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Business succession plans repeatedly fail due to financing issues. It doesn’t have to be that way! After all, the financial leeway is by no means defined solely by the successor’s available equity and the goodwill of their bank.
In our experience, financing efforts often fail due to a lack of preparation or careless planning. However, careful preparation is essential. The financing plan must be well thought out and take the interests of the financing partners into account. It serves as the culmination of a compelling business plan, from which the financing requirements are derived. The overall concept must be coherent. What does that mean in concrete terms?
The business plan includes all of the company buyer’s plans. It outlines the buyer’s goals and describes the strategy and resources the buyer intends to use to achieve them. At the heart of the business plan are the specific skills, characteristics, and unique selling points that enable the company to stand out from its competitors. This information culminates in a strengths/weaknesses analysis, which in turn provides potential investors with a clear opportunity/risk profile.
In addition, the business plan outlines the financial implications of the project. It becomes clear whether, in addition to financing the purchase price, further investments are necessary—for example, to pursue a growth strategy or acquire competitors. All of this information is incorporated into a 3- to 5-year plan that shows whether the company is operating profitably and what its financial requirements will be. Determining the total financing requirement is a prerequisite for initiating discussions with potential investors.
The next step is to define the financing structure. Broadly speaking, this involves the allocation between equity and debt. All options and combinations should be explored and considered at this stage. In addition to bringing in additional shareholders, the option of raising hybrid capital (mezzanine capital = repayable funds with equity-like characteristics, e.g., silent partnerships) and debt capital should be examined. The end result of this process is a financing structure that takes into account the interests of all stakeholders.
The advantages of a comprehensive business plan can be summarized as follows:
The business plan compels the acquirer to engage in a structured examination of all aspects of the business, particularly the formulation and operationalization of their own business objectives.
The business plan thus serves as a guideline for any corrective measures in the event of unplanned business developments. The focus is less on achieving the plan exactly as outlined. Rather, in retrospect, conclusions can be drawn about the stability of market conditions and the quality of planning. Likewise, it reveals how the business responded to unforeseen changes, thereby allowing conclusions to be drawn about the quality of management.
The business plan serves as the acquirer’s business calling card. It offers the acquirer the opportunity to present themselves as a competent candidate, both professionally and personally.
Last but not least: a well-crafted business plan is an effective supplement to the internal approval process of financial backers and makes their work easier.
Take advantage of the opportunities a good business plan offers. Put in the effort—it’s worth it!
