Download SFA Vision - Next Generation Business

Next
Generation
Business
A vision for small
firms in Ireland
Small businesses,
defined as those
with less than 50
employees, make
up over 98% of
businesses
in Ireland.
Foreword
S
mall businesses exist in every single village, town and city in Ireland, and
operate in all sectors. But what makes small business tick? Why do people
establish and grow their own businesses? And what can be done to accelerate
the growth of small businesses in Ireland in terms of their number, profit and
the jobs created?
The vision of the Small Firms Association is:
“Ireland – the most vibrant small business community in the world – supporting
entrepreneurship, valuing small business and rewarding risk takers.”
We believe that the government, state agencies, educators, individual businesses
(both large and small), representative organisations and the general public
all have a role to play in making this a reality. Huge strides could be made in
the space of 5-10 years – creating more jobs, adding value to the economy,
contributing to the Exchequer, injecting vibrancy into towns and villages and
creating a happier population.
Initial successes have the potential to create a virtuous circle. If we establish an
environment that encourages the best raw entrepreneurial talent from at home and
abroad to establish their businesses, access the ecosystem and make a commitment
to wealth creation here in Ireland, then a critical mass could be created to justify the
public and capital expenditure required. This would create a more compelling argument for
foreign investors to establish bases in Ireland and create access to a wider funding base than
currently exists.
This document sets out a roadmap for how to catapult the Irish small business
community to these new heights. Economic analysis, a social narrative and over
60 concrete recommendations combine to trace the current small business
landscape and project into the future.
I encourage you to support us in achieving this vision. Join the conversation by
using #smallbizvision on Twitter @SFA_Irl and LinkedIn www.linkedin.com/
company/small-firms-association
Patricia Callan
SFA Director
A vision for small business in Ireland
1
The small business
landscape – starting
point, challenges,
opportunities
The economic contribution of small firms
The economic importance of small firms cannot be overstated. Nowhere are small firms
more important than in the labour market. Firms with fewer than 50 employees account for
44% of employees and 49% of the total persons employed in Ireland’s private sector.
They also make up over 98% of the enterprise base of the country.
Figure 1: % of employment by firm size
35
19
20
27
25
32
30
10
10
5
0
<10
10-19
12
15
20-49
50249
250+
Source: CSO, 2012
Young and new firms in particular, account for the majority of employment growth. The
most recent data shows that between 2008 and 2012 while the total number of private
sector employees fell by 264,000, companies which were less than five years of age created
106,000 net new jobs; offsetting 40% of the job losses in the broader economy. Indeed
young Irish firms are the second fastest growing in Europe when it comes to employment,
with a young Irish firm on average growing employment by 150% in its first five years.
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Next Generation Business
Figure 2: % growth rate of new firms over first 5 years
149.25
250
200
150
100
50
Spain
Netherlands
Sweden
Italy
Bulgaria
Portugal
UK
Germany
Denmark
Luxembourg
France
Austria
Norway
Ireland
Finland
0
Source: Eurostat, 2012
The spread of small businesses and the sectors in which they play a role are central in the
domestic economy. Small companies are the dominant employers in the domestic facing
sectors such as construction, tourism and retail which are both labour intensive and crucial
for regional employment. Small firms account for around 45% of employment across
counties but account for more than that in all but two counties (Sligo and Dublin) and over
half of employment in 17 counties.
Figure 3: % of workers employed in a small firm by county
80
44.6
70
60
50
40
30
20
0
Louth
Tipperary
Meath
Wicklow
Wexford
Kerry
Mayo
Laois
Cavan
Limerick
Galway
Cork
Clare
Leitrim
Donegal
Longford
Waterford
Roscommon
Kildare
Westmeath
Kilkenny
Offaly
Carlow
Monaghan
All counties
Sligo
Dublin
10
Source: CSO, 2012
A vision for small business in Ireland
3
When it comes to the economy as a whole Central Bank research shows that small firms
account for 31.6% of Gross Value Added (GVA) – or in other words make up a total of one
third of the total value of the Irish economy. Within this, Irish-owned firms make up one
quarter of the Irish economy.
Table 1: Contribution to Gross Value Added
Irish NonExporter
Irish
Exporter
Foreign
NonExporter
Foreign
Exporter
Total
21.80%
3.50%
5.00%
1.30%
31.60%
Medium firms
6.3%
4%
2.7%
7.4%
20.5%
Large firms
71.9%
92.5%
92.3%
91.3%
47.9%
Small firms
Source: Lawless, McCann & McIndoe Calder, Central Bank, 2012
Similarly, small firms account for almost 35% of business investment in the economy, with
Irish owned small firms accounting for 22.6%.
Table 2: Contribution to investment
Irish NonExporter
Irish
Exporter
Foreign
NonExporter
Foreign
Exporter
Total
Small firms
20.1%
2.5%
11.7%
0.6%
34.9%
Medium firms
8.4%
3.5%
2.4%
3.2%
17.4%
Large firms
10.7%
18.0%
6.6%
12.3%
47.6%
Source: Lawless, McCann & McIndoe Calder, Central Bank, 2012
The challenge
As we have shown, the economic contribution of small firms is substantial. Small firms in
particular are the major employers in the Irish labour market giving employment to almost
one in two jobs in the private sector. They account for one third of value added in the
economy and a similar proportion of business investment. This often does not get sufficient
recognition given that it is based on thousands of smaller investments and jobs created
every year rather than large once-offs but it is no less important economically and socially.
n Survival
This is not to say the sector is without its challenges, however. Irish owned firms and
Irish small firms in particular are part of a comparatively weak indigenous enterprise
base. Ireland has some of the fastest growing young firms in Europe but the rate of new
business formation in Ireland is low (6.8% or 12,600 companies in 2012) compared to
other countries, particularly the UK. This in part may be a factor of the slow economy
at the time this data was recorded (2012) but there are also serious institutional issues
preventing Irish people from going into business for themselves.
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Next Generation Business
“Small firms are the major
employers in the Irish
labour market, providing
one in two jobs in the
private sector.”
A vision for small business in Ireland
5
Figure 4: Birth-rate of new firms (New firms, % of existing firms)
15
6.8
12
9
6
Belgium
Netherlands
Ireland
Sweden
Italy
Austria
Germany
Spain
Finland
Luxembourg
France
Denmark
UK
0
Portugal
3
Source: Eurostat, 2012
When those firms are formed, Ireland is a hard place to grow a business. Irish small firms
face a number of challenges to their growth. These include high legacy debts and costs,
a small domestic market, an overreliance on bank funding, barriers to innovation and
challenges accessing and competing for the right skills to help them grow.
Figures for recent years show that new enterprises have had an average five year survival
rate of just 48.4%; less than one in two new companies formed in any given year are still
trading half a decade after they form. This is before they begin to do any of the things the
economy needs new firms to do such as growing their output, taking on more employees
or selling into new markets.
Figure 5: Enterprise survival and employment share after 5 years, %
80
n 5 year enterprise
survival rate %
70
48.4
n Employment share of
firms under 5 years %
60
50
40
30
9.3
20
10
Portugal
UK
Spain
Germany
Finland
Denmark
Italy
Ireland
France
Luxeumbourg
Netherlands
Austria
Belgium
Sweden
0
Source: Eurostat, 2012
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Next Generation Business
n Exporting
Despite Ireland being a small very open trading economy, when it comes to exports the
record of small firms (both indigenous and foreign) is poor. Small firms are responsible for
only 6.4% of exports, whereas they account for over 98% of all companies. This leaves
small businesses far more open to the fluctuations of the domestic economy. It also
means slower growth for small firms given that export sales are a key driver of growth.
Table 3: Contribution to exports
Irish
Foreign
Total
Small firms
3.1%
3.3%
6.4%
Medium firms
4.8%
14.7%
19.6%
Large firms
6.7%
67.3%
74.0%
14.6%
85.4%
100.0%
Total
Source: Lawless, McCann & McIndoe Calder, Central Bank, 2012
n Innovation
Innovation is widely recognised as a key ingredient of economic and business success
across all sectors of the economy. Irish small firms are less likely to innovate than the best
of their European counterparts. Eurostat’s Community Innovation Survey shows that only
37.4% of small firms in Ireland innovate – that is introduce a new product or process –
annually. This is slightly higher than the EU28 average but well off the top of the rankings.
Figure 6: % of firms with 10-49 employees innovating
60
40
36.9
37.4
50
30
20
France
UK
Denmark
European Union
Portugal
Ireland
Italy
Finland
Netherlands
Belgium
Sweden
0
Germany
10
Source: Eurostat, 2012
There is, however, a bigger issue at hand with non-Irish small firms almost 13
percentage points more likely to be innovating than their domestic counterparts. A
large part of this is down to sectors in which they are operating but evidence (ESRI,
2010) suggests that when other factors are taken into consideration, foreign owned and
A vision for small business in Ireland
7
internationalised domestic firms are far more likely to invest in innovation and were more
likely to translate this investment into tangible gains than domestic facing indigenous
Irish firms. Small firms are also far less likely to take up supports for R&D – one of the
key ingredients to innovation.
Smaller firms and start-ups in particular face funding constraints for R&D investments.
Despite this, the R&D tax credit’s take-up among smaller companies has been weak.
Only 1% of companies with turnover less than €1 million use the tax credit each year,
compared with 12.5% above that mark.
n Management skills
Good management skills are key components of business growth in any economy.
Research has shown internationally that improved management skills can improve sales
growth, market share growth and particularly lead to higher productivity.
A 2010 study of Irish firms for the IMI by researchers from the London School of
Economics had some disconcerting results in this context. They found that manufacturing
firms in Ireland had poor management practices, lagging considerably behind their
counterparts in the US and UK. They also found that Ireland had a long tail of poorly
performing firms which was not seen in other countries, which was covered over by
some very high scoring multinationals. Irish domestic firms in general were 20% behind
multinationals in terms of management practices.
Among 10,000 firms in manufacturing and retail across 21 countries, Irish domestic firms
and particularly small firms suffered the biggest challenge with management. Irish indigenous
firms were third bottom among developed countries, higher only than Portugal and Greece.
Figure 7: Management scores (0-5) in domestic and multinational companies
United States
Japan
Sweden
Germany
Canada
Australia
Italy
Great Britain
n Foreign
multi-nationals
France
n Domestic firms
Poland
Northern Ireland
Republic of Ireland
3.17
2.64
India
China
Portugal
Brazil
Greece
2.4
2.6
2.8
3.0
3.2
3.4
Source: Bloom, Genakos, Sadun, and Van Reenen (2009).
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Next Generation Business
The opportunity
n Employment
As we have shown Irish small firms face some major challenges yet they remain a major
driver of economic growth and particularly employment. Small firms account for 45% of
employees (49% of total persons employed) in the Irish private sector. Given employment
(under current forecasts: DOF, Budget 2016) is expected to grow by 240,000 between
2016 and 2021, with the majority in the private sector, it is reasonable to assume that
the Irish small firm community can create in the region of 100,000 net new jobs over that
period – or 16,666 per year – if they continue to account for the same proportion of new
jobs as existing jobs. At current rates of firm formation, new firms alone could create in
the region of 15,000 new jobs annually over the same period.
Figure 8: Total employment growth in new firms baseline and counterfactual
25000
n Employment
growth in new firms
n Employment
growth in new firms
counterfactual
20000
15000
10000
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
0
2007
5000
Source: Ibec estimates
This is a simple baseline, however. Changes in policy and conditions which improve the
ability of small firms to grow and thrive could add to this total and improve economic
growth as a whole.
Irish start-up rates are amongst the lowest in Europe. An increase in start-up rates to
European norms would see employment grow by a further 2,500 annually; increasing new
firm birth rates to UK levels could increase employment by 8,000 annually assuming a
continuation of current trends in employment growth levels of new enterprises.
Our most recent figures (2007-2012) show that only 48% of enterprises survived over
five years from their formation. Those firms that were able to survive had an average
150% increase in employment over five years, with the total number of jobs in those firms
five years old (including those that did not survive) 121% higher than in their start year.
Improving small firm (5y) survival rates to 60% from its current level of 48.4% could add in
the region of 5,000 jobs to the economy annually through greater job retention.
All in all improving small firms’ start-up and survival rates over their first five years could
add in the region of 7,500 jobs annually to the economy over and above what we would
otherwise expect from the small business community, bringing the total employment
growth to 195,000 over the next five years (2016-2021) or 32,500 per annum.
A vision for small business in Ireland
9
n Productivity, innovation and economic growth
Irish indigenous small firms are well below ‘best in class’ when it comes to management,
innovation and exporting – three of the main drivers of business growth and productivity.
Improving management practices, helping firms innovate or export earlier will increase the
productivity and growth of Irish small firms.
Taking the role of small firms in the whole economy, increasing productivity by 5% in
indigenous firms could add 1.5% to GDP permanently; improving productivity of Irish
indigenous firms to the level of their UK counterparts could add 4.9% permanently.
Furthermore, Irish economy-wide R&D spending is equivalent to around 1.6% of GDP;
this is compared with an EU average of 2.1% and leading EU countries spending
3.3%. In order to realise our goal of 2.5% GDP spend on R&D by 2020 and a growing,
exporting, indigenous enterprise base, we need to make sure more small companies are
innovating sooner.
The R&D tax credit has been a successful model in encouraging Irish companies to invest
in R&D and create value in the economy. In line with international research, an Ibec study
showed that for every €1 given in tax credit to participating firms they spend in the region
of an additional €1.25 on R&D over and above what they would otherwise have spent.
Studies in the UK suggest this additional spend could rise as far as €3.60 in the long-run.
In 2013 30% of the value of the €421 million credit went to small companies, or €126
million. Increasing the value of take-up of the R&D tax credit among small firms by 50%
(€63 million) could add as much as €225 million to R&D spending across the economy
over the long-run.
Next steps
In pursuit of the ambitions laid out above, the SFA has mapped out the changes that are
required under three themes:
1. Fostering a strong, inclusive culture and positive recognition
for small businesses
2. Creating a highly educated and skilled population with the ethos
and tools to succeed
3. Building a dynamic and supportive business environment
for small businesses
Each of these areas will be explored in depth and recommendations made.
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Next Generation Business
Theme 1
Fostering a strong,
inclusive culture with
positive recognition
for small business
Culture, parameters and descriptors
An Ireland that is ‘open for business’ must encompass enterprises of all sizes, sectors
and levels of ambition. In a thriving business community, diversity is essential and a vibrant
small business community, including lone sole traders up to high-tech exporting companies
looking to scale, is a crucial dimension. Companies at different life stages and of different
sizes are essential to the existence of a symbiotic ecosystem that will benefit all of business
and society.
Current government policy focuses on the number of start-ups and particularly backs
‘winners’ who have the potential for scaling and internationalising their business. Yet half
of private sector employment is in the 180,000 small businesses that trade mainly in the
domestic economy and will remain small but viable. At their current cumulative scale,
these businesses are significant contributors to the Irish economy and to the creation and
maintenance of jobs throughout the country, and must be recognised and lauded.
The founders of these businesses describe themselves as ‘small business owners’,
rather than ‘entrepreneurs’. They take a calculated risk to set up a business and, once
they have built a profitable company of a size that they can maintain, many don’t have
ambitions to grow further.
Ultimately, all share a belief that it is very rewarding to work for yourself and try to develop
something new. All businesses are motivated by the ability to make a profit. They should be
enabled to pursue this according to their own chosen growth trajectory and should not feel
alienated by government policy or public perception that they are not in the ‘right’ type of
business, in the ‘right’ sector, with the ‘right’ ambitions. Government policy should refocus
on building the capacity that the private sector cannot yet attain by itself and on providing
all companies with the tools to manage risk appropriately.
Culture can change. Government policy and other factors have the potential to accelerate
and guide this change.
A vision for small business in Ireland
11
Fostering
a strong,
inclusive
culture with
positive
recognition for
small business
continued
Recommendations
1. Change the language around entrepreneurship to that of business owners,
exploiting business opportunities with realistic risk assessment. By making
business setup less of a ‘rags to riches’ dreamworks, more people will be
encouraged to make the rational decision to establish.
2. Accept that most business owners do not conform to the stereotypical
image of an entrepreneur. They may not have the drive and ambition
to scale their business, but they should be supported in taking the risk
decision to establish in the first place and create good quality employment
in the process. It shouldn’t all be about backing a handful of winners.
3. Successful business owners should act as role-models to others, through
mentoring, opening doors to their network and participating as nonexecutive directors on the boards of small companies.
4. Small business owners should actively engage in their communities
through local schools and voluntary groups to share their experiences
and insights.
5. Politicians, government officials and those in advisory professions should
speak responsibly and respectfully about small business and small
business owners, acknowledging the economic and social contribution
that they make as well as the challenges they face. Casting aspersions
on business owners or profit-making more generally damages the public
perception of our country’s small businesses.
6. The media should give more coverage to positive small business stories
and celebrate Irish successes.
7. The Government should organise press conferences and photocalls for
job creation announcements in small companies, grouping a number of
companies together to highlight the cumulative effect.
8. Entrepreneurship should be part of popular culture – TV shows and awards
programmes mainstream and promote positive messages about engaging
in business.
9. Steps are needed to encourage small business owners to believe in their
ability to scale businesses and internationalise successfully (in particular
beyond the UK). Concrete initiatives would include more peer-to-peer
mentoring on internationalisation, greater investment in management skills
and a more practical use of the Irish embassy network to generate local
business leads for companies including non-Enterprise Ireland clients.
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Next Generation Business
Setting up a business
A culture supportive of people setting up their own business is vitally important to persuading
more people to do so. The cultural environment towards entrepreneurship has certainly
made great steps forward in recent decades but must continue to improve. This requires
a gradual shift in attitudes, psychology and subliminal messaging, potentially across
generations. Good role models have a vital part to play.
The broad experience in Ireland is still that people are educated and steered by family and
peers towards stable careers as employees in larger businesses. The sense that setting up
a business is an unconventional career decision, along with the begrudgery experienced by
many successful small business owners, must be consigned to the past.
Consultations with SFA members indicate a variety of reasons for setting up a business.
Many describe identifying an opportunity with good earning potential as the reason for
establishing their business, predominantly in areas where they had already had experience
of doing similar work as an employee. For others, the decision was more push than pull;
facing limited opportunities for employment, they created jobs for themselves based on their
existing skillset or interests/hobbies, and additional job creation flowed through growing
market opportunities. The main reason for some people choosing to set up in business for
themselves was the experience of having a poor manager and thus of not wanting to work
for others within a corporate structure, and instead being able to lead and manage in their
own style. Many believe that it is important to learn lessons from working in a variety of other
businesses, rather than setting up in business straight from school/college.
Language plays an important role in terms of both reflecting and influencing culture. ‘Start-up’
is an interesting case in point, as it has come to be connected almost exclusively to the tech
sector and apply even to tech companies that have been operating for five or ten years. In
recent years, the government has introduced a range of measures to support new businesses
and has created positive rhetoric around start-ups, but particular efforts are needed to ensure
that new businesses outside the tech sector feel included in these initiatives.
Recommendations
1. Acknowledge the wide variety of reasons that people set up in business for
themselves and the different types of businesses they will create. Provide
suitable supports to assist them in establishing and getting on their feet
through government programmes, mentoring from like-minded peers, more
formalised supports for spin-outs from MNCs and a better environment
and structure to create and facilitate linkages with suitable non-executive
directors.
2. Profit must be explicitly regarded as a positive in our society and by
government. This perception is essential for businesses to establish, thrive
and grow employment. Without it, businesses will not be created or will fail
and go under. There must be an adequate incentive and reward for risk,
not just in maintaining our 12.5% corporation tax rate, which is essential,
but in creating an appropriate capital gains tax system equivalent to the
UK model of a 10% entrepreneur rate up to a limit of €14mn.
3. Equalise tax treatment between self-employed/proprietary directors and
the PAYE workers and provide a social welfare safety net in the event of
business failure. Continue the Back to Work Enterprise Allowance, the
Enterprise Support Grant and new two-year income tax credit for the longterm unemployed. These are best-in-class internationally as supports to
encourage long-term unemployed people to become self-employed and
should be highlighted more.
A vision for small business in Ireland
13
Fostering
a strong,
inclusive
culture with
positive
recognition for
small business
continued
Serial and second-chance entrepreneurship
Central to the question of culture is an acceptance of failure and the existence of an
environment conducive to starting again. In many countries, particularly the US, there
is a belief that learning from failure is a key attribute of the entrepreneur and that failed
entrepreneurs have a high chance of success in subsequent ventures.
The reductions of the bankruptcy period in Ireland from twelve years to three years and,
most recently, to one year, represent significant steps forward. Still, many owner-managers
feel that there is no real appreciation that it is hard to succeed and doing so involves a huge
personal commitment. There is a lack of understanding that businesses can fail through
no wrongdoing or lack of dedication. Failure is perceived to be absolute and carries social
stigma. It is very difficult to exit business problems and to start again.
Recommendations
1. The Government should establish a working group specifically to make
proposals on supporting serial and second chance entrepreneurship.
2. Establish an early-warning system to identify and support troubled
businesses before they fail, as exists in Denmark and other countries.
3. Make specific mentoring supports, active learning networks and
streams of finance available to people looking to set up again
following a failed venture.
4. The media must ensure to report and analyse business failure in a
constructive light. Where businesses fail with no illegality, this should
be reported on in a respectful and neutral fashion rather than almost a
cause celebre.
“The sense that setting
up a business is an
unconventional career
decision, along with the
begrudgery experienced
by many successful small
business owners, must be
consigned to the past.”
14
Next Generation Business
Theme 2
Creating a highly
educated and
skilled population
with the ethos and
tools to succeed
Education
There is no doubt that entrepreneurial skills need to be enhanced in the Irish education
system. The data from the Global Entrepreneurship Monitor shows that Ireland lags behind
the EU average in terms of primary and secondary education. Ireland should aim to surpass
the EU average on these metrics and compete with the most innovative, entrepreneurial
nations in the world.
The issue is not necessarily to have ‘entrepreneurship’ or ‘business studies’ classes taken
by more students, but rather to introduce key skills such as resilience, critical thinking, risk
assessment/intelligent risk taking and collaboration across the curriculum from primary
to higher education. These skills are crucial for budding entrepreneurs but are also highly
valuable for those looking for employment after leaving education.
Recommendations
Primary and secondary education:
1. Introduce the concept of entrepreneurship in primary schools through
project-based work delivered by outside experts. This already exists in an
ad hoc manner in some schools but should be mainstreamed.
2. Foster collaboration between companies and schools in their local
communities. Companies could donate products to schools to take
apart and learn how to put back together, mentor student enterprises/
entrepreneurs and allow their experiences to be used in real small business
case studies.
3. Continue and build out successful Transition Year programmes including
work experience, model company programmes and student entrepreneur
of the year awards.
4. Encourage children to run fundraising events rather than parents,
allowing them to learn to navigate the mechanics of running a bake
sale for example.
continued on next page
A vision for small business in Ireland
15
Creating
a highly
educated
and skilled
population
with the ethos
and tools
to succeed
continued
continued from previous page
5. Create a national structure for partnership between business
organisations, such as the SFA, and teachers’ organisations to
share insights and perspectives.
6. Promote entrepreneurship as a viable and attractive career choice.
Higher/further education:
7. Integrate entrepreneurial skills into a range of higher education courses,
including engineering, science, journalism and ICT. Teach students how to
set up and grow a business.
8. Deliver self-employment training sessions to adult learners, unemployed
people and those outside of the workforce, including by using games.
9. Educate people to recognise what they don’t know and identify how they
can fill the gaps by upskilling or collaboration.
Management capacity
International studies show that 50% of small businesses fail in the first five years of
existence, and the small business failure could be reduced by half if we invested in more
in management capacity. Only 6.2% of employed persons in Ireland participate in lifelong
learning, compared with a European average of 11.4%. Management training is important
at all stages of the business lifecycle from start-up to growth (including internationalisation)
to sale/succession planning. Time, cost and location of appropriate courses are the biggest
barriers for small business in upskilling.
There is also a clear need to differentiate roles and responsibilities, particularly within a
growing business.
The Small Firms Association is the centre of excellence for learning and innovation amongst
small businesses in Ireland. The SFA, in partnership with the Ibec Training Unit, provides a
range of short duration targeted training courses to owner-managers and their employees,
tailored for small business.
16
Next Generation Business
Recommendations
1. Small companies need to realise that building a professional management
team is important, and the right mix of skills (creative, finance, sales, etc.)
are needed to make a successful business. More time should be invested
in hiring the right people and upskilling others.
2. Many people who set up a business have an idea and want to
commercialise it but they are not naturally skilled in running a business.
There is currently no structured way of matching ‘ideas people’
with professional management, appropriate mentors and nonexecutive directors.
3. The outstanding recommendations of the Management Development
Council Report should be implemented; primarily:
n Increase the level of funding to ManagementWorks to the level
recommended in the Report, i.e. €10-12 million, in the short-term,
with this figure growing over time
n Intensify focus on the ‘long tail’ of badly managed firms, as this has
the greatest potential to increase Gross Value Added.
4. Encourage upskilling in the area of finance through a government-issued
Finance Voucher scheme. In addition, Skillnets ManagementWorks
subsidised training programmes should be greatly extended.
5. Promote awareness of the training and capacity-building programmes
that are available to small businesses, through the SFA, Skillnets
ManagementWorks and others.
A vision for small business in Ireland
17
Theme 3
Building a dynamic and
supportive business
environment for
small businesses
Practicalities of setting up a business
Ireland scores well in international charts on regulatory burden for the ease of setting up a business.
Aspiring owner-managers’ experiences with using professional advisers, however, are more mixed. It
is critically important that, prior to and during the set-up phase, each person or company does their
own due diligence and creates appropriate legal structures. Information remains disparate and there
is still relatively low awareness of the variety of government supports available. Networking is critical
to business success but can act as a barrier to underrepresented groups such as women, ethnic
and young entrepreneurs who often don’t have ready-made networks.
Recommendations
1. Professional advisers such as accountants and solicitors should improve their
service offering to start-ups, particularly in relation to cost during early stages.
Companies should be made aware that solicitors legally have to advise their
fees up front (in accordance with Section 68 of the Solicitors Acts).
2. Government bodies and larger enterprises should be more open to innovative
new start-ups as quite often smaller companies are excluded from quoting for
certain jobs due to their limited size and lack of financial history. SFA and Ibec
plan to roll out a ‘Marketplace’ event in 2016 to help small/new companies
understand the procurement processes of government agencies and large
companies to allow organisations of all sizes to do business together.
3. The government should allocate a clear communications budget for every
new support scheme that is developed. The ‘Supporting SMEs’ online tool
is a good one-stop shop for information and should be maintained but
awareness of it needs to substantially increase.
4. Certain Local Enterprise Offices (LEOs) receive very good feedback for
helpful advice, affordable training and supports. This service level needs
to be standardised across all counties and general awareness levels
improved. The process of moving through agencies, e.g. from LEO to EI,
needs to be seamless from the small business’s perspective.
5. Government should enhance its targeting of supports for underrepresented
groups such as women, ethnic and young entrepreneurs and develop
supportive peer networks across established and early-stage businesses
along these lines. In particular this would assist in checking potential
customers/partners professional credentials in the informal way that more
traditional entrepreneurs can.
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Next Generation Business
Business environment
Businesses create jobs, generate profit and contribute to the Irish economy. In order to do
this they need to operate in a dynamic business environment. Many small businesses believe
that government’s main role should be in staying out of their way and allowing them to get
on with running their businesses in an efficient fashion. If government creates an environment
that is conducive to enterprise, then small business will flourish.
In this context, the focus of government enterprise policy should shift from micro-level
support (picking winners and supporting specific companies through its agencies) to a
macro-level support (building up the infrastructure, institutions and ecosystem and creating
the environment for all companies to succeed, grow and internationalise). The former has
been largely successful to date but the latter is the approach that will enable the next phase
of Ireland’s economic development.
Recommendations
1. Reduce the burden of complying with excessive regulation, in particular
by streamlining administrative processes to minimise burdens –
e-government has transformative potential in this regard.
2. The government should track and monitor business costs and curb those
on which it has influence and control, e.g. education, transport, energy,
labour (minimum wage and JLC rates). All businesses should keep a
strong focus on cost competitiveness.
3. Ireland needs full regional coverage of high speed broadband in the
short-term. Government and private sector providers, including wireless
broadband providers, must work together to deliver the National
Broadband Plan without any further delays.
4. Commercial rents (upward only rent reviews) and commercial rates
systems need to be fundamentally reformed. Planning rules should be
reviewed to ensure there is sufficient commercial and residential property
to meet the needs of our growing economy.
5. Attracting talent, investing in people and retaining staff are tricky as
a small business. Recruitment agencies are often too expensive and
small businesses don’t have experience in recruiting. The Intreo service
should be further professionalised and resourced to provide a good free
alternative service for small firm recruitment needs.
6. Government should focus on enticing the best entrepreneurial talent
internationally to locate in Ireland and supporting high-skilled Irish
emigrants to return home to start new ventures.
7. Public procurement policy needs a complete rethink to ensure that small
businesses have access to contracts. Large scale framework agreements
focused on price mean that small businesses simply can’t compete.
Contracts should be awarded on the basis of a more holistic assessment
of the economic impact including job creation and retention.
8. Support small businesses to cooperate with organisations that are
otherwise their competitors, for example ‘coopetition’ on tenders. Clear
guidance from the CCCP is essential in this regard.
9. Develop new strategies to ensure regional balance and development of
sectoral opportunities, e.g. on tourism.
continued on next page
A vision for small business in Ireland
19
Building a
dynamic and
supportive
business
environment for
small businesses
continued
continued from previous page
10. The government should capacity build private sector institutions. Many
of the programmes run by Enterprise Ireland and the Local Enterprise
Offices could be administered through private sector institutions
like representative bodies or specific business networks. Devolving
programme and funding delivery to private sector institutions will deliver
the same programmes but with a private sector ethos.
11. Build out the capacity of community enterprise centres. The explosion
in the number of these centres, which provide enterprise and incubation
space and hands-on supports for start-up and early-stage enterprises,
has provided highly-effective support for a significant number of small
companies around the country.
Finance
The availability and affordability of appropriate finance is the perennial problem at each stage
of a business’s lifecycle. Competition in the banking sector must be increased and interest
rates brought down so that Irish businesses do not continue to pay more for credit than their
European counterparts. In Ireland and the EU generally, there is a traditional over-reliance on
mainstream bank debt finance, rather than equity investment – the opposite of the situation
in the US, for example. The financial crisis demonstrated how risky this strategy is and the
recession period saw the introduction of a number of helpful government policies to improve
access to debt finance beyond the mainstream banks. These included the establishment
of Microfinance Ireland (MFI), the Credit Loan Guarantee Scheme, the Strategic Banking
Corporation of Ireland (SBCI) and the ISIF funds. Dozens of innovative providers of alternative
forms of finance also established a small presence in the market during this time. There has
been very little progress, however, on initiatives to tackle the equity gap (30%, as banks will
now provide a maximum of 70% financing).
Recommendations
1. Many types of start-up businesses do not need initial large scale
finance. The process of opening basic business banking facilities can be
cumbersome, however, and needs to be streamlined.
2. Managing cashflow is the essential ingredient in all business finance.
Owner-managers should be trained in this essential skill. All businesses
should write clear payment terms into their contracts and the government
must enhance its communication of the Prompt Payment Code and
enshrine it as an essential stamp for doing business in Ireland.
Non-equity finance
3. Mainstream banks need to reinvest in relationship managers who
understand small business and can assess the venture and the individual
behind it in a more personal way rather than lending solely through security
and personal guarantees or automated online assessment. At the very least,
there needs to be good assessments based on cashflow, but we believe
banks should be better at all-round risk assessment on ventures.
continued on next page
20
Next Generation Business
“The availability and
affordability of appropriate
finance is the perennial
problem at each stage of
a business’s lifecycle. ”
A vision for small business in Ireland
21
Building a
dynamic and
supportive
business
environment for
small businesses
continued
continued from previous page
The previous role of the bank manager as a business advisor, supporter and
connector during the tough early days of a business has been identified by
many long-standing owner-managers as having been essential to their very
survival. This broader role is essential to our small business ecosystem.
4. The government’s policy of giving large multinational companies extensive
subsidies for setting up in Ireland causes some resentment amongst small
businesses that do not get similar supports. Its appropriateness as a policy
strategy should be re-evaluated for our new globalised world.
5. Providers of innovative alternative forms of finance should be strongly
supported and promoted by government (e.g. invoice finance, asset
finance, crowdfunding, peer-to-peer funding, etc.), in particular through
appropriate financial regulation and potentially government co-funding,
which would add an essential layer of confidence for individual investors.
Equity finance
6. Government policy around small scale grants, e.g. feasibility, jobs, etc.
needs to be re-evaluated. The policy of ‘backing winners’ is fraught with
difficulties, as grant funding is likely to go to businesses that would have
been successful without it. This funding could be used more efficiently as
a large-scale revolving loan fund, or as a base fund for supporting more
extensive equity investment in Ireland through angels and VCs.
7. Culturally in Ireland, most small business owners are averse to giving
equity to investors and thus curtail their growth to funding from their own
cashflow with bank lending. Businesses now need to scale faster than
ever to be successful so this has become a serious barrier. This issue
merits the establishment of a government-led working group to specifically
examine how to improve access to equity investment in Ireland. Our initial
recommendations include substantially improving the EIIS Scheme to
make it easy for family and friends to invest in a business in the form of
redeemable preference shares. Enhancing angel and VC structures is also
critical. Education and the facilitation of easier access to various forms of
equity is critical – people must believe that owning 70% of something big
is better than owning 100% of something small.
8. Crowdfunding is being suggested as a solution for early-stage ventures.
Whereas government may have no direct role in this funding line, it does
have a role in establishing a legal basis and platforms under which such
funding can operate. This would help to protect both the investor and
the small business. By creating a secure environment for investors, the
government would also create a competitive advantage for Ireland to
attract crowdfunding.
22
Next Generation Business
Taxation
The tax system has a vital role to play in supporting small business development at each
stage of the life cycle of the business. It must constantly evolve to ensure that Ireland
remains an attractive place to establish and scale a business.
Budget 2016 contained some positive changes from a small business perspective. In
particular, the introduction of a small income tax credit for the self-employed was recognition
of the discrimination that this group faces in the tax system, as the SFA had long claimed.
The changes to the CGT entrepreneurial relief also represented a step in the right direction.
Generally there are very high satisfaction levels at dealing with the Revenue Commissioners,
in particular with regard to the relatively low compliance burden and general efficiency.
Recommendations
1. The government should set out a roadmap outlining its plans and timelines
to implement the many excellent ideas contained in the 42 submissions
it received in response to its tax and entrepreneurship consultation in
summer 2015.
2. Tax equalisation between the self-employed/proprietary directors and their
employees must be delivered fully by 2018, inclusive of an earned income
tax credit (EITC) equivalent to the PAYE tax credit and the abolition of the
USC surcharge.
3. The social welfare system should undergo a complete root and branch
review during the term of the new Government to ensure it is equitable,
supports people to take up employment or become self-employed and
provides an equal safety net for business owners as for their employees.
4. Our taxation system must remain competitive internationally and in
particular relative to our nearest neighbour, the UK. Our corporation tax
rate must remain at 12.5% and our CGT entrepreneur rate must match the
UK version of 10% up to €14mn. CGT for all other transactions should be
reduced to a 20% flat rate.
5. Funding of pensions should be supported and there should be a level
playing field across private and public sector. The funding rules should
allow owner-managers to invest to achieve similar outcomes to public
sector pensions over a shorter period of time, as most owner-managers
only start a pension at the age of 50. Reinvestment in their business is their
priority until then.
6. The marginal tax rate for all workers needs to fall to the OECD average.
7. Business-owners in Ireland are among the most compliant in the world. It
is important that public perceptions, as well as those of government and
agency officials, are updated to match this reality.
A vision for small business in Ireland
23
Building a
dynamic and
supportive
business
environment for
small businesses
continued
Research and development
Innovation is in many ways a function of primary research. One key role of government is to
increase over time the quantum of primary research being conducted. This is a long-term
investment. The private sector normally cannot justify this research in the way it can justify
applied research but if Ireland is to create an innovative economy then increased investment
in primary research is essential. An environment needs to be created where companies can
tap into and exploit the excellent research and development being carried out in Irish higher
education institutes.
Recommendations
1. Create new mechanisms to match businesses and research institutes.
2. Support continuous R&D for companies through a manageable R&D tax
credit. This should be promoted to all companies, not just high-tech or
exporting companies.
3. Reenergise the incubation unit environment. Incubators should be
standalone, privately-run organisations, embedded within the third-level
system but with an independent ethos. A key role for incubators should
be to build a list of potential entrepreneurs, business managers and
self-starters who could be a best match CEO to work with the academic
originators of a product on its commercialisation.
4. Third-level institutions need to be encouraged to change their practice with
regard to commercial intellectual property. At present, when a commercial
innovation is derived the primary route of commercialisation is to licence to
larger multinationals. In this case the opportunity to spin-out a commercial
entrepreneurial venture is stymied.
5. Create further opportunities for spin-in (entrepreneurs or innovators
returning to develop their ventures within the environment of the third-level
sector), which has been relatively successful to date.
Conclusion
Achieving this vision is a hugely ambitious project, but one that the SFA is ready to lead.
Even with widespread buy-in, progress will take time, which is all the more reason to start
immediately. I encourage you to support us by identifying what role you can play in your own
businesses, your networks and your community to creata a momentum towards the Ireland
that we have envisioned.
Join the conversation by using #smallbizvision on Twitter @SFA_Irl and LinkedIn
www.linkedin.com/company/small-firms-association
24
Next Generation Business
So just what is an SFA Business Owner?
Single minded, MULTI-FACETED,
trustee of dreams, ROOTED IN
REASON, invested with a currency
of self-belief… POTENTIALISTS,
forward thinkers, FUTURE
SCOPERS, minds ajar, OPEN FOR
STOCK-TAKING, MIND DIVINERS,
RISK FLUENT, failure acquainted…
green field, VALUE-VALENT, inner
circle, BRIGHTEST OUTLOOK,
scruff of the neck, SEAT OF THE
PANTS, local base, GLOBAL
PLACE, a class apart,
A FORCE TOGETHER…
Ea
Bo
Small Firms Association
84/86 Lower Baggot Street, Dublin 2
T: +353 (0)1 6051500
E: [email protected]
w: www.sfa.ie
LinkedIn: www.linkedin.com/company/small-firms-association
Twitter: @SFA_Irl