Business set-up, transfer and closure

Draft report

This report was released on 21 May 2015. You were invited to examine the draft report and to make written submissions by 3 July 2015.

The report deals with the key drivers of business set-ups, transfers and closures. It considers innovative new business models and entrepreneurial activity.

It also examines a wide range of regulatory, institutional and financial factors that influence primarily set-ups, but ultimately can also impact on the manner and ease with which businesses close.

Finally, the report examines the closure of businesses - through voluntary exits, personal insolvency (bankruptcy) or corporate insolvency.

This inquiry has concluded. The final report was sent to Government on 30 September 2015 and publicly released on 7 December 2015.

Please note: This draft report is for research purposes only. For final outcomes of this inquiry refer to the inquiry report.

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Businesses are set-up for a variety of reasons and in any one year there is a churn of entries and exits that is comparable with other countries. Most businesses are small and a very low proportion are innovative, producing a product or service new to Australian or international markets. The propensity to be innovative is highest amongst larger businesses.
While it is generally relatively easy to start a business, a number of longstanding issues with specific regulatory requirements and regulator engagement and funding remain unaddressed and are making new business entry unnecessarily complex or costly.
Some new business models - particularly those that exploit digital technology to make better use of information - are challenging existing regulatory arrangements or causing others to operate in regulatory grey areas. Regulators should have the capacity to exempt businesses for a fixed period, from particular regulatory requirements where these deter entry but exemption does not threaten consumer, public health and safety, or environmental outcomes.
Government assistance to business set-ups should not be directed at particular business models, technologies, sectors or locations - criteria based on desired outcomes (such as technology transfer and spillovers) with matching private sector investment, are less likely to distort incentives and behaviours, particularly in a rapidly evolving environment. Any assistance should focus on those areas where there are economy-wide net benefits, and in the absence of a business set-up, there would be a justifiable need for other forms of government assistance.
Access to finance is generally not a significant barrier to business set-up.
- New debt financing platforms, such as peer-to-peer lending, are helping to fill the gap in unsecured debt finance available from the major financial institutions. The voluntary participation by lenders in comprehensive credit reporting should be reviewed.
- A two-tier regulatory structure should be introduced for crowd-sourced equity to balance the financing needs of business against the risk preferences of different types of investors.
Most businesses are closed or transferred without financial failure. Governments' role in such situations should be limited to provision of clear guidelines for businesses, associations and advisers on exit and succession planning, and ensuring government processes are timely.
While some specific reforms to Australia's corporate insolvency regime are warranted, a wholesale change to the system, such as the adoption of the United States 'chapter 11' framework, is not justified.
- Formal restructuring of companies through voluntary administration should be enabled as an option for when a company may become, but is not yet, insolvent.
- There should be provision for a 'safe harbour' to allow company directors to explore restructuring options without liability for insolvent trading.
- A simplified liquidation process should be introduced to reduce the time and expense toward winding up businesses with little or no recoverable assets.
- All directors should be required to obtain a director identification number to enable the easier detection of disqualified or fraudulent directors.
The default exclusion period and associated restrictions applying to bankrupts in relation to access to finance, employment (including being a company director) and overseas travel should be reduced from 3 years to 1 year, with the trustee and courts retaining the power to extend this period where necessary to prevent abuse of the bankruptcy process.

Business reforms long overdue

Governments can do more to reduce impediments to setting up and closing businesses, according to a draft report released by the Productivity Commission today.

'An evolving and expanding stock of businesses is the core to a growing economy,' said Commissioner Dr Warren Mundy. 'Whilst the rate of new business establishment in Australia is relatively high, very few businesses can be characterised as innovators. Policy options are available to create a commercial environment more conducive to innovation. When businesses struggle, regardless of what the best option is, it is often easier to close them than to restructure. Even when businesses should close the process takes too long and is too expensive, and thereby ties up business resources that could be used in other productive activities.'

Government assistance, whether it is seeking to promote innovative entrepreneurialism, small business, or structural adjustment, is less effective in the face of broader, persistent regulatory impediments. Dr Mundy said 'The Commission has identified a large number of longstanding regulatory issues, largely in the hands of state, territory and local governments, that if addressed would make new business entry easier and less costly. Action is long overdue.'

The draft report proposes new recommendations that would improve the environment for setting up and closing businesses:

Financing options for new small businesses would be improved through the introduction of a crowd-sourced equity arrangement that balances the financing needs of business against the risk preferences of different types of investors.
Formal restructuring of companies through voluntary administration should be possible when a company is not yet insolvent.
A simplified liquidation process should be introduced to reduce the time and expense of winding up businesses with recoverable assets of little value.
The exclusion period and restrictions on bankrupts should be reduced from 3 years to 1 year.

Where innovative new business models are disrupting established regulatory arrangements, the Commission proposes a structured exemption period, to allow regulations and regulators to be flexible and adaptive. Regulators should be properly resourced for this task.

'We are looking forward to responses to this report by way of submissions and participation in public hearings in the coming months,' Dr Mundy said.

Preliminaries
- Cover, Copyright and publication details, Opportunity for further comment, Terms of reference, Contents, Abbreviations and explanations
Overview
Draft findings and recommendations
Chapter 1 Scope of the inquiry
- 1.1 Inquiry background
- 1.2 What this inquiry is about
- 1.3 Other reviews and work of relevance
- 1.4 Guide to the report
Chapter 2 Understanding business set-ups, transfers and closures
- 2.1 Recent trends in business set up, transfer and closure
- 2.2 What influences business set up, transfer and closure?
- 2.3 Why are business set ups, transfers and closures important?
Chapter 3 Setting up a business
- 3.1 Generic requirements for setting up a business
- 3.2 Requirements applying to specific business activities
- 3.3 Ongoing and cumulative compliance burdens
Chapter 4 Business structures
- 4.1 Different business ownership structures
- 4.2 Prevalence of different structures
- 4.3 Incentives in choosing a business structure
- 4.4 Issues and concerns with current business structures
Chapter 5 Access to finance for new businesses
- 5.1 Is there evidence that access to finance is an issue?
- 5.2 Types and sources of business finance
- 5.3 Why might new businesses find it difficult to access finance?
- 5.4 What conclusions can be drawn on access to finance?
Chapter 6 Equity finance
- 6.1 The role of equity finance
- 6.2 Access to equity finance
Chapter 7 Debt finance
- 7.1 The use of debt finance by new businesses
- 7.2 Debt finance issues for new businesses
- 7.3 Options for improving access to debt finance
- 7.4 In summary
Chapter 8 New business models, the digital economy and regulation
- 8.1 Rapid changes in the way businesses operate
- 8.2 Digital business models present regulatory challenges
- 8.3 Capturing the benefits of new business models
Chapter 9 Payment systems regulation
- 9.1 Accommodating new business models in the existing payment systems
- 9.2 Access and competition in payment systems
- 9.3 Digital currencies
Chapter 10 Other government and industry restrictions
- 10.1 Government restrictions on new entry
- 10.2 Business to business contracts
- 10.3 Government procurement practices
- 10.4 Land tenure arrangements
- 10.5 Foreign investment restrictions
- 10.6 Other potential barriers
Chapter 11 How governments assist businesses
- 11.1 Types of government assistance
- 11.2 Rationales for government assistance
Chapter 12 Voluntary business exits
- 12.1 How and why do businesses exit?
- 12.2 How many businesses exit without failing?
- 12.3 Business exit requirements
- 12.4 Issues in voluntary exit
Chapter 13 Personal insolvency
- 13.1 Characteristics and trends in personal insolvency
- 13.2 Legal framework for personal insolvency
- 13.3 Issues in personal insolvency
Chapter 14 Corporate insolvency: frameworks
- 14.1 The economics of corporate insolvency
- 14.2 Restructuring processes in Australia
- 14.3 Winding up processes in Australia
- 14.4 Scope for reform of insolvency processes
Chapter 15 Corporate insolvency: reforms
- 15.1 The timing of restructure
- 15.2 Facilitating restructure
- 15.3 Reforming the winding up process
- 15.4 Broader aspects of winding up
- 15.5 The Commission's proposed reform framework
Appendix A Inquiry conduct and participants
Appendix B Business stock, entry and exit data for Australia and overseas
Appendix C Business finance and foreign investment data
References

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Business Set-up, Transfer and Closure - Draft report infographic 1. Text follows the 3 images.

Business Set-up, Transfer and Closure - Draft report infographic 2. Text follows the 3 images.

Business Set-up, Transfer and Closure - Draft report infographic 3. Text follows the 3 images.

Business Set-up, Transfer and Closure: Draft report (Text version of the infographic)

Of 2.6 million businesses: 97.6% are small, 2.2% are medium-sized and 0.2% are large.

Business entry and survivial rates are similar to other countries (%)
Country	Entry rate	1-year survival	3-year survivial
Australia	12	86	63
Israel	9	85	55
South Korea	15	62	41
New Zealand	9	71	46
United States	3	85	58

Did you know?

Over 90% of businesses close each year for reasons other than financial failure. They can be sold, passed onto family members, associates or employees or closed.

Business and innovation

A very low proportion are innovative. 1 to 2% offer a product or service new to Australian or international markets.

Small businesses are far less likely to engage in innovative activity or a service that was 'new to Australia' than larger businesses. Small business 1% - Large business 14%.

Policy should create an environment that enables entry of new and innovative businesses. Our draft report makes recommendations about how to improve the ability of businesses to innovate.

More innovative ways to get finance helps all businesses

New debt financing platforms, such as peer-to-peer lending, are helping to fill the gap in unsecured debt finance available from major financial institutions.

Crowd-sourced equity is provided by both professional and Mum and Dad investors. A two-tier regulatory structure should be introduced to satisfy the different risk preferences of these investors.

Business set-up, transfer and closure

Business set-up, transfer and closure

Draft report

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