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However, the situation for many business owners in Germany differs significantly from their fictional counterparts: while intrigue is the order of the day in those stories to secure the best position in the family hierarchy, German small and medium-sized businesses lack family members who are interested in taking over the company or who would be eligible to inherit it.
Just under one-third of business owners in Germany are over 60 years old
This trend is exacerbated by demographic shifts: the proportion of entrepreneurs of retirement age is rising steadily. While 20 years ago only about one in ten entrepreneurs was over 60 years old, that figure has now risen to nearly one-third, and only one in ten is younger than 40.
The desire to start a business and become self-employed is fundamentally present among the younger generation; although the rate of new business formation (startups per resident of working age) has declined somewhat in recent years according to the KfW Startup Monitor, the pursuit of security and stability is not the top priority for many young people.
Existing business structures give young entrepreneurs a head start in terms of time and knowledge compared to new startups
To successfully implement a business succession, the successor must be made to understand the value of building on existing business structures and an established customer base. One thing is clear: Compared to starting a business from scratch, a business takeover involves significantly less risk and is often more financially attractive. Continuity and long-term growth pay off. An increasing number of private equity funds have also recognized this and are specifically focusing on the topic of business succession (so-called “search funds”). Mid-sized companies with a valuation of more than 10 million euros are the focus of these search efforts.
What is the first step?
The starting point for the search for a suitable successor is a thorough assessment of the company’s situation. Many factors—such as location, market positioning, and competitive environment, as well as unique selling propositions and the depth of value creation—influence a company’s value. The interplay of these factors determines the company’s medium-term planning, which serves as the basis for a valuation. The income approach and discounted cash flow are the most widely recognized methods used for this purpose.
Buyer Databases as an Essential Tool
The pool of prospective buyers must be a good fit not only for the location and industry but also for the transaction size. Seller’s advisors who have already conducted numerous discussions with prospective buyers and closed transactions in the industry develop a network of interested parties—comprising strategic acquirers, private equity firms, and MBI candidates—that can be drawn upon as needed (so-called “sorting and matching”). In this context, hard facts regarding potential buyers—such as creditworthiness and professional qualifications—play a role, as does an intuitive sense of which combination is likely to work well based on the personalities of the entrepreneur and the successor candidate. With regard to the intended joint transition period, during which the entrepreneur’s life’s work is to be placed in good hands, it is particularly important that the entrepreneurs get along well as individuals.
Hard and Soft Factors in Prioritizing Candidates
The candidate’s willingness to familiarize themselves with the company and learn the business can generally be assumed, but should nevertheless be explored, just as in a job interview. In most cases, the interview also makes it possible to determine a potential successor’s professional background and the leadership experience they bring to the table.
Separating the wheat from the chaff and prioritizing candidates requires a certain amount of effort. All too often, prospective buyers come with unrealistic expectations. They overestimate their own creditworthiness or believe that, through occasional, supervisory-board-like activities, they can manage the company without having to be involved in day-to-day operations.
Therefore, it’s worth investing time at this stage to ensure that a letter of intent (LOI) is signed with a promising and suitable candidate. If you’ve backed the wrong horse from the start, valuable time is lost because, as a rule, exclusive pre-contractual negotiations with one party are agreed upon for 2–3 months. In addition to the exclusivity clause, the letter of intent contains the key terms of the upcoming sale, including the purchase price, the timeline, and the duration of the transition phase (any intended consulting agreements for the former owner may also be included).
A good M&A advisor will ensure in advance that incoming purchase offers are structured in a way that ensures comparability. Particularly where earn-out clauses are involved, it is important to assess the contribution the successor can make to the company’s further development and, consequently, how realistic it is to achieve certain targets.
The Reward for the Effort—Contract Signing and Handover
Once the hurdles of candidate selection and due diligence have been cleared, a binding offer is made, in which related ancillary agreements and appendices can already be firmly agreed upon in the preliminary contract, so that the signing of the contract is, ideally, merely a formality. The final step is the handover of the company, including all rights and obligations (closing), so that the successor can get to work implementing their vision for the company. Close support during the onboarding phase is often desired and, ideally, in the interest of both parties, as bonus agreements (or earn-out clauses) encourage the former owner to remain connected to the company for a certain period of time.
Conclusion
To successfully complete a business transfer, we recommend planning and preparing for the sale well in advance. An experienced succession advisor understands the challenges associated with succession. Their expertise, experience, and network ensure that this complex process proceeds smoothly and successfully. This approach helps avoid costly mistakes in negotiation tactics and contract drafting.
