Wealth and Investment Management

October 2012

White Paper

Entrepreneurs IndexMapping business activity and wealth creation across the UK & Ireland

1

Our Expert PanelWe are extremely grateful for the time and help from the experts on the our panel:

Karl von Bezing, Senior Consultant, Banking and Wealth Management at Ernst & Young

Matt Clifford, Chief Executive, Entrepreneur First

Tony Greenham, Head of Business and Finance, New Economics Foundation

Imran Hakim, CEO at Hakim Group, North West

Professor Jonathan Levie, Hunter Centre for Entrepreneurship at the University of Strathclyde and Global Entrepreneurship Monitor (GEM) UK Team Leader

Professor Colin Mason, Adam Smith Business School, University of Glasgow

Richard Phelps, Managing Director, Head of Corporate & Employer Solutions, Barclays

Guy Rigby, Partner, Head of Entrepreneurs at Smith & Williamson LLP. Author of From Vision to Exit: The Entrepreneur’s Guide to Building and Selling A Business

Representatives from the British Chambers of Commerce:

Clive Memmott, Chief Executive, Greater Manchester Chamber of Commerce

Graham Morgan, Director, South Wales Chamber of Commerce Director

Phil Smith, Managing Director, Business West

Ross Smith, Director of Policy, North East Chamber of Commerce

Colin Stanbridge, Chief Executive, London Chamber of Commerce and Industry

Ian Talbot, Chief Executive, Chambers Ireland

ForewordThe UK coalition Government’s view that entrepreneurship is the “lifeblood of the economy” is a long-standing theme. Indeed, as far back as the eighteenth century, when the economist Richard Cantillon first introduced the word ‘entrepreneur’, these individuals were credited with bringing prosperity and equilibrium to a market. In this current era of austerity, the government is looking increasingly to the private sector, and in particular to small and medium sized enterprises (SMEs) to kick-start future growth.

It is difficult to overestimate the importance of this entrepreneurship and innovation. Not only is it present to a greater or lesser degree in the 4.5 million small businesses operating in the UK today1, resulting in the employment of around 13.8 million people and generating an estimated turnover of £1,500 billion each year; it also represents a route to recovery. Without the drive, dynamism and ideas of entrepreneurs, it is difficult to envisage a bridge between our current situation and a more prosperous, innovative future. Entrepreneurs are catalysts of job creation, of economic growth, of international trade through exports, and ultimately of wealth realisation for individuals, communities and countries.

In order to gain a greater understanding of the dynamics of SMEs, we have produced, in co-operation with Ledbury Research, the first Barclays Entrepreneurs Index, which aims to map business activity and wealth creation in a way which has never been done before. Using an innovative methodology, the report examines the entrepreneurial landscape by exploring the levels of activity occurring across the UK and Ireland.

Clearly, the path to success for many of those who are looking to start their own business is strewn with challenges and anxieties. To see a business through from the first seed of an idea to fruition, conquering the milestones of securing investment, employing others, making a profit and potentially selling the business, requires a focus and strength of mind that few possess. For those that do reach these milestones, the journey - although fraught - can be immensely rewarding. At Barclays, as a universal bank, we strive to help people who are passionate about their businesses, from start-up, to exit, and beyond.

I hope you find the following report both insightful and thought-provoking.

Thomas L. Kalaris Chief Executive Barclays Wealth and Investment Management Executive Chairman of Barclays in the Americas

About BarclaysBarclays is a major global financial services provider engaged in personal banking, credit cards, corporate and investment banking, and wealth and investment management. With over 300 years of history and expertise in banking, Barclays moves, lends, invests and manages money for customers and clients worldwide.

As a leading global wealth and investment manager, Barclays provides international and private banking, wealth planning, trust and fiduciary services, investment management, brokerage services and research to private and intermediary clients across the world. Additionally our clients may benefit from access to the breadth of personal, corporate and investment banking expertise across Barclays, one of the largest financial services groups in the world.

For further information about Barclays, please visit our website barclays.com/wealth

Follow us on twitter.com/barclayswealth

1 Source: Department for Business, Innovation & Skills

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BackgroundThe spotlight is firmly fixed on entrepreneurs at the moment as Britain struggles to get back onto its economic feet in a distinctly shaky global environment. These individuals, and the businesses that they create, are vitally important from the perspective of creating prosperity at both an individual and national level.

There are very few statistics available to measure the financial health of entrepreneurs in the UK. At a national level, official figures show that the number of active businesses operating in the country has been in consistent decline since 20081. Yet individuals are still acting on ideas, taking risks and setting up businesses, demonstrated by the fact that the level of start-up activity remains high.2

The end of the entrepreneurial journey is often the sale of the business and the realisation of individual wealth. This can serve to stimulate the economy as the proceeds are re-invested, saved or spent on other start-ups. To track this activity, the vital statistic that is missing is a regular measure of the number of privately owned active and growing businesses which are changing hands as ownership is passed on.

To fill this gap, Barclays Wealth and Investment Management and Ledbury Research have devised an innovative methodology that analyses all companies in the UK and Ireland in a way which has never been done before. This analysis shows precisely the number of growing companies that have changed shareholding, which we use as a proxy for ‘entrepreneurial activity’(see full methodology at the end of this report).

The results of this analysis are provided here, along with breakdowns by business sectors and regions, to build a picture of entrepreneurial activity. Further context is also provided through interviews with experts in the field and, crucially, with entrepreneurs themselves.

Definitions of terms used in this report

• Entrepreneurial activity: creation of wealth from the complete or partial sale of a privately owned, growing business, measured by any change in shareholder activity

• Growing companies that have changed hands: private and active companies with growing revenues between £5m and £200m, which have had a change in shareholding over the two six month periods of H2 2011 and H1 2012

• Wealth creation: the wealth realised for individuals as a result of selling or transferring their shareholdings in the growing companies that have changed hands

• Profitability: based on the latest available annual profit/loss before tax of growing companies that have changed hands

Executive Summary• 34,000 growing companies that have changed

hands from July 2011-July 2012, out of a total universe of companies with revenues of £5-200m.

• Decline in entrepreneurial activity in an uncertain economic environment. The number of growing companies that have changed hands fell by 38% in the first half of 2012 (H1 2012) compared to the second half of 2011 (H2 2011), from 21,000 to 13,000.

• Rise in the health of growing companies that have changed hands. The average profitability of these companies rose 29% to £1.7m in H1 2012 versus H2 2011.

• Sales in shareholdings do not represent ‘quick flips’. The average age of the growing companies that have changed hands is 20 years, implying that business owners had invested much of their working lives in them.

• The industrial, retail and knowledge sectors are the main wealth generators in the UK and Republic of Ireland. Combined, these sectors account for two-thirds of all entrepreneurial activity.

• Business success stories are spread across the country. London, however, remains home to most activity and was one of the biggest movers in terms of growth in entrepreneurial activity. The South East and Midlands are the next biggest regions.

• Business profits are also spread across the UK. Businesses in London, Scotland and North East are the most profitable. Wales saw the biggest improvement in profitability between H2 2011 and H1 2012.

• Growing companies that have changed hands are a significant source of employment in the UK. 2.5m people were employed by these growing companies that have changed hands at the end of H1 2012, which represents 8% of total employment in the UK and Ireland.

• Women are well represented across the UK and Republic of Ireland. They accounted for 25% of the owners of growing businesses that changed hands in both periods.

1 OfficeofNationalStatistics2 Global Entrepreneurship Monitor

54

The number of growing companies that have changed hands fell by 38% between the two six month periods of H2 2011 and H1 2012. At the same time, there was a 29% increase in the average profitability of these businesses. This section explores the likely reasons for this and provides insight into the reinvestment trends of entrepreneurs.

Lifting the lid on entrepreneurialactivity in the UK

Increased economic uncertainty

Using our proxy of shareholder changes, the number of growing companies that have changed hands fell by 38% from 21,000 in H2 2011 to 13,000 in H1 2012. This steep drop in entrepreneurial activity can be explained by on-going uncertainties around the economic environment. Guy Rigby, Author and Partner at Smith & Williamson, notes, “There is a huge amount of uncertainty in the market, so a lot of people are sitting on their hands and staying alive… whereas last year there was some optimism that things were improving, those hopes have been dashed and it reflects on people’s appetite to actually go out and do things.”

This view is echoed by Imran Hakim, CEO of Hakim Group, who says, “In the second half of last year, people got a bit tired of listening to all the negative headlines in the media. They started to be a little more positive, but as soon as all the eurozone issues resurfaced at the beginning of this year, it gave entrepreneurs a renewed sense of uncertainty.” Colin Stanbridge, Chief Executive of the London Chamber of Commerce and Industry, concurs by adding, “I don’t think we have that ‘go for it’ mentality at the moment and that hits entrepreneurs more than anybody else.” He notes that there is a lot of capital waiting to be invested, but market volatility and lack of confidence are holding entrepreneurs back.

Chapter 1

76

Taking longer to exit

Prices are not necessarily at levels that selling entrepreneurs would like them to be due to muted demand. Professor Colin Mason at the University of Glasgow gives insight into the angel investment market. This is where individuals, known as angels, provide financial capital to entrepreneurs with start-up companies. He says that individual angels are finding it difficult to exit these days, and “whereas the view 10 years ago was that as long as you built a solid business, exits would take care of themselves, these days, you need to think about the exit before you even write the cheque to invest in the business.” He does note that whilst it is more difficult to exit, angel investing has remained fairly robust.

During times when liquidity is tight and exiting can take time, some investors can become exposed to risks that they would normally not worry about. Richard Phelps, Managing Director and Head of Barclays Corporate & Employer Solutions explains:

“Smaller businesses are exposed to different types of people risk, for example the loss of key employees or shareholders. This can create cash flow issues just at the point when an exit is being contemplated. We are seeing increased demand for services which address these concerns as owners and investors seek to protect themselves, knowing that a quick sale is not necessarily an easy option.”

Higher quality transactions

Despite the drop in entrepreneurial activity, the health of the growing companies that have changed hands appears to have risen from H2 2011 to H1 2012. The average profit of all these companies rose 29% to £1.7m3 in H1 2012. Colin Stanbridge is not surprised by this, and explains to us, “We’ve had a weeding out during the recession, so the ones that are left are the strongest. They are going to be more aggressively entrepreneurial.” Imran Hakim agrees and points out that uncertain times like this “separate the good entrepreneurs from the great entrepreneurs. Good entrepreneurs are able to take risks in most conditions, but great entrepreneurs actively seek out opportunities during the challenging times, and take the necessary steps they need to grow.”

Regionally, the companies that we analysed in London, Scotland and the North East have consistently been the most profitable. Wales jumped up the league table from 8th to 4th place, while the North West tumbled from 5th to 9th place.

Profitability league table by region

H1 2012 H2 2011

London 1 1

Scotland 2 3

North East 3 2

Wales 4 8

South West 5 4

Midlands 6 7

South East 7 6

Northern Ireland 8 10

North West 9 5

Yorkshire and Humber 10 9

Rep of Ireland 11 11

3 This is an average of the profits of all growing companies that have changed hands, including outliers

“Good entrepreneurs are able to take risks in most conditions, but great entrepreneurs actively seek out opportunities during the challenging times, and take the necessary steps they need to grow.”Imran Hakim, Director at Envestors, North West

98

The largest wealth-realising sectors in both periods were industrial, retail and knowledge, in order of size. The three sectors combined accounted for over 64% of all activity in H1 2012 and a similar proportion, 66%, of total activity in H2 2011. Most sectors achieved a double-digit rise in profits over both periods.

The sectors driving today’s entrepreneurs

Chapter 2

Industry remains the UK’s backbone

The number of growing companies that have changed hands in the industrial sector fell by 33% across the period. Profits rose by 15% however, and it is still the largest sector across the UK in terms of entrepreneurial activity. Guy Rigby speculates this may have been stimulated by inward investment from foreign companies, given the attractiveness of the pound and the political stability of the country. Imran Hakim explains that the sector has historically been significant, certainly in the North West where he is based. The sector is an important source of employment, so during tough times, the local councils and organisations will always try to ensure that it is well looked after and has the necessary resource and support required to thrive.

Retailers struggle

Entrepreneurial activity in the retail sector fell 42% across the period, a greater drop than that seen in most other sectors. The sector’s troubles are very much in evidence in the growing number of vacant shops on British high streets. Despite this, it remains the second largest sector in the UK for entrepreneurial activity, and profits increased by 12%. According to Imran Hakim, there are some great deals to be done with landlords at the moment, so established entrepreneurs are taking advantage of these lowered market barriers to try things out, resulting in a lot of speculative shareholder activity.

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Technology drives opportunities

The third largest in the UK and Republic of Ireland, in terms of the number of companies changing hands, is the knowledge sector. 80% of the sector comprises of media & IT and management consultancy companies, while the rest is made up of advertising & marketing, architectural & engineering, legal and accountancy companies.

Within the knowledge sector, it seems that everyone is looking for the next big technology opportunity. Matt Clifford, Chief Executive of Entrepreneur First, sees many young, freshly graduated entrepreneurs interested in the sector. He cites three reasons for this. First, it is cheap and not capital intensive. Second, it is fast – if the product is not as well received as expected, this can be fed back to the entrepreneur within a short amount of time and the risk of investing too much time in that business is reduced. Third, it is easier to be credible in the technology space. “No one knows how old you are, so you lose the disadvantage of being young and inexperienced. People then tend to focus solely on the quality of the product.”

Technological advancement has also given entrepreneurs affordable windows to reinvent existing business models, products and services. Colin Mason observes a strong bias for business angels to invest in areas associated with technology, and Guy Rigby supports this by citing a general move towards “tech-enabled traditional business” (business which can be automated, made mobile, or done in a more efficient way with technology).

“People have understood that data capture, data analysis and analytics are more and more important. All of this has become a science, and if you’re a serious business, you can’t do without it.”

He also stresses the importance of industrial technology in addition to web technology, as a way of developing machinery, and specifically making them greener. Tony

Greenham, Head of Business and Finance at New Economics Foundation, has also seen a solid level of interest and activity in the renewable energy sector. He mentions housing retrofits as an important area to look out for in the future – bringing existing homes up to modern standards of energy efficiency. With the Green Deal, he believes the Government is going to try and support this sector whilst looking for ways to stimulate the economy and bring the UK out of recession.

Management consultancies also contributed to the high level of entrepreneurial activity in the knowledge sector. Imran Hakim believes this is driven by the loss of public sector jobs. The trend is for those workers who have been made redundant to set up consultancies around their knowledge and expertise and become self-employed.

Utilities and property remain quiet

Looking at which sectors logged the lowest levels of activity in terms of share transactions of growing businesses, the utilities sector had the least in both periods. This is a very concentrated industry run by large corporations, so naturally leaves little opportunity for enterprising individuals.

The property sector was the second smallest sector in terms of entrepreneurial activity over both periods. This is likely to pick up however, with the UK Government’s recent announcement of its decision to relax planning regulations on house-building. But Tony Greenham is unclear as to what extent this will manifest itself in private entrepreneurial activity. “There is a debate about who should build them – will they be built predominantly as private developments or through social housing developments?” Regardless, the sector turned around from an average loss in H2 2011 to a profit of £356,000.

*Over50%ofthe“Other”categoryconsistsofOfficeAdministrationandBusinessSupportActivities.Therestismadeupofrepairofcomputers&householdgoods,domesticpersonnel,cleaningactivities,landscaping,security/investigationactivities,creditbureaus,collectionagencies,gambling,sportsclubs/activities/facilities,amusementparks,performingarts,libraries,museums,HR,travelagenciesandotherpersonalserviceactivities(Washing/Drycleaning/Hairdressing/Otherbeautytreatments/Funeralservices)

Key

H2 2011

H1 2012

Source: Ledbury Research

Retail Knowledge Based

Finance Public Primary UtilitiesPropertyIndustrial

-42% -48% -7% -33% -31% -24%-32%-33%

6.000

5.20

2

3.47

7

4.64

6

2.70

1

3.70

2

1.90

9

1.16

5

1.08

2

548

368

334

231 411

278

241

182

Graphic 1: Total number of growing companies that have changed hands, by sector

£6.0

-£2.0

Finance

£4.8

£4.7

Primary

£3.9 £4

.4

Utilities

£3.3

£3.2

Knowledge Based

£1.1 £1.3

Industrial

£1.4 £1.6

Retail

£0.9

£1.0

Public

£0.7 £1

.1

Property

-£1.1

£0.4

Other*

-2% 11% -4% 17%15% 12% 73% 133% 49%

£1.1 £1

.6

Graphic 2: Average profit of growing companies that have changed hands, by sector (£m)

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Looking at wealth creation across regions, pockets of entrepreneurial activity are observed in different sectors, and in different geographies. London and the Republic of Ireland showed the most improvement across all sectors, a sharp contrast to Northern Ireland and Scotland.

Putting entrepreneurial activity on the map

Chapter 3

London and South East dominate entrepreneurial activity

London and the South East remained home to most of the shareholder changes. Colin Mason points out that while angel investment is spread out across the UK and the vast majority of wealth is retained and recirculated locally, the money that does leak out of local economies tends to flow towards the South East. Colin Stanbridge points to the network of support and other advantages in and around the capital, which also contribute to a higher level of entrepreneurial activity.

“There are many more organisations willing to give out top quality advice; there are lots of different sources of finance, and you’ve got a bigger overseas market in London.”

The third largest region, the Midlands, also showed resilience across sectors, with a large growth in share transactions of businesses in the finance and utilities sectors. Similarly, activity in the North West remained stable over both periods. This may be due to a particular mindset in the region which Imran Hakim recognises as a determined mentality which has seen entrepreneurs prove to be hardy through the recession.

Scotland and Northern Ireland experienced relative declines in entrepreneurial activity overall. This contrasted with the Republic of Ireland which saw improvement across all sectors (except the property sector) over the 12-month period.

1514

Focus outside London

Research from the New Economics Foundation found that an essential component of regional growth is “regional or local financial infrastructure”. Tony Greenham compares the UK, which has a handful of national banks, to competitors such as Germany, Switzerland and the US, all of which have banks that serve only their local region, canton, or state. This dynamic makes it naturally easier for entrepreneurs to set up a business in larger regions, such as London, because many different sources of finance and quality advice are available around London. Colin Stanbridge comments that London probably has a larger market in any sector than anywhere else in the country. This creates a positive virtuous cycle because it attracts people to set up businesses in the city, which in turn draws more entrepreneurs to do the same because it becomes a comfort zone for them, to know that other people around them are embarking on similar ventures. Matt Clifford observes this phenomenon in the technological space, noting that technology entrepreneurs tend to cluster in the same areas

because of the specific skills required, as compared to non-technological sectors where the skills required tend to be more generic.

Matt Clifford also observes that the level of regional entrepreneurial activity driven by young entrepreneurs is highly correlated to the level of support that the universities in every region provide. In addition, the government has designed programmes to support businesses across England. In May, it launched GrowthAccelerator, a £200m programme to help up to 26,000 small and medium enterprises in England achieve their growth potential. The programme provides small entrepreneurial businesses with coaching, fast track to business advice and access to angel networks amongst others. Similarly, in September, the Department for Business, Innovation and Skills and the Department for Communities and Local Government announced that they would provide combined funds of up to £24m to allow Local Enterprise Partnerships, which replaced the Regional Development Agencies, “to drive forward their growth priorities”.

“While angel investment is spread out across the UK and the vast majority of wealth is retained and recirculated locally, the money that does leak out of local economies tends to flow towards the South East.”

Change in proportion of growing companies that have changed hands (H1 2012 vs. H2 2011), by region and sector overall

Primary 88% 12% -40% 6% 229% -45% -18% -79% 92% -18% 32%

Industrial 2% 24% 0% 16% 18% 29% -28% -42% 60% 15% 19%

Knowledge 15% -15% -13% -27% -44% -58% -47% -66% 38% -40% -38%

Property 35% -3% 37% 15% 10% 130% 19% -100% -7% 83% -28%

Retail 14% -4% -9% 2% -25% -17% -46% -37% 44% -5% -11%

Finance 76% 78% -6% 112% 20% 147% -20% -76% 68% 65% 119%

Utilities 48% 46% 6% 108% 65% -53% 33% -82% 88% 46% 23%

Public 44% 30% 26% 7% 97% 10% -45% -34% 65% -23% -21%

Other 7% 6% 0% -10% -6% -2% -57% -55% 19% -22% -26%

130% Property 147% Finance

108% Utilities

19% Other 38% Knowledge 44% Retail 60% Industrial

97% Public 229% Primary

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Looking to the future

Chapter 4

Entrepreneurial addiction

After exiting, there are a number of routes entrepreneurs choose to follow. Some choose to reinvest into new businesses, while others decide that they want to change their lifestyles and their risk appetites. In Guy Rigby’s opinion, not all entrepreneurs can repeat their success and they recognise this. As a result, these individuals often put most of the money from share sales into safer assets – property and cash being the favourites.

Karl von Bezing, Senior Consultant, Banking and Wealth Management at Ernst & Young, considers the size of the liquidity event to be a factor in determining the likelihood and nature of the reinvestment. He believes that if the liquidity event is relatively small, “a lot of people will take that money and that will be the end of it. They will look to safeguard those assets by finding an appropriate wealth manager”. This contrasts with the scenario of a sizeable liquidity event, in which most of them will try and look towards a more sophisticated position for investing their money.

The stage at which the individual is in their wealth lifecycle also matters. Those at the ‘serial entrepreneur’ stage are more likely to reinvest as they are still in their prime. However those closer to the ‘exit’ stage who have other considerations, such as families or are nearing retirement, will be more focused on succession planning and on how to involve the next generation in the business.

While this may be true for many entrepreneurs, this does not apply to all. Colin Stanbridge says serial entrepreneurs get bored very easily and won’t retire, irrespective of age. They are driven by non-financial reasons: “Making money is not the sole object for reinvestment, it is just the marker of success”. Imran Hakim explains it is a natural instinct that entrepreneurs have, which does not disappear once they have exited. His own experience saw him wanting to relive the entrepreneurial journey, in a bigger and better way,

having learnt from previous mistakes. He observes that younger entrepreneurs generally already have one eye on their next venture before they exit, while older entrepreneurs take a 12 to 24-month break when they exit. They have been doing this for so long that they welcome this holiday initially, but become bored and seek to return to the adrenaline-filled environment by reinvesting.

There was consensus that entrepreneurs tend to reinvest in similar or related sectors where they can still apply their expertise. This is especially relevant for sectors relating to technology. Karl von Bezing explains this is because technology, and in particular internet based businesses, tend to have lower barriers to entry, “It is much easier to bring a new idea to market”.

Becoming angels

Experts have also seen successful entrepreneurs take a small proportion of the proceeds to become angel investors. Again, they are not driven by financial gains but by the buzz they get out of being involved in start-ups. Colin Mason tells us that “typically for any single investment, angel investors have a 40-50% chance of losing all their money, 20-30 % make normal returns you would get in a current account, and 20-25% make big returns”. As a result, angel investors are very likely to diversify. Their decisions are driven more by the entrepreneur than the sector: “They are betting on the jockey rather than the horse”.

He describes a typical angel investor as being over 50 (though the average age is falling), and someone who has started two to three companies before, but recognises that it is not for everyone.

“It’s a bit like being a grandparent. You need to let the entrepreneurs make their own mistakes, but try and ensure they don’t make fatal mistakes. Some become angels and discover that temperamentally, they’re not suited”.

1918

London

Primary

16%

13%

Industrial

33%

30%

Knowledge Based

4% 4%

Property

26%

23%

Retail

17%

24%

Finance Utilities

3% 4%

Public

1% 1% 1%2%

There were 2,039 growing companies that have changed hands in London across both periods. This was the highest across all regions in the UK and ROI. These companies were also the most profitable across the regions examined, making an average of £3.45m in annual profit. Their average age was 18.6 years, the second youngest across all regions. These companies were responsible for employing the highest number of people per capita, employing 4.9 people per 100 in the nation’s capital.

Looking at the important sectors in London, knowledge represented a large proportion of entrepreneurial activity. This was likely driven by technological businesses. Matt Clifford observes that amongst the young entrepreneurs that he deals with, the more their business plans revolve around technology, the more they want to relocate to places like London and Cambridge. As Colin Mason points out, 20-25% of angel investments made over long distances flow into the South East region of the country, including London.

The finance sector saw the biggest increase in entrepreneurial activity out of all the sectors, overtaking the retail sector in size. Colin Stanbridge points out, “Despite all the criticism, financial services is still one of the lynchpins of the London economy.” He is also of the

opinion that the retail sector is holding up a lot better in London than in other parts of the country, as it has always been a shopping destination for overseas visitors. He believes there will be an Olympic bounce effect that will boost the sector – something that has been evidenced already by Halfords, which saw its bicycle sales race ahead by 14.7% as a result of the Olympics.

Looking at the entrepreneurs themselves, the proportion of female entrepreneurs in London was lower than the national average. London had 23% of female entrepreneurs against 25% across the UK. Colin Stanbridge explains that this could be because there are more opportunities and acceptance of women to work in businesses in London. He says, “It may be that there are far more job opportunities for women with entrepreneurial spirit to use it in positions of influence in larger companies, rather than starting their own. If you are outside of London, you’re almost forced to start your own company to succeed.”

This may also be because of the high proportion of technology businesses in London. Matt Clifford points out that the young female entrepreneurs who applied to his Entrepreneur First programme tended to lean towards retail, hospitality and often service industries, rather than software or physical products.

This section looks at the growing companies that have changed hands in the first half of 2012 across the major regions in the UK.

• London

• South East

• Midlands

• North West

• Yorkshire & Humberside

• Scotland

• South West

• North East

• Wales

• Northern Ireland

• Republic of Ireland

Spotlight on Regions

Chapter 5

For each region, data represents proportion of growing companies that have changed hands by sector (H1 2012 vs. H2 2011).

Companies changing hands

2,039Average profit

£3.45mAverage age

18.6Jobs per capita

4.9

2120

Midlands

Primary

43%

46%

Industrial

17%

11%

Knowledge Based

Property

30%28%

Retail

3%

6%

Finance Utilities

3% 3%

Public

2% 2% 1% 2%2% 2%

Companies changing hands

1,138Average profit

£1.8mAverage age

24.5Jobs per capita

2.1

Companies changing hands

1,945Average profit

£1.63mAverage age

22.7Jobs per capita

2.6

There were 1,138 growing companies that have changed hands in the Midlands during the period of H2 2011 and H1 2012 – the third highest among all UK regions. They made an average profit of £1.80m annually and were 24.5 years old on average. The companies were responsible for the employment of 2.1 people per 100 in the region.

The pattern of entrepreneurial activity in the Midlands mirrors the South East closely: the industrial sector is the largest, followed by the retail and knowledge sectors.

As with the South East, knowledge experienced the largest drop in activity.

South East

3% 3%

Primary

35%

40%

Industrial

23%

18%

Knowledge Based

Property

29%

25%

Retail

5%

8%

Finance Utilities

3% 4%

Public

1%1% 2%1%

There were 1,945 growing companies that have changed hands in the South East. After London, this was the second highest across all regions in the UK and ROI, representing 6% of the total number of businesses changing hands in the UK over this period. These companies made an average of £1.63m in annual profit – slightly lower than the national average, were 22.7 years old on average, and employed 2.6 people per 100 in the region.

The largest sectors in the South East are the industrial sector, followed by retail. The retail sector also saw the biggest increase in change in shareholding.

The knowledge sector experienced the largest fall in shareholder changes compared to other sectors in the South East.

2322

Yorkshire & Humberside

Primary

44%

51%

Industrial

14%

9%

Knowledge Based

Property

29%

24%

Retail

4%

8%

Finance Utilities

3%3% 3%3%

Public

1% 2%1%2%

Companies changing hands

666Average profit

£0.95mAverage age

28Jobs per capita

2.8

There were 666 growing companies that have changed hands in Yorkshire & Humberside. They were amongst the least profitable across all regions in the UK and ROI, making annual profits of £0.95m, compared to the UK average of £1.7m. At 28 years, they were the oldest in the country, and responsible for employing 2.8 people per 100 in the region, the second highest across the UK and ROI.

The industrial and retail sectors are the largest two sectors in Yorkshire and Humberside. The proportion of entrepreneurial activity represented by the industrial sector rose, while retail fell.

The finance sector experienced a relatively big rise in the proportion of entrepreneurial activity

North West

Primary

41%

46%

Industrial

18%

10%

Knowledge Based

Property

31%29%

Retail

3%5%

Finance Utilities

3%3%

Public

2%2%1% 2% 2%1%

Companies changing hands

754Average profit

£1.35mAverage age

25Jobs per capita

2.1

In the North West, there were 754 growing companies that have changed hands, which is the fourth highest among the UK regions. The average annual profit of these companies was £1.35m - lower than the UK average of £1.7m. The companies were responsible for the employment of 2.1 people per 100 in the region and were on average 25 years old.

The industrial sector, the largest in the region, saw the most entrepreneurial activity. As Imran Hakim explains, it is the lifeblood for most residents in the North West, and a sector which creates significant of employment.

According to Clive Memmott, Chief Executive of the Greater Manchester Chamber of Commerce, the region’s business landscape has undergone a number of shifts within the past year, with the BBC’s move to Salford ‘Media City’ boosting creative and digital industries in the area. “As well as the traditional sectors of financial and professional services that are prevalent in Manchester, the BBC’s move has brought with it an enormous rise in the number of creative and digital practices in the region, as its supply chain localises and diversifies. This is reflected in the rise in entrepreneurial activity in the knowledge sector.”

Looking ahead, Clive Memmott cautioned that although certain sectors in the North West are continuing to perform well, employers are still hesitant to take on greater numbers of staff. “We are seeing employers choose to invest in their current staff, using any money to train and up-skill their workforce, rather than further recruit. This is symptomatic of a wider uncertainty around future trading conditions.”

2524

South West

Primary

37%39%

Industrial

21%19%

Knowledge Based

Property

31%29%

4%

Retail

3% 3% 3%

Finance Utilities

3%

Public

2% 2%2%1%2%

Companies changing hands

497Average profit

£1.84mAverage age

23.4Jobs per capita

1.8

The number of growing companies that have changed hands during the period analysed was 497. These companies had an average annual profit of £1.84m, which is 8% higher than the figure for the national average. The companies changing hands were on average 23.4 years old, and employed 1.8 people per 100 in the region.

The industrial and retail sectors accounted for the most entrepreneurial activity in the South West. Whilst the industrial sector experienced a rise in proportion, the retail sector fell. The knowledge sector also fell.

Phil Smith, Managing Director of Business West, explained that the region has seen a significant amount of mergers and acquisitions within these sectors over the last year. “We have seen a lot of general structural changes in the knowledge based sector specifically, with many professional services and consultancy firms merging and growing.” He said. “Larger companies with cash on their balance sheets are looking to invest in smaller companies.”

Looking ahead, Phil Smith is positive about the region’s outlook, naming Bristol as a hub for creative and green energy industries. “Bristol is still the engine of the South West, and is one of the most productive cities in England when it comes to GDP per head, however we will see business begin to spread further to rural areas, as factors influencing the ease of doing business improve – the development of 4G and enhanced broadband quality should have an impact on this.”

However, confidence remains an issue for South West companies. Phil Smith added: “At the moment, there is still a great deal of uncertainty and until that eases, firms will be reluctant to expand too quickly or take on more people. Currently, three quarters of businesses in the South West employ less than five people, which is similar across the UK.”

Scotland

Primary

38%

6%

42%

8%

Industrial

17%

14%

Knowledge Based

Property

28%

23%

Retail

4% 4% 4%

Finance Utilities

3%3%

Public

2%2% 2%

Companies changing hands

470Average profit

£2.58mAverage age

23.4Jobs per capita

2.4

Scotland had 470 growing companies that have changed hands, representing 1.4% of the total number of companies which saw a change of shareholding in the UK. Their average annual profit was £2.58m, making them the second most profitable across the UK and ROI, after London. The average age of these companies was 23.4 years, and they were responsible for the employment of 2.4 people per 100 in Scotland.

The primary sector represents 8% of entrepreneurial activity in Scotland, higher than any other region. This is a rise from 6% in H2 2011. The industrial sector also rose, and as Jonathan Levie observes, food product manufacturers have remained very resilient.

The retail sector on the other hand, fell as a proportion of all sectors.

The finance sector remained stable; Jonathan Levie notes that Edinburgh ranks fourth in Europe in equity assets, and second in the UK after London.

Scotland also had the highest proportion of female entrepreneurs (33%) across the UK. This is 8% higher than the national average of 25%.

2726

Wales

Primary

49%

58%

Industrial

15%

8%

Knowledge Based

Property

28%

21%

Retail

4% 5% 4%3%

Finance Utilities Public

2% 2%1% 1%1%0%

Companies changing hands

201Average profit

£2.01mAverage age

24.6Jobs per capita

1

Wales had 201 growing companies that have changed hands, one of the lowest figures among all UK regions. Their average profit was £2.01m, which is higher than the figure for the UK average. The companies were on average 24.6 years old. They were responsible for employing 1 person per 100 in the region, the lowest proportion across the UK and ROI.

The largest sectors in Wales were the industrial, retail and knowledge sectors.

South Wales Chamber of Commerce Director, Graham Morgan, explains that “recruitment and IT companies are now beginning to outperform the companies in more traditional sectors such as manufacturing and wholesale. In addition, mergers and acquisitions in the manufacturing industry have been prevalent, so it is not a surprise to see the industrial sector at the top of the pile in terms of shareholder activity.”

“Although there is still a lack of confidence amongst businesspeople in Wales, we are seeing a number of entrepreneurs sell their businesses and reinvest in new ventures, and we are looking to build on this entrepreneurial appetite in the region.”

Looking at the entrepreneurs themselves, the research found the biggest gender difference in Wales compared to the rest of the UK. While the national average is 1 female entrepreneur to 4 male entrepreneurs, women only accounted for 1 in 10 (11%) of all entrepreneurs in Wales. This may be explained by the fact that it has seen relatively less urbanisation compared to other regions in the UK, and urbanisation normally brings with it greater gender equality in employment, and greater encouragement for female entrepreneurs.

North East

Primary

48%

60%

Industrial

16%

6%

Knowledge Based

Property

28%

23%

Retail Finance Utilities

5%3%3%

Public

2% 2%2%1% 1%1% 1%

Companies changing hands

190Average profit

£2.01mAverage age

26.4Jobs per capita

1.5

Across all UK regions, the North East had the second least number of growing companies that have changed hands. There were 190 such companies with an average annual profit of £2.01m, which is among the highest in the country, alongside Scotland and London. Ross Smith, Director of Policy at the North East Chamber of Commerce, puts the lower level of entrepreneurial activity compared to the rest of the country down to the fact that it is the smallest region in the UK: “Some of the best bits of the UK economy are represented in the North East and the region is home to some extremely resilient companies which are doing well even in the current tough climate. However the business community needs to grow further, and there is a space for more of these types of company within the region.”

The average age of the growing businesses that changed hands was 26.4 years (the second highest across the country) and they employed 1.5 people per 100 within the region.

The industrial sector, the largest in the region, saw a marked rise in entrepreneurial activity. The property sector also rose, but all other sectors paled in comparison, especially the knowledge sector which experienced the largest decline.

In August this year however, George Osborne announced plans to extend the region’s enterprise zone by 50%. These are specific areas where a combination of financial incentives, reduced planning restrictions and other support is used to encourage the creation of new businesses and jobs, and may help serve to boost economic growth in the North East in the future.

Ross Smith comments that “the onus is now on the region and its business community to make the most of the extension to the enterprise zone, by matching the government incentives with the necessary regulation, business support, and marketing activity to encourage growth.”

2928

Republic of Ireland

Primary

24% 25%

Industrial

13% 12%

Knowledge Based

Property

28% 27%

Retail

25%27%

3%

Finance Utilities

4% 3%

Public

2% 2%2% 2%1%

Companies changing hands

442Average profit

-£0.44mAverage age

15.5Jobs per capita

1.5

There were 442 growing companies that have changed hands in the Republic of Ireland. While all other regions covered in this report made a profit overall, on average, businesses in ROI made a loss of £0.44m. These companies were the youngest across the UK and ROI, at 15.5 years old, which is 4.5 years less the national average. They were responsible for employing 1.5 people per 100 in the region.

The retail and finance sectors were the largest in the Republic of Ireland. While the finance sector experienced a rise in proportion of entrepreneurial activity however, the retail sector dipped slightly.

The industrial and the knowledge sectors, the third and fourth largest sectors respectively, remained relatively stable. Ian Talbot, Chief Executive for Chamber of Commerce in Ireland, said: “These findings are largely consistent with what we’re seeing on the ground. Certain sectors have been affected by the troubles in the construction industry, which has caused a slump in profits and had a knock-on effect on associated sectors and services. However, there are also opportunities in this climate for surviving companies in the market to acquire smaller businesses, which in turn, creates growth and employment.”

Northern Ireland

Primary

46%

50%

Industrial

11%

7%

Knowledge Based

Property

33%

38%

Retail Finance Utilities

3%

Public

0% 1%2% 1% 2%2%1%1% 1%

Companies changing hands

132Average profit

£1.40mAverage age

24.3Jobs per capita

1.4

Northern Ireland had the least number of growing companies that have changed hands, at 132. These companies made an average annual profit of £1.40m – significantly lower than the UK average of £1.7m, and were 24.3 years old. They employed 1.4 people per 100, the second lowest across the UK and ROI.

The industrial, retail and knowledge sectors were the largest in Northern Ireland, in order of size.

3130

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MethodologyLedbury Research looked at the Annual Returns of all companies in the UK and Ireland and analysed the demographics of private companies that had changed the details of their shareholders over two reporting periods, H2 2011 and H1 2012.

The focus was on active companies with growing revenues, to sift out distressed sales which would not be representative of entrepreneurial activity. This was further narrowed down to include only those companies with revenues between £5m and £200m.

Graphic 1: H2 2011 numbers

Graphic 2: H1 2012 numbers

This was to position our dataset to be independent of FTSE 250 companies and also recognising the complications of the use of the limited company structure to help tax planning for contractors and other professionals, and that some registered companies are shell companies. This used the assumption that a core reason for a shareholder change is a liquidity event triggered by individuals selling their stakes in businesses, and thus is a suitable proxy for tracking entrepreneurial activity. We analysed primary trading addresses of these companies, as opposed to their primary registered addresses.

The research also looked at the gender split of the shareholders who had made changes to their shareholding, although the interpretation of this data is complicated by the fact that there may be tax reasons for holding company shares in a spouse’s name. By keeping the methodology consistent in each wave, we can track changes in the make-up of these entrepreneurial transactions over time.

There were 7.3m active companies in the period...

... of which 2.2m registered a change in shareholding...

... and 33,000 of these had annual revenues of £5-£200m...

... and 21,000 of these had growing sales

There were 7.5m active companies who registered returns at Companies House during this period...

... of which 1m registered a change in shareholding...

... and 20,000 of these had annual revenues of £5-£200m...

... and 13,000 of these had growing sales