Small and medium-sized business owners think they know it all. At least when it comes to their own companies. After all, they’ve known their products, markets, and employees for decades. But when they want to—or have to—sell their life’s work, none of that helps much. They are then confronted with issues they’ve never dealt with before and about which they have no idea. They must value their company and clarify specialized legal and tax matters, such as the exclusion of liability claims and the severing of ties to their personal assets. Those who make mistakes here often pay dearly. That’s why it makes sense to seek outside help. Hardly any transaction goes through without advisors. Countless specialists court small and medium-sized business clients with their supposedly indispensable services. But their involvement is by no means beneficial for every seller.
Transaction Advisors
Specialists at accounting firms, investment banks, or independent consulting firms promise an all-inclusive, worry-free package for the sale. “We often play a key role and coordinate the work of everyone involved in a transaction,” says Alexander von Hachenburg of the Munich-based M&A advisory firm Ferber & Co. All entrepreneurs for whom sales situations are not part of their daily routine rely on this expertise. This applies to most small and medium-sized business owners. In fact, consultants often have close ties to companies across various industries and are frequently the first to learn who is looking to sell or buy. Some also have an international network and can reach out to potential buyers whom the owner may not even be aware of.
The consultants’ work does not end with finding a buyer. They know when to present which business documents and the draft purchase agreement, and they handle the valuation of the company. “Small and medium-sized businesses often lack the accounting data required by a professional buyer,” says André Schröer, a partner at the Düsseldorf-based M&A advisory firm Livingstone. The advisor must then provide guidance—and do so before sales negotiations begin. Their services are compensated by a negotiated success fee as a percentage of the agreed-upon purchase price, but they are indispensable for larger transactions in fragmented markets. Finding the right firm is difficult. A data platform operated by the state-owned development bank KfW alone contains more than 20,000 names. Without conducting their own comprehensive research, entrepreneurs won’t reach their goal. The consultants’ websites almost always feature a list of past transactions. The clients listed there can share how the transaction went. It’s a good sign if the consultant reaches out to past clients on their own initiative.
Management Consultants
Traditional strategy consultants usually get involved before the sale. They can assess the prospects and determine whether the owner can manage on their own or whether it would be better to bring a new partner or owner on board. Once the decision to sell has been made, they can also develop strategies to streamline the company—for example, by reducing the number of employees—and thereby increase the sale price. However, if the sale needs to be completed quickly, it’s usually too late for this. Traditional management consultants also offer their services in finding a buyer and conducting a valuation. However, specialized M&A advisors are usually better, especially when it comes to pricing. They have a feel for what price can actually be achieved in the market, regardless of predefined formulas.
Banks
Major banks, as well as savings banks and cooperative banks, have departments or subsidiaries that provide advice on corporate transactions. When a company’s primary bank learns that its client intends to sell, it often recommends working with these entities. Like independent M&A advisors, they then seek out potential buyers and organize the negotiations. The advantage here is that the key data is already available; the banks know the company inside and out and don’t have to go through the tedious process of getting up to speed first. Unlike independent M&A professionals, banks have significant interests beyond the sale itself. For example, they place a high priority on remaining on board as financing partners, even if the buyer has access to cheaper lenders. Regional banks and savings banks also have affiliated consulting firms and may receive commissions when they refer clients.
“Entrepreneurs should be transparent about this and specifically ask about commission payments,” recommends Martin Petsch, a member of the management board at VR Corporate Finance in Düsseldorf. Reputable consulting firms therefore disclose commission payments and other payment terms in the consulting agreement.
Lawyers
Even the most successful negotiation can go down the drain if the buyer later discovers defects and the seller is required to compensate for the damage. “Lawyers must ensure that the entrepreneur can actually retain the negotiated purchase price,” says Gabriele Fontane of the Frankfurt-based commercial law firm Otto Mittag Fontane. This only works if the buyer’s liability claims after the sale are excluded through legally watertight wording.
But lawyers are indispensable for more than just liability issues. Even though they cannot provide business advice to the negotiating parties, they must ensure that all decisions made during the negotiations are implemented. After all, entrepreneurs can only rely on these decisions if they are legally enforceable in the purchase agreement.
Lawyers who specialize in transactional law are particularly attuned to issues surrounding liability and sales contract law. Since errors in contract clauses can be costly, business owners must, for better or worse, invest the necessary funds in a specialist. They should therefore resist the temptation to seek advice from their long-standing in-house counsel during a sale, as that counsel lacks transaction experience.
Tax Advisors
Even larger tax advisors offer assistance with finding a buyer and valuing the business. However, they often lack transaction experience. When it comes to valuing the business, they also often have the wrong perspective. They apply statutory valuation methods designed to determine the highest possible tax value—for example, in cases of inheritance. Nevertheless, tax advisors are almost always indispensable in sales processes. For example, they resolve the business relationships between the former owner and their company. A common example of this is when a shareholder leases commercial real estate to their own company. Only once such issues are resolved can the sale proceed without hindrance.
The relevant structures were often established under the guidance of the tax advisors with whom the business owner has been working for years. Upon sale, these very structures must be dissolved. The tax advisor is particularly important to the seller when it comes to protecting the profit generated by the transaction from the tax authorities. For example, the tax advisor ensures that the fees of all consultants can be deducted from the sale proceeds. These structures were often established under the guidance of tax advisors with whom the business owner has been working for years. When selling the business, these very structures must be dissolved. The tax advisor is particularly important to the seller when it comes to protecting the profit generated by the transaction from the tax authorities. For example, the tax advisor ensures that the fees of all advisors can be deducted from the proceeds of the sale.
This article is an excerpt from the “Company Acquisition” dossier in WirtschaftsWoche. Try the WirtschaftsWoche Digital Pass for free and receive the entire dossier as a gift.
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