In a traditional small- to medium-sized family-owned business, the second level of management consists of executives who report directly to the CEO/owner and enjoy his or her trust. This does not necessarily have to be reflected in specific job titles. Various roles or staff functions may be directly linked to the managing director and belong to the executive team, even if they do not have personnel management responsibilities.
Thus, when preparing for business succession, the organization must be assessed for its resilience. This involves subjecting the business model to a stress test and evaluating the extent to which the departure of the principal shareholder would have a significant impact on the company’s continued existence. A flat hierarchy can reach its limits here if responsibilities and competencies are not redundantly mapped out.
These lean structures, which have also contributed to a certain competitive strength, have in many cases evolved over time. Tasks arising from growth were distributed among the relevant functions, or specific positions were created based on personnel availability.
This can be an obstacle to succession planning and the corresponding M&A process for several reasons, which will be examined in greater detail here.
A future acquirer of the company expects clear structures and correspondingly well-defined processes within the company, as depicted or described in the organizational chart or process map. The departure of the former shareholder or managing director must not lead to a vacuum in these processes. This emerging gap can most effectively be filled by an MBI candidate. Even in the case of a strategic investor or, indeed, a private equity buyer, the lack of structure can lead to the deal falling through. A sustainable transfer of knowledge and leadership must be ensured for the transition phase and the period that follows.
In the case of a technically oriented owner who is heavily focused on production and drives the company through innovation, there is a risk that, in the absence of a successor for this role, the company will stagnate technically and the sales-oriented manager will lack a counterpart. Conversely, in the case of a sales-oriented owner who perfectly “caters to” his customers, there is a risk that sales will suffer during the succession process. In both cases, the company’s value will decline, and the successor’s business plan may not work out. Consequently, a shortfall in revenue can jeopardize financing. In extreme cases, the entire company is structured around the former shareholder, and all decisions pass through his hands. In an M&A process, the advisor’s task is to clearly identify this structure and make the information available to potential acquirers.
Another point that should not be overlooked is a potential competitive situation with the new acquirer. A candidate from the second tier of management may have calculated their own chances of succeeding the business and is working purposefully during the sale process to undermine the model of external succession.
The M&A advisor must therefore take the initiative early on to examine the second-tier management more closely. This involves assessing whether all of the company’s processes will continue to function properly even after the seller’s departure, or whether there might be bottlenecks that need to be eliminated—ideally before the company is sold. It is important to assess whether there is alignment between the organizational chart and actual operations, and whether reporting structures within the company will function even after the former owner steps down.
To avoid discounts on the target purchase price, the entrepreneur must take proactive measures. Expanding the responsibilities of a sales or production manager can be an effective strategy in this regard. Here, too, a measured approach is essential, and sufficient time must be allocated for implementing these measures.
In one of the initial discussions regarding potential succession strategies, it must be determined whether a candidate from the second tier of management might be a suitable candidate for an MBO. In addition to professional qualifications, the financial situation of the potential candidate must also be assessed to determine whether they can actually carry out the transaction. Involving (specifically approaching) such a candidate carries the risk that confidentiality regarding the topic of corporate succession will be compromised too early with regard to the workforce and the market.
