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Swiss SMEs: Company Succession Is a Matter of the Heart

Credit Suisse Study on Success Factors for Swiss SMEs with a Focus on Company Succession

Credit Suisse today published its study on ‘Success Factors for Swiss SMEs – Company Succession in Practice’. It is based on a survey of more than 2,000 Swiss SMEs. The topic of company succession is of concern to SMEs: 22% of entrepreneurs wish to hand over their business in the next five years. These businesses employ about half a million people. Approximately 40% of SMEs are normally passed on to a family member. Financial motives are not the most important factor in succession management in Swiss SMEs; the main motive is self-fulfillment. The Credit Suisse survey also shows that like in the previous year, SMEs take a positive view of Switzerland as a business location. However, they assigned lower grades to the success factors ‘infrastructure’ and ‘research environment’ and are especially pessimistic about the future development of the regulatory framework.

Each individual SME - and Switzerland as a whole - has to work continuously to achieve success and remain competitive. Each year, Credit Suisse's study series ‘Success Factors for Swiss SMEs’ analyzes the conditions in Switzerland as a business location from the perspective of SMEs. Based on the main topic of this year's study, Credit Suisse economists also collaborated with the University of St. Gallen's Center for Family Business to examine how SMEs pass on their businesses to the next generation of entrepreneurs and to determine what the most important factors in a handover are in practice. "For many Swiss entrepreneurs, company succession is a matter of the heart, their business is their life's work. If well-managed companies are successfully handed on to the next generation, economic value is retained in the form of jobs, value creation and the tax base," says Urs Gauch, Head of SME Business Switzerland at Credit Suisse.

SMEs Satisfied with Switzerland as a Business Location – Alarm Bells about Infrastructure and Regulation
The SMEs' verdict on the success factors in Switzerland remains positive in 2013. Overall, the assessment is only slightly less favorable than in the previous year. As regards infrastructure, Swiss SMEs see a clear deterioration. That is not entirely surprising. Rapid population growth means that the existing infrastructure is nearing its limits in terms of capacity. Infrastructure nevertheless remains the factor with the most positive influence on business success. Looking ahead to the next three to five years, SMEs are, in most cases, optimistic about infrastructure. A deterioration is primarily expected by the SMEs in relation to the regulatory framework and the economic environment. Given the major significance of these two factors, this is a warning sign. In the case of the regulatory framework, there is a special challenge for politicians: In order to avoid putting Switzerland’s attractiveness to SMEs at risk, the state needs to reduce the regulatory burden.

Company Succession Is of Great Significance for Businesses and for the Economy
The subject of company succession is a particularly relevant issue for SMEs. In 22% of Swiss SMEs, the owners plan to pass on their business in the next five years. They employ around half a million people. In almost 16% of SMEs, the owners are already planning a handover within the next two years. On average, the whole SME landscape changes its ownership every 25 years. Microenterprises (1-9 employees) are more likely than small and medium-sized enterprises to report difficulties in achieving the desired succession solution. In 8% of cases, microenterprises opt for closure or liquidation – much more frequently than either small or medium-sized enterprises (2% and 0% respectively).

Entrepreneurship Seen as a Privilege
Handing over a business is just as much a matter of the heart as taking one over. The opportunity for self-fulfillment is the main motivation when taking over a business and is far more important than financial attractiveness. The incumbent owners are mainly prepared to part with the company for age or health-related reasons. These are typical observations for a country like Switzerland, with its functioning labor markets, social stability, and consumption-driven and leisure-oriented society. Many entrepreneurs find fulfillment in their business. In total, 90% of respondents also advise their children and friends to become entrepreneurs.

Succession Doesn't Always Match What People Want
Many owners of family businesses would like to see a handover within the family. Owners of non-family firms often rely on employees to be their successors. It is not always the case that an entrepreneur can achieve the desired succession arrangements. Viewed overall, however, the reality differs little from the wishes of entrepreneurs. Around 40% of Swiss SMEs are passed on to family members (family buy-out), 40% to external parties (management buy-in), and 20% to employees within the company (management buy-out). Management buy-ins, in particular, occur much more frequently in practice than originally envisaged, as many entrepreneurs who have not made any concrete plans for succession finally pass on their business to external parties. Half of the external successors already know the incumbent owner before the takeover. Management buy-outs occur less frequently than planned. Employees often express an interest in principle but frequently shy away from the (financial) responsibility it would entail.

Room for Improvement in the Handover Process
In many SMEs, the strategic decision about the handover lies only to a limited extent with the Board of Directors, and only in one in four external handovers are there several candidates to choose from. Surprisingly, in 46% of handovers, no specific requirements exist for the successor. There is no plan for the development of skills and competencies in 60% of SME handovers. Fewer than 60% of SMEs have a plan about the way in which the handover should be communicated to people internally and externally. Approximately 60% of SMEs have contractually agreed on the previous owner's relationship with the company in the post-succession phase. Consequently, in many respects, there is plenty of scope for improvement in the structuring of succession planning in SMEs. Due diligence (systematic assessment of strengths/weaknesses, as well as of the value of the business) is, by contrast, commonplace. A total of 80% of SMEs conduct an audit of this nature in connection with a company handover.

Family Handovers Less Structured
In many respects, family handovers proceed in a different way to external handovers. With family companies, the Board of Directors has very little influence and the handover process is less structured. Requirements for successors are even less common, and there are often no alternative candidates that could be selected for a handover. There is frequently no contractual agreement on the relationship with the previous owner and due diligence is also less common. Handovers within families also take longer. The senior manager frequently retains a strong presence within the firm years after the handover. Many retain an office in the company for years and have a relatively strong influence on business activities. There are often also closer ties from a financial perspective. Successors from within the family take businesses over at a better price. The average discount on the market price is 42%, compared with 22-30% in the case of non-family companies. Moreover, 20% of successors from within the family even take companies over for free. In addition, they more frequently receive a loan from their predecessors than in the case of external successors. The strong presence of a senior figure is potentially a source of conflict but, in most cases, the successors feel encouraged and supported by their predecessors.