For the European economy the importance of Small and Medium Enterprises (SMEs in short) can hardly be overstated. SMEs represent sixty percent of all value added in Europe, two thirds of all private employment, and four out of five new jobs created. The vast majority of SMEs are family businesses ran by one or more members of a family. Given the demographic structure of Europe, every year approximately seven hundred thousand SME owners/ entrepreneurs are expected to withdraw/ retire. Unfortunately, most of these businesses are not transferred to a new owner, and in quite a few of the cases that they are transferred they fail later one, because of fail of the transfer process.
It is true that in a continuously changing economic environment some firms are going to fail. This is the famous process of “creative destruction”. However, failure of an otherwise viable firm because of a flawed transfer process (or lack thereof) implies an economic loss not only for the ex-owner / entrepreneur but for society as well. The loss for the ex-owner is obvious: loss of an income producing asset. The loss for society is twofold: devaluation of physical assets (structure, equipment) which, very often, are firm specific and loss of human capital. Human capital, i.e. the value of human assets is, of course, the main source of production and value. Human capital is the total value of all the skills, abilities, dexterities, experiences, knowledge, motivation and values of the workforce and management of a firm. Whatever the available amounts of financial capital, land, structures and equipment production is not possible without human capital while for some production processes.
Part of this human capital can be transferred to any business, some is industry/ sector specific and some is specific to the unique characteristics, idiosyncrasies, value system of the firm. Thus, the loss to society from the death of a business depends on the location and characteristics of a firm. Death of a firm in a rural area will, most probably, imply a higher loss compared to a large city, since they will be fewer opportunities for finding employment in a similar firm. Be that as it may, the unwarranted failure of a firm results in a loss to society which in turn, suggests that government intervention can be beneficial.
It should be noted that the economic loss to society from a failure of the transfer of a business is magnified by the loss of social and cultural capital. In this context, by social capital we mean the intertwined networks of buyers, sellers and experts. Networks that provide the firm with new opportunities reduce the cost of doing business and maximize the possibility of survival in difficult times. By cultural capital we mean the value system, values such as honesty, commitment to quality, corporate social responsibility. Values which tend to maximize the sustainability of a business.