If the business owner cannot find a successor within his or her family, and if there are no managers on the staff who could be promoted to shareholder status, it is not uncommon for the current owner to initiate the sale process.
“Long-time owner” does not necessarily mean that the owners are of a certain age. As acquisition experts have observed, sellers are increasingly younger. Boris Breidenstein of KMU Mittelstandsberatung in Hachenburg, Rhineland-Palatinate, says: “I’m currently noticing that owners aged 50 and older are increasingly considering—or even going through with—the sale of their companies.” The SME specialist, who focuses on companies with revenue of up to 10 million euros, explains this as follows: “This often has to do with the owner simply wanting to enjoy life, but in some cases the companies are also operating in a low-return market.”
Selling a company is perhaps the most complex process in business life in general. This is also evident in the amount of time it takes. Klaus Peter Dressen of HRP Financial-Relations notes: “The sales process typically takes between six and eighteen months.” It involves business, tax, corporate law, and inheritance law considerations, as well as emotional factors. An efficient and successful conclusion to the negotiations is important not only from a personal perspective but also from an economic standpoint. According to estimates by the Institute for Small and Medium-Sized Enterprise Research (IfM) in Bonn, approximately 27,000 business succession cases are expected annually in Germany through 2018.
This figure suggests that more businesses will be up for transfer in the coming years as the baby boomers reach retirement age. At the same time, the number of potential successors is declining due to demographic factors. According to the IfM Bonn, this trend will intensify in the coming years.
One thing is clear: Nearly every successor must finance the purchase of the company. According to the findings of the DIHK Succession Report, nearly one in two prospective buyers today struggles to finance the business succession. As experts have found, this often revolves around structural weaknesses in the businesses that come to light during the financing process. It is often the case that many companies awaiting a handover do not generate sufficient profits to ensure the successor’s financial viability.
Precisely because selling a business is very complicated, every seller is advised to engage consultants. If an owner attempts the sale without outside assistance, things often go wrong. Consultant Breidenstein says: “The danger is that the project will be ‘dragged through the market’ and give the impression of being ‘off the shelf.’” As a result, according to the consultant, pressure on the selling price increases, and there is a risk that the search for interested buyers will be exposed, that news of the intention to sell will leak out, and that the price will consequently drop. According to consultant Breidenstein, the professional approach is to assess on a case-by-case basis which channels should be used for the sale.
Both Breidenstein and the sellers deal with very different types of prospective buyers. Financial investors—who are traditionally very return-driven—are less common at this scale. The largest share of potential buyers comes from competitors—across the entire value chain. There, the selection process is highly sensitive; many existing owners do not want rivals to examine their books for personal reasons, fearing that their interest is merely feigned.
The group of so-called up-and-coming entrepreneurs—people who are usually joining a company as shareholders for the first time—is gaining in importance. According to consultant Dressen, this is precisely why personal suitability in professional, social, and financial terms is so important.
Sometimes, however, the pitfall lies elsewhere. “It’s a tricky business to assess the creditworthiness of an up-and-coming entrepreneur,” says Breidenstein. On the one hand, the seller has a legitimate interest in knowing the prospective buyer’s financial stability. On the other hand, the potential buyer has an interest in not disclosing their financial situation in detail, as this could affect the purchase price negotiations. “The key here is to build mutual trust so that a willingness to be transparent on this matter emerges,” says Breidenstein. In the end, a bank reference is the necessary compromise.
Especially in the case of young entrepreneurs, negotiations often bring together very different personalities: on one side, the down-to-earth, family-business owner; on the other, the young entrepreneur—who is often multilingual and has corporate experience. This makes it all the more important to have an advisor who can build trust and mediate between the different parties.
