:quality(80))
Fewer and fewer small and medium-sized business owners are finding suitable successors within their own families. After initial discussions with family members who are unwilling to take on the burden of succession—and after considering which members of the workforce are not deemed capable of continuing the business—the focus shifts to an external succession plan. It’s easy to believe that a management buy-in (MBi) candidate could be an outstanding entrepreneur.
But what actually drives this seemingly ideal type of buyer? A shift in perspective attempts to provide answers:
Why would a lone entrepreneur even consider taking over a company?
Most candidates come from the management consulting field and are convinced they can also succeed as entrepreneurs. Or they’re on the verge of taking on more responsibility at their current company, only to once again be denied the long-promised equity shares—and they think to themselves, “I can do this on my own,” “I’ll send my best man!” and manage the business themselves going forward.
Before embarking on what MBi views as a 5-step succession process, every candidate should take a hard, honest look at themselves. Should an established company really be taken over, or would you rather found a “sexy” startup yourself? In addition, business, technical, and interpersonal skills must be in place to lead a company. Even at this stage, we strongly recommend seeking professional help in the form of assessments and coaching.
The planning phase will focus primarily on the MBi’s most sensitive issue: its capital base and ability to raise capital. With interest rates having risen sharply, banks now generally expect the MBi to be able to cover at least 20% of the potential purchase price from its own funds; meaning the MBI must be able to demonstrate approximately one year’s operating profit as equity. While there are funding programs available that can be tapped into, it is far more important for the seller to make concessions—such as granting the MBI a seller’s loan. This acts as equity for the MBI and can thus close a potential gap in its financing. Here, the seller should therefore accommodate the buyer early on and signal a willingness to grant a seller’s loan.
During the exploratory phase, the first, technical contact takes place between the business owner and the MBi. This contact is largely highly formalized. The MBi usually only receives the company name after signing a non-disclosure agreement (NDA), which is peppered with penalties. The candidate will try to find out as much as possible about the company. If interest persists, a letter of intent (LOI) is drafted as part of the preliminary negotiations, which already tightens the screws considerably.
The heart of the process is the subsequent review phase, which involves due diligence. This is where the good relationships that have been built up are put to the test. After all, while the entrepreneur wants to secure a high valuation for the company’s past performance, the MBi is eager to pay as low a price as possible for the future in order to recoup its investment quickly. Consequently, it is naturally difficult for both sides to separate personal considerations from professional ones.
Finally, during the negotiation phase —which will primarily focus on determining the purchase price—the entrepreneur will also be required to provide guarantees to the MBi. One side may view these as a threat, particularly regarding its reputation for wanting to pass on a healthy business, but without which the other party will not complete the purchase due to fears of uncertainties regarding, for example, future liability risks.
No MBi will take over a company’s entire business—both operationally and strategically—ad hoc and immediately, going from zero to one hundred, without a planned integration phase. Rather, a guided transition period is required, during which the former owner is available to the new owner in an advisory capacity. Many joint visits to banks, insurance companies, suppliers, and key customers are on the agenda. At this point, at the very latest, harmony between the seller and the buyer pays off, which in turn reinforces third parties’ confidence in the business succession.
Conclusion:
The transfer of a business to an external party is not a routine cash transaction of everyday life, where goods are exchanged for money, and should therefore not be taken lightly by either side. Every MBi candidate still faces some lingering uncertainty even before the sales process really gets underway. This requires courage on the part of the buyer, as well as a preliminary trust in the entrepreneur willing to sell. A great deal is demanded of both parties on their journey. And only those who manage to engage intensively with the respective perspectives of the “other side” will ultimately succeed. For both share a common goal: the sustainable transfer of their life’s work to a new generation of entrepreneurs.
The author’s book, *The Successful Management Buy-In*, to be published by Springer Gabler in the summer/fall of 2024, offers an even more in-depth exploration of the topic of management buy-ins and the dynamics between the parties involved. The book delves deeply into the differing perspectives of the seller and, above all, the buyer on the process and outlines strategies for mutual success.
