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Most corporate transactions take place among small and medium-sized enterprises. In Germany, we can estimate that there are approximately 3,000 registered business transactions per year. That is already a considerable number, and it is likely to continue rising due to the succession situation among the baby boomer generation of entrepreneurs. (This figure does not include micro-enterprises and sole proprietorships.)
However, quite a few transactions go unregistered because they never actually take place, even though the owners are seeking to sell their businesses—often to arrange for succession due to retirement. In this article, we’d like to address a few key barriers to transactions that we encounter time and again in our daily consulting practice.
First, the good news: As a business seller, you can increase the likelihood of a successful transaction. However, you need to know how to do so, have realistic expectations, and be willing to invest in the sales process.
Valuation Expectations
“I want to get at least X million euros for my company when I sell it. I won’t settle for less than that.” We hear statements like these from our clients on a regular basis. But when you take an objective look at the company’s business performance over several years, it becomes clear relatively quickly that there is a significant gap between desire and reality.
Business owners often overestimate the market value of their company. The market value is the amount that external third parties would pay to acquire the company. It’s similar to real estate, with the difference that a business valuation is generally much more complex. There’s really no “right” or “wrong” here, but you can narrow down the potentially achievable enterprise value with relative accuracy based on a few criteria. A professional M&A advisor should be able to do this. A business transaction is finalized when the buyer and seller agree on the purchase price and the transaction structure. As in many other situations in life, the result is a compromise for both sides.
For most of our clients, selling a business is a highly emotional process with its ups and downs. This is only natural. A great deal of time, passion, energy, and money has been invested in the business over many years or even decades. The sacrifices, all the hard work, and the entrepreneurial risk should be appropriately valued in the sale. Often, all or a significant portion of the client’s assets are tied up in the company and serve as retirement savings, which are to be realized upon sale.
On the buyer’s side, you are generally dealing with professionals experienced in M&A. Buyers evaluate a company based on objective criteria. A profitable, growing company with a strong management team and low dependencies in a sector that is not sensitive to economic cycles is likely to generate significant interest among buyers and command higher valuations. In such cases, it is usually the competitive bidding process facilitated by the M&A advisor alone that leads to an increase in value for the seller(s). It is not uncommon to find such companies in the software or healthcare sectors. However, most small and medium-sized enterprises do not meet the aforementioned criteria. This does not mean that a sale is impossible, but it will come with certain compromises.
For any buyer—whether a financial investor, a search fund, or another company—the acquisition of a company is an investment that must pay off in the long run. As a rule, significant sums are involved, and for most buyers, the acquisition is a very important business decision that also carries a high level of entrepreneurial risk. Sellers naturally know their companies and the associated opportunities and risks much better than potential buyers, and what buyer would be willing to pay today for the future potential of the company they intend to acquire? The buyer wants to realize that future potential themselves as compensation for the investment risk.
According to a recent survey of the private equity industry conducted in 2025 by the auditing firm Rödl & Partner, sellers’ (unrealistic) asking prices are by far the most common deal-breaker for corporate transactions.
Transparency of Financials
In a corporate acquisition, without exception, all professional buyers—whether financial investors or strategic buyers—scrutinize the financial figures closely. Typically, external consultants or auditors are brought in for financial due diligence. The buyer wants to understand and be able to reliably calculate the sustainable profitability of the target company, as this is, from the buyer’s perspective, a key factor in the company’s valuation.
The availability, consistency, and reliability of financial data are key when selling a company. This applies not only to annual financial statements but also to business performance during the year and forecasts. Most small and medium-sized enterprises are not sufficiently equipped or adequately prepared in this regard. This does not necessarily mean that the company is not successful. The management tools used to date have evidently been sufficient to lead the company to where it is today. However, the existing data and management tools are often insufficient to meet the requirements of potential buyers during due diligence. This is a barrier to the transaction!
For example, there is a lack of consolidated financial data when multiple companies are to be sold as a corporate group; interim financial reports (BWAs) are only available after a delay; accrual entries are missing; and the previous year’s annual financial statements are still not available as of August. This somewhat exaggerated description is the rule rather than the exception and is underestimated by many business owners looking to sell. As a reflex, the company’s tax advisor is often contacted and asked to remedy these “shortcomings” in the sales process as quickly as possible—a solution that rarely works.
A lack of availability and transparency regarding company figures is a disruptive factor in business sales and does little to build trust among prospective buyers. As a result, business sale processes in the SME sector tend to take a long time—even for smaller transactions—sellers may have to accept value discounts, or, in the worst-case scenario, the transaction may not go through at all. This is particularly tragic when age-related succession depends on it.
Financing
It is more the rule than the exception that business acquisitions are partially financed with debt, either through bank financing, debt funds, or other lenders. In such cases, financing and financial viability are typically based on the cash flows of the company being acquired and the (additional) debt burden it is likely to be able to withstand in the future.
If the buyer requires debt financing for the acquisition, this represents an additional source of uncertainty for the transaction that should not be underestimated. At the same time, the need for debt financing increases the demands placed on due diligence, particularly financial due diligence. The availability, consistency, and reliability of the company’s financial figures are all the more important in this context.
It is not uncommon for M&A transactions involving small and medium-sized enterprises to fail due to the lack of debt financing required for the acquisition. There can be many reasons for this, such as the company’s small size, volatility, declining business performance, a lack of financial transparency, insufficient collateral, heavy dependence on customers or suppliers, or an industry in which the target company operates that is difficult or impossible to finance.
Lenders are risk-averse and, at best, receive interest and principal payments. As an equity investor, the buyer can benefit from a future increase in the value of the target company. The buyer’s invested equity has a different risk-return profile than the debt financing used for the acquisition.
A lack of “bankability” on the part of the target company significantly reduces the likelihood of the transaction. In such cases, a buyer must be found who can finance the acquisition entirely with their own funds and is also willing to do so. Seller loans are often used in these situations to bridge the buyer’s financing gap.
Conclusion
Corporate transactions are usually time-consuming and complex projects, even for smaller companies. It is not uncommon for them to fail due to the sellers’ lack of experience, insufficient preparation, unrealistic valuation expectations, and limited financing options.
Business owners typically sell a company only once in a lifetime. On the buyer’s side, one usually encounters parties with M&A experience. Professional M&A advisory services can help balance this asymmetry and significantly increase the likelihood of a successful transaction. A good M&A advisor acts as a critical sounding board, examining the company up for sale and the situation from the perspective of a potential buyer.
Ideally, you should begin taking preparatory steps a few years before you plan to step back from the company as a shareholder and from day-to-day operations. This may include, for example, implementing management control tools to increase financial transparency, reducing dependence on specific individuals, customers, or suppliers, cutting costs, or taking other measures to boost the company’s profitability. All of these measures can help increase the value of the company and improve the likelihood of a successful business transaction.
