Starting a Business
is more than just deciding to “make.” After all, those who start a business generally don’t simply decide to launch a business concept on their own instead of just exercising the “buy” option. “Making” is highly complex. First, you have to find that one good business idea. A concept that’s truly viable. This means putting a startup idea through its paces a thousand times, rethinking it, reimagining it, and considering the project from a different perspective. Thinking differently than you have before. Almost every business venture has already been attempted and implemented, at least since the years of the economic miracle up to the present day.
There are many analogies that a founder can draw upon for comparison by analyzing business cases, products, or market needs both domestically and abroad. The question arises: What is the problem? And what does the solution look like? Starting a business therefore means, above all, redefining processes and designing products in a way that bridges the gap between reality and the virtual world. We’re talking about digital transformation, which has become indispensable in the founding process and the development of the products behind it. True entrepreneurship, therefore, always involves an element of disruption. Of course, there’s the entrepreneur who opens a hair salon around the corner. It’s relatively easy for them to assess the demand and make their decision. If they happen to come across a salon that’s currently for sale, they can weigh whether taking it over would be advantageous.
Starting a business today—especially when compared to weighing the pros and cons of acquiring an established company, which involves a significant capital outlay—means much more. It means growing rapidly in order to even compete with an established business. It means scaling up. Aiming for market leadership, whether in terms of product, revenue, etc. A simple example illustrates the point: Launching a purely digital auto club is relatively straightforward. Members can be recruited through referral campaigns on social media platforms. Either you purchase coverage for expected claims through existing mobility service providers, or you build your own network of service partners right from the start.
However, this won’t provide a competitive advantage—especially in terms of cost and efficiency—over the existing “Yellow Angels.” But if you approach the business model “differently,” by recruiting members as helpers, taking stock of which tools—from jack to jumper cables to towing capabilities—members own and know how to use, digitizing the on-call service via a smartphone app à la Uber (originally for private drivers), and reward them for their service with free membership, then you can launch a genuine challenger to the market leaders. Of course, it doesn’t stop at these few steps: Data analysis of members’ vehicle fleets is essential; “predictive maintenance” for the fleet “under management” reduces the damage rate; and artificial intelligence calculates the probability and susceptibility of damage based on region, vehicle type, age of registration, etc.
The point here is to make it clear: Starting a business requires a well-thought-out concept, which may ultimately also need to attract investors. Anyone who can’t rely on their own capital faces a significant hurdle ahead. Attracting venture capital investors—in exchange for shares—is time-consuming and not exactly promising. The same applies to bankers, who must first be convinced—usually only by offering personal liability as collateral. Even guarantee banks don’t exactly take a lenient approach when it comes to startups. Quite apart from the need for a brilliant idea and the difficulty of raising capital, the “make” process requires a true founder’s personality—a visionary with pragmatic skills. A person willing to take risks. Someone who rolls up their sleeves and isn’t too proud to even order toilet paper.
Starting a business means doing everything—and I mean everything—in the company, even on your own if necessary. Filling every role yourself at some point. The processes have to be built from the ground up. That’s not easy: What looks quite simple on paper turns into a battle with an endless number of variables and implications. In the end, it takes an entire team—and here, too, you’ll have to give up some equity. After all, investors are investing precisely in this. The team is crucial, not just the idea. However, the idea must have the potential to attract a strong team, withstand critical scrutiny from all stakeholders, and be scalable. Only then does giving up company shares pay off for the actual founder. Only then can he even win the “competition” against succession as an alternative.
Taking over a family business
is more than just deciding to “buy.” After all, someone who takes over an existing company usually doesn’t just pick one out of a mail-order catalog; rather, they either have a family connection, assumes the role of a shareholder as part of an MBI, or has engaged intensively with the target company through extensive research, including the associated M&A process. While the first two options are still relatively manageable—though they naturally have their pitfalls despite the good insights into the company to be acquired—the option of entering an unfamiliar company is fraught with numerous hurdles. These must be overcome.
The central linchpin is this: Where does the knowledge about the company’s products, production, and processes come from? Or, more specifically, can this knowledge be transferred to the successor? At least in a way that allows him to truly take the driver’s seat in his company?
It all begins with good—yes, the atmosphere matters—conversations and in-depth interviews with the business owner who is considering selling his company. He, too, faces a significant risk: by letting go of his company, he risks it falling into financial trouble and, most likely, losing part of his purchase price—which is partly contingent on future performance (vendor loan, earn-out). It is therefore in his best interest to be fully engaged in this process. However, when it comes down to the nitty-gritty—pricing, payment terms (a high fixed price and a low variable component paid later on), and the actual due diligence (review of all relevant company assets)—interests often diverge widely. The art of a business acquisition lies in conducting due diligence—with all its multifaceted aspects—as thoroughly as necessary while keeping the process as harmonious as possible: ensuring certainty and clarity regarding everything that defines a company with a history. Here, no processes, sales models, products, etc., are being developed; rather, the goal is to draw conclusions for the future based on the company’s past elements. Similar to buying a car, it is essential to ensure that the body, chassis, and engine are still intact and truly connected to one another. That each part functions on its own, but above all, that they work together seamlessly. Once you’re satisfied with this, the next step is negotiating the purchase agreement—ideally at the same time as, or shortly after, securing financing for the acquisition. Unlike when starting a business from scratch, it’s relatively easy to raise funds for a succession. As a rule, the purchase of a business can be financed with the support of a bank and the KfW. If the price components are skillfully negotiated, the business acquisition will gradually pay for itself. Amortization—that is, the number of years it takes the successor to recoup the purchase price through ongoing business operations or operating income—is more of a mathematical issue than a business one—unless a successor deliberately decides to acquire a company in financial distress. However, it is precisely the aspect of easily manageable purchase price financing that makes a succession so attractive, compared to the high complexity of starting a new business and the uncertainty as to whether the new company will even be successful.
This has already attracted a new group of investors—specifically, those who do not invest in high-risk startups but rather in very secure succession models. They provide buyers with the financial resources to facilitate a company acquisition. In return, they expect a minority stake in the company, which they either pass on to private equity -driven financial investors after a few years or sell to the successors—naturally with a premium typical of mezzanine capital that pays off. Since this alternative financing model is still relatively new, it remains to be seen what will come of it: Will there be serial entrepreneurs who, backed by the same investor, acquire more and more successor companies? We’re already familiar with this remarkable trend among startup founders. One thing is also clear: the type of person who positions themselves as a successor is different from that of the founder. The successor is likely more pragmatic.
A manager whose strength lies less in vision and more in administration—someone who focuses less on disruption and more on preservation and gradual development. At least, that’s the best approach to take initially. They’d be wise to proceed cautiously and make only gentle changes to a well-established, smoothly running company. Empathy is definitely needed to adapt to the “new” environment. From the very beginning—during the initial discussions with the seller, when the succession is announced, in day-to-day operations with existing employees, and once again with the seller, who should support the successor with advice and assistance for at least a transition period of one to two years.
Conclusion
The bottom line is that there is no right or wrong. But there is a highly attractive alternative to the much-touted route of starting a business from scratch, one that few have taken so far—due to a lack of awareness. Until a few years ago, German universities did not have the topic of entrepreneurship on their radar. In the meantime, university-initiated startup incubators have sprung up everywhere. Hopefully, the same trend is on the horizon for business succession as well. Given the large number of companies ripe for succession (based on the age of the business owners) and the significantly reduced risk, this makes perfect sense even for young entrepreneurs. If, in the end, the skilled trades sector also responds and, through the chambers of trade, the Chambers of Industry and Commerce (IHK), etc., incorporates succession planning into its training curricula, Germany can only benefit. The excellent companies based there are worth it. And those who have the ambition to run a business—who are passionate enough for such a task—can find excellent fulfillment through succession planning without taking on the great risk of failure.
