Challenges and support of business transfers in the Baltic Sea Region

Max Hogeforster,
Dr., Chairman,
Baltic Sea Academy,

Small and medium-sized enterprises are the backbone of economically strong regions in Europe. In the countries of the Baltic Sea Region, SMEs account for over 99% of all enterprises, generating almost 60% of the GDP and create 70% of all jobs. As a result of their significant macro-economic impact, their stability is crucial to overall economic growth. Meaning, their unique structure needs to be taken into account, especially in critical times, in particular when the business is passed on to the next generation. This happens at an increasing rate, since many new private companies were established in the early 1990ties. Their managers are about to retire soon and require successors.

A successful transfer preserves jobs, cluster structures and intellectual and production capital. Each year up to 400.000 companies are transferred in Baltic Sea Region countries. One-third of the estimated transfers are likely to fail. Two third of these failed business transfers are not related to economic reasons, but a result of the non-functioning transfer. This has fatal consequences; it unnecessarily destroys jobs in prospering businesses, and it hinders the economic development.

The reason for these failed business transfers are diverse and closely related to the challenges SMEs face during the business transfer. One critical factor is time, as SMEs usually have a smaller planning horizon of 1 to 6 months, but business transfers need to be planned much more in advance. At least 12–36 months are required for the handover of a company. Also, the lack of preparation of a business transfer leads to difficulties in finding a suitable successor, securing necessary funds as well as reorganizing the company.

Finding a qualified successor is challenging. For a company this process is time consuming, needs a lot of planning and expertise. For many SMEs it isn’t easy to conduct this process besides the daily business. There is also a widespread lack of entrepreneurs willing to take over an existing business. Due to the demographic changes there are also less and less young people that can lead the companies in the future.

Resources and the know-how for conducting successful business transfers are lacking among most companies. The process of handing over the company to a successor is unique and new to many owner-manager and business support organisations. More innovative models for business transfer processes and their planning, especially in eastern countries, are necessary.

The financial expectation of the old owner-manager is frequently hindering the negotiation process as it is often non-realistic regarding the enterprise value. This complicates the negotiation process with the potential successor. Expertise is missing to conduct an independent valuation of the business.

Even though the European Commission stated that more jobs are lost due to failed business transfers then new jobs are created by start-ups, the majority of public economic support still focuses on start-ups.  A change is the INBETS project, co-financed by the INTERREG VB Program. It aims at tackling these challenges by comprehensively elaborating the topic of business transfers in the Baltic Sea Region. It is systematically strengthening the institutional capacity of existing SME business support institutions and raising awareness about the importance of business transfers among political decision makers.

Within the scope of the project the INBETS consortium developed six different business transfer models facilitating the transfer and financing for the involved parties. For each case, a detailed instruction helps to structure the transfer in the right way. The models cover transfers within the family, to an external entrepreneur, to a former employee or a workers’ cooperative and the takeover of another company.

Managing owners will be better prepared for the phase of the transfer. For this purpose, it developed tools that facilitate the transfer. The developed valuation models serve as an independent tool, helping retiring SME owners and potential successor to find a price for the business, fair for both parties. A knowledge management tool is crucial for preserving important information, contacts and procedures during the transition phase.

An important focus of the project is furthermore the training of business support organizations to increase institutional capacity for backing business transfers in the Baltic Sea Region. A training program for SME consultants was developed, tested, evaluated and finalized that puts these consultants in a position of being able to actively promote and accompany the business transfer of a SME. The personal support before or during transfers that can thus be provided by the trained coaches is of particular importance for the companies.

To tackle the demographic changes and the overall lack of qualified potential successors, another essential part of the project is the recruitment and training of potential entrepreneurs who could take over the SMEs. For this reason, the project provides training for entrepreneurship and successors, as well as curricula for (young) people who are currently studying related subjects at schools and higher education institutes.

In summary, it can be stated that the economically important field of business transfer has been neglected up to now, but will gain in importance in the future due to the strongly increasing demand of the consulting market and projects like the one outlined above.

Expert article 2839

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