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In light of demographic change, business succession is of considerable economic importance. At the same time, the business itself represents the entrepreneur’s primary asset. Many entrepreneurs put off addressing the issue of succession until it is often too late. The reasons for this are varied and often include not only emotional challenges stemming from a deep attachment to their own business and employees but also economic considerations, since the business is the primary source of income and, given demographic change, there are fewer prospective buyers willing to pay a correspondingly high purchase price. It is also not uncommon for entrepreneurs to harbor the hope that one of their children will eventually agree to take over the business. This complex situation typically leads the business owner to simply wait and see while continuing day-to-day operations, but without focusing on business succession—thereby increasing the risk that the business will simply have to close due to the owner’s illness or, in the worst-case scenario, death.
Holistic Approach
Successful business succession therefore requires a holistic approach that takes into account both the entrepreneur’s personal and professional circumstances. Experienced advisors recommend a roadmap spanning at least three years, developed with consideration of personal and professional circumstances and based on the following phases:
Assessment (analysis of the current situation and motivations, valuation, and business planning)
Early Phase – three years before the planned succession (recommendations for action regarding assets, corporate structure, business real estate, tax optimization, and contingency plan)
Middle Phase – two years before the planned succession (review and optimization of strategies regarding assets, retirement planning, management, and the company’s organization)
Late phase – one year before the planned succession (planning the allocation of funds, review of the company’s financing structure, products, processes, and investments, and identification of the buyer profile)
Sale Phase (due diligence and negotiation of the purchase agreement; assistance in securing financing by the buyer)
Post-sale phase (implementation of asset planning, onboarding the acquirer, and support for integrating the company into the acquirer’s corporate group)
The success of the succession process depends on consistent succession planning. Entrepreneurs who have successfully built their companies often believe they can manage the succession process on their own. However, they are mistaken in this belief. While the entrepreneur is an expert in his or her industry or field of activity, it would take too long and would be ineffective for him or her to attempt to acquire expert knowledge to an extent that would render the involvement of M&A advisors, M&A attorneys, and transaction tax advisors. Furthermore, a “good cop/bad cop” strategy can be particularly useful, especially in negotiations with potential buyers, allowing the advisor to take a more assertive stance and giving the selling entrepreneur the opportunity to waive the advisor’s demand in whole or in part by making a concession. Therefore, it is strongly recommended that selling business owners engage experienced M&A advisors and M&A attorneys at an early stage.
Financing the Purchase Price
If managers—either existing managers of the company as part of a so-called management buyout (MBO) or external management as part of a so-called management buy-in (MBI)—are interested in acquiring the company, the question of financing the purchase price often arises. Unless both the selling entrepreneur and the buyer(s) are advised by experienced M&A advisors and M&A attorneys, they may not be readily aware of the various options for acquisition financing, i.e., financing the purchase price. In addition to standard bank loans, these include, among other things, earn-out agreements, seller loans, mezzanine capital, and government grants. Of particular importance here is that the company being sold—and thus its assets—serve as collateral for the financing. Since financing the purchase price is a key factor that the selling entrepreneur can influence directly, it is advisable for this reason as well that the selling entrepreneur consult with experienced M&A advisors and M&A attorneys.
Special Case: Phased Succession
The option often chosen—frequently without the guidance of appropriately experienced advisors—when there are problems raising the purchase price is what is known as a phased succession, i.e., the sale of only a portion of the company’s shares to the acquirer with the expectation of selling more if future profits allow. In the absence of a clear transfer of responsibility, this situation gives rise to ambiguous responsibilities that particularly confuse employees and lead to conflicts. Typically, this also leads, at a certain point, to conflicts between the transferring and acquiring business owners, so that the business succession is at risk of failing and often results in a legal dispute. If, in fact, no alternative to a phased succession is feasible, a fixed conflict-resolution mechanism—agreed upon from the outset and tailored to the specific circumstances of the business succession—is required. In such situations, it is therefore essential to consult an experienced M&A attorney.
BVMW Business Succession Commission
The German Association for Small and Medium-Sized Businesses (BVMW) has recognized the importance of business succession for small and medium-sized enterprises and the German economy as a whole and has therefore established a Business Succession Commission consisting of experts in the field of business succession. The Business Succession Commission has developed policy recommendations and regularly expands upon them to facilitate the framework conditions for succession. At the same time, the BVMW’s Business Succession Commission is also available to address relevant questions and provide recommendations, provided that the respective company is a member of the BVMW or decides to become a member. The author is an attorney with many years of experience in the field of business succession and also serves as chairman of the BVMW’s Business Succession Commission.
