Conversely, inadequate preparation for the transaction has a negative impact on the breadth of the pool of interested buyers and, consequently, on the sale price that can be achieved. A lack of transparency regarding the company’s financial situation and organizational structure unsettles potential buyers and repeatedly leads to unforeseen and universally undesirable friction in the sales process.
A well-thought-out transaction strategy is rarely developed in small and medium-sized businesses; after all, the owners are often still very heavily involved in day-to-day operations. An endless chain of day-to-day problems requiring immediate solutions ensures that no resources remain for optimizing the business, and thoughts of selling the company are continually put off. Added to this is the fact that most SME owners have never sold a business themselves before and are thus entering entirely new territory. They often grapple with this uncertainty on their own, as concerns about confidentiality prevent them from discussing the topic of selling the business with those around them. And even when the business owner seeks dialogue, the conversation often remains superficial rather than evolving into a substantive consultation on the proper approach to transaction preparation—or even on the achievable purchase price and the factors driving it.
Building a Basic Understanding and Laying the Groundwork
To prepare adequately for the sale of a business, it is first necessary to adopt and understand the buyer’s perspective. In business sales, there are significant information asymmetries between buyers and sellers. What may seem self-evident to the owner, based on years of experience, may well require explanation from the buyer’s perspective. Therefore, it is important to establish transparency from the very beginning—both in day-to-day operations and with regard to finances. If potential risks or issues only come to light during the buyer’s due diligence process, this will permanently undermine the buyer’s trust and that “gut feeling” that is so crucial for transactions involving small and medium-sized enterprises.
A transparent financial and business analysis prepared in advance—including key metrics and realistic, well-founded projections—can remedy this situation and clearly illustrate the company’s development. The business model should be clearly defined; the customer, supplier, personnel, and competitive structures should be presented clearly; and strengths, weaknesses, opportunities, and risks should be identified as part of a SWOT analysis—again, as openly and honestly as possible. While a broad and comprehensive raw data set is essential for all this information, the prospective buyer should not be overwhelmed. The more streamlined and clearly organized the information is—and the sooner it can be provided in advance—the better.
As mentioned at the outset, an entrepreneur usually has little time to handle this alongside day-to-day operations and, as a rule, has no prior experience in selling a business. Early contact with professional advisors is essential here and can be worth its weight in gold during the eventual sale. The current owner should also consider a realistic timeline for the sale of their business—taking into account the process itself, any necessary transition period, and, ideally, professional transaction preparation. Some questions, however, only arise during the sales negotiations—by which time it’s far too late: How long will it take to resolve any outstanding corporate law issues? Are there any holding periods that haven’t been taken into account? Can I still make any necessary structural and operational adjustments to minimize my tax burden?
Identifying and Implementing Operational Improvement Opportunities
The most fundamental operational problem in business sales and external succession planning—one that must be resolved during transaction preparation—is owner dependency in many small and medium-sized businesses. What exactly does that mean? “Owner dependency” generally refers to all dependencies of the company and its profitability on the owner or managing partner as an individual. Of course, every company has tasks and information that rest entirely with the owner, which is generally not a problem as long as these can be easily transferred. A dependency on an individual exists—and becomes critical—when the owner’s personal, non-transferable relationships and characteristics are so extensive that their loss would result in a decline in revenue or profits for the company. Good examples include personal relationships with customers, suppliers, and partners that have been built up over the years and were also established and maintained in the owner’s private life. In another example, the owner is the sole holder of business-critical know-how. Is the owner the only person in the company who calculates quotes? Are there specific licenses or certifications (such as the “master craftsman” requirement in the skilled trades) that only the owner possesses? The list of such questions is virtually endless.
But it’s not just dependence on the owner that can pose a problem; excessive dependence on other stakeholders, such as customers or suppliers, can also be an issue. If such dependencies exist, they should ideally be resolved or mitigated before the sales process even begins.
It is also helpful if all areas of the company are up to date. The website and the entire public image should be current and appealing, as should, for example, any existing certifications and permits. An existing, modern, and well-integrated IT infrastructure is another plus when selling the business. The same applies to clearly defined, documented, and efficient processes, as well as qualified, experienced staff. In addition, management control tools should be in place to ensure the best possible transparency regarding the company and its divisions and to be able to competently answer questions such as “Which business units generate high revenue and margins?” —questions that prospective buyers are sure to ask—can be answered competently. Preparing regular reports on key performance indicators is recommended and also provides potential buyers with a quick and clear overview of the company up for sale. Any unexpected developments should be explained as plausibly as possible.
A forward-looking perspective on the intended transaction process and the resulting attractiveness of the company generally leads to an increase in the achievable purchase price, which more than offsets the initial costs. Therefore, one should not cut corners here—for example, with the mindset that “it’s going to be sold anyway”—but rather make sensible investments to prepare the company as well as possible for the transaction.
Conclusion
The issue of succession is put off for years in many small and medium-sized enterprises. Day-to-day operations take priority. Furthermore, most entrepreneurs in the small and medium-sized enterprise sector lack transaction experience, yet often shy away from targeted and timely discussions on this topic for reasons of discretion.
This lack of capacity, combined with a strategy of avoidance, means that thorough transaction preparation is often skipped or completely ignored. Instead, the sale is often initiated in an unplanned and unprepared manner when the business owner first consults an advisor. In practice, this approach frequently leads to unnecessary delays and friction in the sales process and ultimately reduces the chances of achieving the best possible outcome.
It is therefore advisable for the company to take certain precautions early on in preparation for a potential sale. It is important to adopt the buyer’s perspective in this process. The buyer needs as clear and transparent an insight into the company as possible. Existing situation analyses and business plans are helpful in this regard.
Furthermore, it is necessary to determine whether any corporate, tax, structural, or operational adjustments need to be made. This includes, for example, clarifying the ownership structure of the company and the scope of the sale (which assets are to be sold?) and making adjustments to the balance sheet. This is the case, for instance, with assets used primarily for private purposes or those not necessary for business operations. A decision must also be made on how to handle existing pension obligations toward the former shareholder. Adjusting all these aspects cannot be done “overnight,” which is why the time factor should always be taken into account for such processes.
Dependence on the owner should also be reduced early on, as should personal dependencies on customers or suppliers. The website, informational materials, and IT infrastructure should be designed to be as appealing as possible and kept up to date. Controlling tools that regularly provide key performance indicators should be implemented.
In summary, early transaction preparation with a specialized process consultant has a positive impact on achieving the best possible outcome when selling a company.
