Every day an average of approximately 14 SMEs are closing down because there is no potential successor taking over the company. Confronted with these facts and having to accept that they are no exaggeration, it is important to face the questions and related challenges heads on and to begin the search for a suitable successor. Start early, take the time necessary and use a systematic approach.
When should you start to look for a successor?
There are basically two ways to find a successor for a company – a planned one or the forced by the circumstances one. The latter option should be avoided at all costs. Obviously the need for an urgent business handover can also become necessary without warning, driven by unpredictable strokes of fate. Precisely for this reason, it is therefore advisable to secure your company business already at an early stage, comparable to other business safety measures taken by management.
The size of your company is thereby of minor importance. The key questions are how complex a company is structured and what its current development stage is. Following a systematic approach and having sufficient preparation time are also factors of key importance that make a business transfer successful. It is a general principle that it takes at least 3 years until a successor can follow in one’s footsteps. It is also essential to take all relevant stakeholders along with you on the same path of fundamental change and convince them in the process. The immediate start of an official change management process when a new or future boss has arrived in the company should also never be underestimated. It is important to involve all employees as early as possible.
What defines a good successor and which other parties are involved?
As with many projects the first step is to make a plan. This includes to consider who the successor should be. A requirement profile must be drawn up, defining the technical expertise, industry knowledge and personal characteristics necessary and wanted.
This is particularly important because in 30% of succession cases, people outside of the family or the company are taking over (management buy-ins). Furthermore a dossier with all comprehensive business information must be put together before any invitation for tenders can be made. Potential buyers today expect fast and comprehensive background information about the company on offer. External support is advisable to guarantee the required professionalism in the sales process. Documents, presented to the interested parties include a confidentiality agreement, a possible teaser / blind profile, a company evaluation and sales documentation. Only when these steps have been taken and all documents are prepared, a tender offer can be communicated with an advertisement, via management network contacts, a mailing to potential tenders or with the help of a consultant. The tender can be made anonymously or with an official and public approach. Since potentially interested people are often looking for the needle in the haystack, it might be beneficial to manage these steps with the help of an experienced consultant and getting access to his network and contacts as well.
Key Factor: mutual trust and full transparency.
Active communication, full transparency and good documentation are important to ensure that the trust between buyer and seller is maintained during the long phase of transition. Based on the contract, establish in advance fixed rules of conduct and define milestones together as a point of process orientation for both parties, giving every participant the opportunity to also develop themselves further with the situation. Often there is a generational age gap between the negotiating parties. This can influence communication style, behavior and expectations among the participants. Maintaining an open and regular exchange with each other helps that even sensitive topics can be addressed and dealt with.
Find the right balance between letting go and being the Big Boss.
Letting things go is one of the biggest challenges in life: children who have grown up. partnerships who have drifted apart, saying goodbye to loved ones. Owning and managing a company, having existential responsibility for the employee’s wage payments and contributing to society by adding value and jobs can form an essential part of one’s identity. Often there is only a small distance between the private and the company life. But after the age of 55 it is important to resolve this entanglement and create space between oneself and the company – making room for new things and for other people who will share responsibility and participate in ownership in the future. No one can tell you how to completely let go and pass on the best. However in any case, it is of key importance to trust and have confidence in the successor to continue the company in a healthy manner. Even if this means in some cases substantial change and breaking traditions.
Avoiding disaster: The most important questions concerning the purchase price and how to increase it.
In the end, despite all the other major challenges, it remains a sales deal. One party wants to achieve the highest possible price while the other wants to pay the lowest – finding middle ground is part of the art of negotiating. Often the purchase price is not the decisive factor. Rather, it is all about putting together a suitable, tailor-made overall package.
Such a transaction has many benchmarks and influencers forming the negotiation room: buyers, benefit / damage transitions, purchase price, financial modalities and payment terms, continued employment of the seller, future management direction and company strategy. In such negotiations, decisions of great importance are made, which often cannot be reversed anymore afterwards.
Determining the selling price is difficult, especially for small and medium-sized companies. Ultimately, one should see the purchase from the viewpoint of a younger generation who will look into the company’s possible future potential and value within a five or ten years timeframe. Obviously already existing contracts are to be equated with secure income. But what about the return on equity or how many products are cash cows and the question if they still will be attractive in a few years’ time? In particular younger generations set their focus now specifically on topics like digitization and automation in a company. Such developments can positively change the company value and bring new momentum even before it is sold. Thus an interested party could be found even faster.
August 25, 2020
