In particular, executives with many years of experience are increasingly taking advantage of this opportunity to realize their dream of owning their own business. The following article provides key guidance for successors and compares the opportunities and risks of business succession and starting a new business.
Business Succession in an Existing Market or Entering a New Market by Starting a New Business?
Starting a new business is significantly more challenging than business succession, as a new entrepreneur often cannot rely on established customer relationships. In addition, the new entrepreneur needs time and sufficient financial resources to successfully and sustainably position their products or services in the market.
In addition to a clearly defined business
a robust business plan that includes a coherent sales and growth strategy.
The founder should also take into account potential delays during the start-up phase and plan for possible failures of individual products or services. This applies to startups with market-
as well as relaunches of traditional products and services.
Successors benefit from established business models and strong customer relationships
In comparison, business succession is often significantly easier, as the company being transferred typically has robust customer relationships and well-established processes and structures.
A business successor should definitely assess a company’s suitability for succession. The first question to answer is whether the company is generating a profit and thus yielding a return on equity commensurate with the economic risk. In addition, it must be determined whether the current owner is paying themselves a market-rate owner’s salary.
The long-term viability of the current product and service offerings, as well as the extent to which existing customer and supplier relationships depend on the current business owner personally, are other important questions that need to be addressed.
In a direct comparison between starting a new business and
succession, it is evident that the great entrepreneurial freedom of a startup is often accompanied by a comparatively high market risk. The high number of startups that fail very early on underscores their longer ramp-up period and the higher entrepreneurial risk.
In the case of business succession, the entrepreneur’s focus should be primarily on the future viability of the business model, as well as on processes and structures. Implementing change processes can sometimes be very complex and time-consuming.
Focus on the Business Plan and Financing Strategy
Both new entrepreneurs and successors should pay special attention to the business plan and the resulting financing strategy. When well-prepared, these documents provide coherent answers to all questions raised by investors. Given the company’s track record, banks are often more open to business succession in financing discussions than they are to new business startups.
The financing plan for business succession should cover not only the purchase price to be paid but, above all, the company’s ongoing capital requirements as well as the capital needed for necessary replacement and new investments. In this regard, it is advisable to use a conservative estimate of revenue potential and to factor in reserves on the cost side.
In principle, financing can be structured using a combination of the successor’s own funds, subordinated loans from the existing company (seller loans), and bank financing combined with federal and state subsidies. The use of these financing solutions must be evaluated on a case-by-case basis for each business succession.
External support pays off in a business succession
Involving a consultant can positively support a business succession. Through the consultant’s networks, business opportunities can be presented to a large number of potential partners in a very short time. This high number of contacts increases the likelihood of success in finding a buyer. Effective management of the transaction process, support during financing discussions, and goal-oriented negotiation facilitation—which also takes emotional factors into account—are further advantages of working with a consultant experienced in transactions.
