There are many reasons for this trend. Professional fulfillment outside their parents’ family business, the younger generation’s different strengths and core competencies, and the millennial generation’s greater emphasis on work-life balance are certainly just a few of the reasons—but likely the most important ones—that lead to well over half of all businesses currently awaiting a succession being taken over by no successor from within the family. This is often an unwelcome reality for parents, since transferring one’s life’s work to a buyer outside the family is, of course, almost always a “harder break” than when—at least in their perception—everything somehow stays the same.
As is so often the case, however, what initially seems like the “second-best solution” turns out, objectively and in the long run, to be the better one. It is not uncommon for business owners, when interviewed several years later, to have become deeply convinced that selling the company was the best possible solution for everyone—for themselves, their own children, and almost always for the company and its employees as well.
Why is this the case? Nothing in life brings lasting joy or satisfaction if it is done solely out of a sense of duty. However, the obligation—at least as perceived morally—to continue the parental business becomes a burden for the family successors, as well as for the company and its employees, at the latest when the son or daughter lacks the necessary industry and product know-or lacks the leadership and sales skills that distinguished the previous entrepreneur and guaranteed market success. Core competencies simply vary from person to person.
In such cases, looking outside the family can often be very enlightening. Sometimes—albeit very rarely—a successor for the entrepreneur can be found within the company itself; if not from within the family, then at least from within the company. Statistically speaking, however, this is extremely rare, accounting for only about 3–4% of all business takeovers that occur from within the workforce. It is therefore much more likely that the ideal successor will be an external candidate, another company in the industry, or even a financial investor. All of these options present both opportunities and risks for the company preparing for the transition. However, the opportunities typically far outweigh the risks. Why? Because a very deliberate assessment of the opportunities and risks of each alternative can be made—objectively, independently, and, in most cases, with sufficient time to evaluate these opportunities and risks for the entrepreneur himself, his family, and the business.
The external party, referred to in technical jargon as an MBI (Management Buy-In), is often a successful manager at the highest executive and management level who is well-versed in the industry. He or she has already proven the ability to lead a business and has a deep understanding of the industry and a company’s products and services. He or she is characterized by entrepreneurial drive and seeks the challenge of acquiring and developing a business. Smaller companies, in particular, are often well-suited for sale to MBI candidates.
The strategic investor is often a competitor of the business up for sale, and sometimes a customer or supplier seeking to expand their value chain. This group is by far the most common acquirer of family-run businesses. Competitors who are in direct competition with the company up for sale know the market, are aware of the strengths and weaknesses of the business in question, and will only acquire it if they recognize forward-looking potential in the business slated for succession. This potential does not necessarily have to lie solely in specific product innovations or research and development. Often, it is the very basic advantages—such as the customer base, which offers additional sales potential for the acquiring company; regional markets that the company for sale has already tapped; or—increasingly important in times of a skilled labor shortage—a larger pool of qualified employees.
The third and ever-growing group of buyers consists of financial investors who acquire shares in a company for a limited period—though not infrequently for a duration that is not limited from the outset—and continue to develop the company during that time. The spectrum of these investors is very broad, ranging from family offices—which often make long-term commitments within clearly defined industries—to private equity firms, which tend to have a medium-term investment horizon of five to eight years and whose exit strategy is usually formulated at the outset of the investment. What they all have in common is that they are able to provide the company undergoing succession with financial resources for further growth and, together with the existing management—or, alternatively, external management—to lay the foundation for a successful future. This promise cannot always be fulfilled. It should be noted, however, that the successful development of the acquired company always represents a win-win situation—both for the investor and for the company in question.
Which of the potential external acquirers is the best solution for the family business must be determined by examining each individual case. An MBI will most likely continue to operate and develop the business in a manner similar to that of the previous owner; however, due to the financial constraints of most MBI candidates, an acquisition by an MBI is typically limited to smaller businesses. It is certainly no coincidence that a takeover by a competitor is the most common form of external business transfer. This typically offers the greatest potential for synergies for the company itself, as well as for its employees and customers. When a successful competitor of the company up for sale takes over, it can generally be assumed that the acquiring company would not have generated the financial resources for a takeover without having achieved success in the past.
However, an investor who is primarily financially committed for a limited period can also be an excellent option, particularly when, for example, capital-intensive strategic investments in new machinery and equipment, new markets, or research and development are on the horizon. In addition, the involvement of financial investors often has a less disruptive impact on the company’s structure than, for example, when one mechanical engineering firm acquires another with the aim of realizing synergy potential, such as centralized administration or the relocation of production facilities.
In short, every case is unique and presents both opportunities and risks. Often, however, it is precisely in cases of external business succession that the opportunities ultimately far outweigh the risks, leading the company and its employees into a promising future. And for the retiring entrepreneur, who knows that their life’s work is in the best hands and who receives financial compensation, this is generally a very reassuring thought.
