On the one hand, there is a growing number of business owners who are desperately searching for a successor. On the other hand, there are founders who are eager to start their own businesses with energy and conviction. The handbook “Succession Instead of Starting a New Business” by gründerküche.de focuses on bringing these two groups together. Using a roadmap, the editorial team guides founders step by step through the process of successfully navigating a business succession. According to the “SME Succession Monitoring” report by the Kreditanstalt für Wiederaufbau (KfW), around 152,000 owners of small and medium-sized enterprises (SMEs) plan to hand over their companies to the next generation by the end of 2021. And the trend is on the rise. So the potential for the future is great: the next generation of entrepreneurs doesn’t have to start from scratch. But to ensure that the rocky road to taking over the business is successful—much like when starting a new business—it’s essential to know and understand the processes and to proceed in a structured manner.
The Succession Roadmap from gründerküche.de
1. Vision for the Succession-Based Startup
Every business venture begins with a dream. For some, it’s the dream of owning their own little café. For others, it’s the idea of using their organizational skills to build a business. Whether it’s a unique product idea or the desire to get rich through their own company—something must burn within the founder to embark on this long journey. From this idea, the founder develops their vision—their concept of entrepreneurship. Whether it’s the organizational structure, market positioning, or even the atmosphere within the company—how the business should operate must be defined early on.
2. Succession, a New Startup, or a Franchise
The better founders understand their idea and vision for a business, the better they can decide on the path to take. Much more often than expected, it’s not starting a new business that leads to the best outcome. Many aspiring entrepreneurs are much better off taking over an existing business.
3. Establish criteria
Once you’ve decided to start a business as a successor, the next step is to find the right company. The search for the right business to take over is one of the key tasks for a successor entrepreneur: If the situation isn’t already very clear-cut—such as in the case of a family succession—founders should keep their options open. The goal should be to have a shortlist of three to five suitable businesses. To do this, it’s best to define so-called “knockout criteria” based on your own needs and goals. These could include size, location, industry, and the number of employees. Or they could involve expectations such as a company’s sustainability or social responsibility.
4. Finding Acquisition Candidates
An important starting point for your research is business succession marketplaces. There are also specialized brokerage firms, known as “M&A advisors” (“Mergers & Acquisitions”). Such advisors aren’t just helpful in the search process; with their industry expertise, they can guide you through the entire process. As a general rule, founders must think outside the box and clearly articulate their desire to sell. In this interview, Prof. Dr. Birgit Felden advocates for a proactive approach: “Tell everyone who isn’t up a tree by the count of three that you’re interested in a sale.”
5. Evaluate Candidates
So look before you leap. What applies to marriage is no less important for business succession. A thorough vetting of one to three potential candidates is the next major step for the successor founder. The company’s business model must be understood and evaluated for its functionality. The defined deal-breaker criteria serve as guidelines.
6. Evaluating candidates
Now it’s time to delve into the details of the company review. A due diligence review examines a company’s facts and figures and provides important checks on the outgoing entrepreneur’s self-presentation. A company valuation is also on the agenda—an important basis for negotiating the purchase price. Important: At this stage, at the latest, the successor faces the task of contacting the current owner and initiating initial negotiations. This is a very sensitive situation within the overall acquisition process. Tact and, above all, respect for the current owner’s lifetime achievements are essential. Even if the owner paints a realistic and objective picture of their company—stepping back from the business is a process that can never be entirely free of emotion.
7. Takeover Plan/Continuation Plan
For new entrepreneurs, the business plan is an essential tool for embarking on this adventure in a structured and well-thought-out manner. The successor’s acquisition plan is very similar: It contains all the key facts, important figures, and the challenges that must be addressed during the takeover process and in the upcoming steps of managing the company. The result is a plan that can and should serve as a guide for upcoming business decisions in the years to come. Key data points in the business continuity plan include the date of the business transfer, the purchase price, the planned legal structure, capital requirements planning, liquidity planning, and risk planning. The break-even point is also important: When will the acquisition costs have been recouped from ongoing operations?
8. Determining the Purchase Price
As with all purchases, there are two sides—usually with conflicting interests: The buyer wants to pay as little as possible, while the seller wants to achieve the best possible price. This is generally true for business succession as well. And depending on market conditions, one side may exert more pressure than the other. But be careful: Both parties in a succession are dependent on each other in the long term. Fair negotiations and honest discussions provide the best foundation for agreeing on a mutually acceptable price.
And here, too, there is considerable flexibility: For example, the successor can secure the purchase by structuring the payment in installments tied to the achievement of specific sales or profits. As a general rule, the business owner who wants to hand over their company will expect more for it than the buyer and successor are willing to pay. The emotional factor should not be overlooked: It’s also about somehow capturing a person’s lifetime of work in a single figure. That can’t really work. This is where mediation helps. A third party recognized by both partners—who can reconcile their respective expectations and demands, present arguments objectively, and act as a mediator—is invaluable in this situation.
9. Clarify Financing
Whether through a loan, grants, or (in very rare cases) directly out of one’s own pocket, a business acquisition must be financed. The solutions are diverse and must be tailored to each individual case. The gründerküche.de guide “Financing Business Startups and Startups” covers the available financing options and how best to apply them to the project.
10. Finalizing the Decision Before Signing the Contract
Even if successor founders are already deep into the process at this point, nothing has been signed yet. You should take this final opportunity to review your decision and align it with your own vision. In addition, contracts must be drafted, negotiated, and formally reviewed. At the end of this step, the acquisition is official. Anyone who now believes the takeover process is over fails to realize that the real work as an entrepreneur is only just beginning. Customers must be convinced to remain customers. Business partners, suppliers, and service providers must be brought on board with the new corporate direction. Employees must be integrated into the upcoming transformation process. But the successor entrepreneur can tackle all of this with the satisfaction of knowing that, from now on, they are working for their own company.
