:quality(80))
Even though the preference for succession within the family remains strong, it is now successful in fewer than two out of five cases, and the trend continues to decline. Succession by employees (management buyout = MBO) is also an option only in exceptional cases. Initially, many discussions fail due to a lack of courage on the part of the prospective buyers; later, they fail because of differing expectations regarding the purchase price; and at a more advanced stage, they fail due to financing issues. As a result, succession through a sale to an external investor is the most common form of succession. But even this is not a sure thing; the market shifted more than ten years ago, and the trend is gaining momentum year after year. Meanwhile, one in three entrepreneurs is over 60 and is facing increasingly declining demand from potential buyers. We are talking about a buyer’s market and are observing a trend toward greater professionalism. Even though prices (multiples) are currently (still) moving sideways, investors’ quality requirements are rising. This increases the challenges for a seller in finding the “perfect” buyer.
Step 1: Preparation in the Broadest Sense
In many cases, companies and their shareholders are not sufficiently prepared. The business model (products, processes) is just as outdated as the workforce, the machinery, and the processes. Revenue and profitability are declining, and the balance sheet is burdened by oversized real estate holdings and pension provisions. Last but not least, there is no true second tier of management, and the managing partner makes decisions in a “high-handed” manner. However, this is only a very small selection of the shortcomings frequently encountered. If there is a lack of time, energy, or patience to adequately address these issues, concessions regarding the purchase price and financing are unavoidable. After all, time is money.
Step 2: Preparation in the Narrow Sense
Once the preparation in the broader sense is complete—or if the marketing process is to be or must be launched, regardless of whether the aforementioned issues have been resolved—it’s time to showcase what’s available. The following are important:
a marketable asking price
This filters out bargain hunters and inexperienced buyers when reaching the market, thereby reducing the effort involved—which should not be underestimated.
Nevertheless, it must be set at a level that attracts a sufficient number of potential buyers. Subsequent downward price adjustments should be avoided if possible. The market reacts to these like a seismograph, and potential buyers are tempted to wait it out.
However, the asking price must be realistic. “You get what you pay for.” This preserves room for downward negotiation, and in the best-case scenario, it can lead interested buyers into a bidding process to maximize the potential selling price.
So if there is uncertainty about whether an asking price is marketable or not, it’s worth having the company valued by an experienced (!) appraiser.
An appealing sales brochure (concise, clear, truthful)
Products are marketed by attractively highlighting the uniqueness of their features and the benefits they offer customers. Questions are answered proactively, and no promises are made that, upon closer inspection, prove to be inaccurate. These rules also apply to a prospectus used to market a company.
In this context, it is also important to note the legal risks associated with prospectus liability.
“Lies have short legs,” yet “the fish must find the worm tasty.”
Step 3: Market Approach
Reaching the market is the key point. For this reason, the approach should be broad in scope without neglecting discretion.
Broad market outreach
Anyone who is not addressed or does not feel addressed will never become a buyer. The approach must therefore be very broad and designed to take into account the information needs and decision-making timeframes of potential interested parties. For example, the information needs of potential buyers at upstream or downstream stages of the value chain are greater than those of direct competitors, and the decision-making processes of an international corporation are longer than those of a medium-sized company with a managing partner. It is, of course, advisable to reach the final negotiation phase with as many interested parties as possible (keyword: bidding process). However, this requires that the outreach be staggered right from the start.
Maximum discretion
A broad market approach and the greatest possible discretion need not be a contradiction. However, this can only be achieved by involving a third party. Their role is to verify the seriousness and creditworthiness of the parties, assess the strategic fit, evaluate the prospects for success, and balance the differing interests of the prospective buyer and the seller. Only when all questions can be answered in the affirmative and a confidentiality agreement has been signed will the property listing identify the specific parties involved.
Step 4: Negotiation and Due Diligence
The interests of prospective buyers and sellers diverge. The purchase price is just one of many issues. A comprehensive overview of the multitude of issues would go beyond the scope of this discussion. However, in this phase, the right balance of openness and transparency, as well as structure, is crucial—one step at a time. From the perspective of both an investor and a seller, risk mitigation is always essential. However, the transition period—during which the seller actively cooperates—and the seller’s participation in financing are key factors that are becoming increasingly important. If the purchase price is set “correctly,” however, the assumption of risks or the forgoing of opportunities should always “pay off” for both sides in some form. An agreement then leads to aletter of intent (LoI) or a term sheet. At this point, it is also advisable for the seller to ensure that the buyer has sufficient creditworthiness. During the subsequent due diligence process, a prospective buyer gains comprehensive access to all company documents that verify the accuracy of the information previously provided. The better the preparation—in both the broader and narrower sense—the more carefully potential buyers were selected, and the more informative and accurate the sales prospectus is, the less need there will be for subsequent negotiations. This should now be limited to the so-called findings, the assessment of opportunities and risks, and the drafting of the purchase agreement.
Step 5: Signing and Closing
Now it is time to stay the course and bring the process to a smooth conclusion. Both parties have invested time and money, and the key issues have been clarified. These must now be put in writing. This is where it becomes clear whether both parties have understood the terms in the same way. The more clearly the details were discussed and documented beforehand, and the more transparent the process has been so far, the easier the final steps should be. The same, of course, applies in reverse! Too many discussions cost time and money and increase the likelihood that unforeseen events will occur and the process will suddenly come to a halt. The COVID-19 pandemic and the sharp rise in interest rates are the most recent examples, but there are also less dramatic reasons. It’s to one’s advantage to conduct parallel negotiations and still be able to close the deal with one of the remaining interested parties. However, before a purchase agreement is signed, the buyer must now—at the very latest—be able to provide proof of financing without any reservations. After that, any conditions that might render the purchase agreement provisionally invalid should also be fulfilled promptly for the reasons mentioned above.
The Result
A purchase price acceptable to both parties has been agreed upon, mutually acceptable terms have been reached on the points deemed important by both the seller and the buyer, and the buyer’s creditworthiness has made it possible to finance the transaction. And thanks to the orderly handover—often desired by both sides—the exit does not end abruptly. The life’s work continues in one form or another, the jobs of deserving employees are preserved, and the fruits of years of labor have been reaped. The outcome is likely different from what was hoped for at the start of the project; nevertheless, the goal was the sale—but “not at any price.” Therefore, the buyer is “perfect”—at this moment, under these circumstances, and among the available market participants. This was achieved with the help of the available resources in terms of time, budget, and flexibility.
