Succession Planning in the Company
On the one hand, there is a growing number of business owners desperately seeking a successor. On the other hand, there are founders who are eager to start their own businesses with energy and conviction. Thehandbook “Succession Instead of Starting from Scratch” by gründerküche.de focuses on matching these two groups. Using a roadmap, the editorial team shows founders, step by step, how to successfully navigate a business succession. According to the “SME Succession Monitoring” report by the Kreditanstalt für Wiederaufbau (KfW), around 152,000 owners of small and medium-sized enterprises (SMEs) plan to hand over their companies to the next generation by the end of 2021. And the trend is on the rise. So the potential for the future is great: the next generation of entrepreneurs won’t have to start from scratch. But to ensure that the rocky road to a successful takeover goes smoothly—much like when starting a business—it’s essential to know and understand the processes and to proceed in a structured manner.
The succession roadmap from gründerküche.de visualizes this path.
1. Vision for a Succession-Based Startup
Every business venture begins with a dream. For some, it’s the dream of owning their own little café. For others, it’s the idea of using their organizational skills to build a business. Whether it’s a unique product idea or the desire to get rich through their own company—something must burn within the founder to set out on this long journey. From this idea, the founder develops their vision—their concept of entrepreneurship. Whether it’s organizational structure, market positioning, or even the atmosphere within the company—how the business should operate must be defined early on.
2. Succession, a New Startup, or a Franchise
The better founders understand their business idea and vision, the better they can decide on the right path. Much more often than expected, it’s not a new startup that leads to the best outcome. Many aspiring entrepreneurs are actually much better off taking over an existing business.
3. Establish criteria
Once you’ve decided to start a business as a successor, the next step is to find the right company. The search for the right business to take over is one of the key tasks for the successor entrepreneur: If the situation isn’t already very clear-cut—such as in the case of a family succession—founders should keep their options open. The goal should be to have a shortlist of three to five suitable businesses. To do this, it’s best to define so-called “knockout criteria” based on your own needs and goals. These can include size, location, industry, and the number of employees. Or they can encompass expectations such as a company’s sustainability or social responsibility.
4. Finding Potential Acquisition Targets
An important resource for your search are business succession marketplaces. There are also specialized brokerage firms, known as “M&A advisors” (“Mergers & Acquisitions”). Such advisors aren’t just helpful in the search process. With their industry expertise, they can guide you through the entire process. As a general rule, founders need to think outside the box and clearly articulate their intent to acquire a business. In this interview, Prof. Dr. Birgit Felden advocates a proactive approach: “Tell everyone who isn’t up a tree that you’re interested in a takeover.”
5. Evaluating Candidates
So look carefully before you make a lifelong commitment. What applies to marriage is no less important for business succession. A thorough review of one to three potential candidates is the next major step for the successor founder. The company’s business model must be understood and evaluated for its functionality. The defined deal-breaker criteria serve as guidelines.
6. Evaluating candidates
Now it’s time to delve into the details of the company review. A due diligence review examines a company’s facts and figures and provides important checks on the incumbent entrepreneur’s self-presentation. A company valuation is also required—a crucial basis for negotiating the purchase price. Important: At this stage, at the latest, the successor faces the task of contacting the outgoing owner and initiating initial negotiations. This is a very sensitive situation in the overall acquisition process. Tact and, above all, respect for the current business owner’s lifetime achievements are essential. Even if the owner paints a realistic and objective picture of their business—stepping back from the company is a process that can never take place entirely without emotion.
7. Takeover Plan/Continuation Plan
For new entrepreneurs, the business plan is an essential tool for embarking on this adventure in a structured and well-thought-out manner. The successor’s acquisition plan is very similar: It outlines all the key facts, important figures, and the challenges that must be addressed during the takeover process and in the subsequent steps of managing the business. The result is a plan that can and should serve as a guide for upcoming business decisions in the years to come. Key data in the business continuity plan include the date of the business handover, the purchase price, the planned legal structure, capital requirements planning, liquidity planning, and risk planning. The break-even point is also important: When will the acquisition costs have been recouped from ongoing operations?
8. Determining the Purchase Price
As with all purchases, there are two sides—usually with conflicting interests: The buyer wants to pay as little as possible. The seller wants to achieve the best possible price. This is generally true for business succession as well. And depending on market conditions, one side may be able to exert more pressure than the other. But be careful: Both sides of a succession are dependent on each other in the long term. Fair negotiations and honest discussions provide the best foundation for negotiating a mutually acceptable price. And there is plenty of flexibility here as well: For example, the successor can secure the purchase by structuring the purchase price in installments tied to the achievement of specific sales or profits. As a general rule, the business owner who wants to hand over their company will expect more for it than the buyer and successor are willing to pay. The emotional factor should not be overlooked: It’s also about somehow quantifying a person’s lifetime of work in a single figure. That can’t really work. This is where mediation helps. A third party recognized by both partners—who can reconcile their respective ideas and expectations, present arguments dispassionately, and act as a mediator—is invaluable in this situation.
9. Clarify Financing
Whether through a loan, grants, or (in very rare cases) directly out of one’s own pocket, a business acquisition must be financed. The solutions are varied and must be tailored to each individual case. The gründerküche.de guide “Financing Business Startups and Startups” covers the various components of purchase price financing and how best to apply them to your project.
10. Making the Decision Before Signing the Contract
Even if successor founders are already deep into the process at this point, nothing has been signed yet. You should take this final opportunity to review your decision and align it with your own vision. In addition, contracts must be drafted, negotiated, and formally reviewed. At the end of this step, the takeover is official. Anyone who now believes the takeover process is over fails to realize that the real work as an entrepreneur is only just beginning. Customers must be convinced to remain customers. Business partners, suppliers, and service providers must be brought on board with the new direction of the company. Employees must be integrated into the upcoming transformation process. But the successor entrepreneur can tackle all of this with the confidence that, from now on, they are working for their own company.
The complete handbook “Succession Instead of Starting a New Business” is available here as a free PDF download.