162 14 87 263
Total
61.6% 5.3% 33.1% 100.0
%

Table A18 Change in turnover and performance against expectations post-

transfer

Turnover post-transfer Total

Increas Decreas No change
ed ed
Overall performance post-transfer

113 3 32 148
Better than
expected 33.5% 0.9% 9.5% 43.9
%
73 6 63 142
As expected 21.7% 1.8% 18.7% 42.1
%
14 16 17 47
Worse than
expected 4.2% 4.7% 5.0% 13.9
%
200 25 112 337

Total
59.3% 7.4% 33.2% 100.0
%

86
Table A19 Change in profit margins and performance against expectations
post-transfer

Profit margin post-transfer Total

Increased Decreas No change
ed
Overall performance post-transfer

86 2 31 119
Better than
expected 32.6% 0.8% 11.7% 45.1
%
44 8 59 111
As expected 16.7% 3.0% 22.3% 42.0
%
7 15 12 34
Worse than
expected 2.7% 5.7% 4.5% 12.9
%
137 25 102 264

Total
51.9% 9.5% 38.6% 100.0
%

Table A20 Change in turnover and number of employees post-transfer

Turnover post-transfer Total

Increas Decreas No change Unknow
ed ed n
Employment post-transfer

124 11 47 20 202
Increase 32.5% 2.9% 12.3% 5.2% 52.9
%
42 11 44 11 108
Decreas
11.0% 2.9% 11.5% 2.9% 28.3
e
%
36 4 22 10 72
No
9.4% 1.0% 5.8% 2.6% 18.8
change
%
202 26 113 41 382
Total 52.9% 6.8% 29.6% 10.7% 100.0
%

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Table A21 Post-transfer turnover change, by quartile of IMD rank

Turnover post-transfer Total

Increas Decreas No change
ed ed
20 7 28 55
IMD Ranking

Within 25% most

deprived 36.4% 12.7% 50.9% 100%
25-50% most 29 4 13 46
deprived 63.0% 8.7% 28.3% 100%
25-50% least 37 3 15 55
deprived 67.3% 5.5% 27.3% 100%
Within 25% least 25 3 17 45
deprived 55.6% 6.7% 37.8% 100%
111 17 73 201
Total 55.2% 8.5% 36.3% 100.0
%

Table A22 Extent of pre- and post-handover work shadowing

Pre-transfer
Shadowin No Total
g shadowing
Owner stayed on 19.3% 7.3% 26.6
%
Post- Owner did not stay 24.8% 48.6% 73.4
transfer on %
Total 44.1% 55.9% 100.0
%

88
Table A23 Functional areas in which new owners reported significant
innovation

Functional area %
innovatin
g
Products or services 50.1%
Supply or supplier relations 43.3%
Administration and office systems 38.1%
Work practices, or workforce 37.6%
organization
Markets or marketing 36.3%
Production processes (including 29.8%
storage)
None 29.5%
Table A24 Innovation and change in profit margins post-transfer

Increa Decrea No
se se change
No innovation 34.7% 13.3% 52.0%
Any innovation 58.3% 8.3% 33.3%
All businesses 51.7% 9.7% 38.6%

Table A25 Innovation and change in turnover post-transfer

Increa Decrea No
se se change
No innovation 44.9% 6.1% 49.0%
Any 65.2% 8.2% 26.6%
innovation
All businesses 59.4% 7.6% 33.0%

89
Table A26 Employee and management buyouts by sector
EBO MBO Other Total
Manufacturing & 8 25 49 82
Construction
9.8% 30.5% 59.8% 100%
Wholesale retail 5 11 45 61
8.2% 18.0% 73.8% 100%
Hotels & Catering 5 5 113 123
4.1% 4.1% 91.9% 100%
Business services 3 12 38 53
5.7% 22.6% 71.7% 100%
Other 6 4 54 64
9.4% 6.3% 84.4% 100%
Totals 27 57 299 383
7.0% 14.9% 78.1% 100.0
%

90
Table A27 Purchasers’ ratings of the potential of policies to ease the
transfer process
No importance Moderate Important Crucial
importance
A one stop shop to provide
information on all aspects of 23.0% 33.2% 32.6% 11.2%
transfer
A mentoring system for owners
27.2% 31.6% 33.9% 7.3%
wanting to sell their business
A training course on transfer
for business owners/potential 35.8% 30.0% 28.2% 6.0%
successors
Self analysis check up toolkit to
identify potential issues and 31.1% 31.1% 31.6% 6.3%
analyse approach
Schemes to inform and support
34.2% 27.7% 31.1% 7.0%
transfer to employees
Specialist loans for business
transfer in addition to standard 28.5% 17.8% 37.6% 16.2%
bank loans
The establishment of a loan
guarantee scheme for 29.5% 17.0% 40.5% 13.1%
purchasers
Standardised information about
31.9% 22.7% 35.2% 10.2%
business via ‘seller’s pack’
Licensing/accreditation of
36.6% 20.1% 32.9% 10.4%
brokers
Local/national/online directory
34.7% 24.8% 35.8% 4.7%
of all specialist intermediaries
A tax system that treats small
business purchases as 13.3% 12.3% 32.1% 42.3%
equivalent to start-ups

91