One of a total of 15 talks —Topic: “The Right Succession Strategy”
260,000 businesses will need a successor within two years. The number of business takeovers—at approximately 70,000 per year—remains too low and lags significantly behind this figure. 1 Given demographic trends, these numbers will remain high and, due to the age distribution, will most likely diverge even further.
Business transfers and new business start-ups resulting from succession have been slowed down once again, not least due to the pandemic. Business sales that were actually due have been postponed, and the resulting bottleneck has been easing since 2021.
So the big question remains: “How can we inspire entrepreneurs to embrace business succession?” Nils Körber, founder and owner of KERN – Unternehmensnachfolge, wants to spark enthusiasm for the topic early on and says:
“We need to make entrepreneurship appealing! And that starts as early as school and college. If we want to secure prosperity in Germany, we must promote more entrepreneurship as quickly as possible. This requires the right political and social framework.”
The Right Succession Strategy
If everything goes well, the desired successor is found—either early on or, more often, later—and the process of selling and handing over the life’s work begins. Both sides need to prepare thoroughly for this. When there’s a change in leadership, all of a company’s stakeholders must be brought along for the journey. Employees, customers, and suppliers must be brought on board, as must investors. What are the potential stumbling blocks? How long does such a process take?
In addition to the founder’s personal efforts, there is also a need—and this is, unfortunately, a widespread and current issue—for a special commitment from lending or capital-providing institutions.
Malgorzata Gedlek, project manager for “she succeeds – More Female Succession!” at the Association of German Women Entrepreneurs, sees enormous potential in empowering female leaders and aims to use public relations efforts to prepare potential female successors for the complex handover process.
“Providing informational materials, offering continuing education programs, and highlighting best-practice examples raise awareness among both the general public and the target audience about issues related to succession and business transfers,” says Gedlek.
Once the right strategy and the dream company are within reach, questions naturally arise regarding the type of financing. Dr. Miloš Stefanović, Managing Director of Bürgschaftsbank Brandenburg , sees a particular challenge in the fact that the purchase price correlates with the company’s earnings, making the issue of collateral a major challenge.
“Buyers must, of course, ask themselves how they will finance the purchase price, regardless of whether it’s an MBO or an MBI. Unfortunately, the buyers rarely have assets of sufficient value, so the Bürgschaftsbank provides substitute collateral,” explains Dr. Stefanović.
Financing is therefore a key component of a successful transfer or acquisition strategy. But what is a reasonable price for a company, and how much should prospective successors be prepared to invest?
Company Value: What Exactly Is a “Fair” Purchase Price?
On one hand, the buyer wants to optimize the purchase price, while the seller naturally wants to get the best possible return on their life’s work and exhaust all opportunities for value enhancement. Dr. Kai Bartels, Managing Partner, Dr. Bartels M&A Consulting:
“The motto is: ‘Think like the buyer’—sellers must develop an investment rationale from the buyer’s perspective and ask themselves: Why does the company being sold fit perfectly into the buyer’s strategy and direction? Which markets, technologies, and target groups can be better tapped?”
Bernhard Kluge, an M&A specialist at the consulting firm COVENDIT, addresses key questions in this interview that are particularly essential for the buyer to properly evaluate the target company and successfully continue its operations. In addition to analyzing financial data, the company’s know-how is of particular importance.
This value lies largely in the employees, and it should be ensured that they remain available after a change in ownership. The same applies, depending on the industry, to the network of suppliers and customers. Other important topics include business structures and investments.
There is often room for improvement in terms of digitalization—which can also present an opportunity for the new owner. Considerations regarding sustainability are also becoming increasingly important—not only in business operations and production, but also among suppliers and in relation to financing.
In practice, we are seeing more and more transactions in which ESG requirements play a role. Ultimately, a holistic analysis of the business model is essential to identify all risks and opportunities and thereby determine the value of the company.
From the perspective of strategy consultant Florian Kaiser, a partner at Dr. Wieselhuber & Partner GmbH, there are essentially two aspects the buyer must consider: “Is the market strategy presented clearly enough and sufficiently embedded within the company to clearly show the buyer what market access and market success they are acquiring?”
Secondly, he refers to the strategic significance and potential integration of the company being acquired and advises the buyer to ask themselves whether it has been clearly established in advance, from a conceptual standpoint, why they want to buy the company and what kind of synergies are intended to be achieved through the acquisition.
Stephan von Vultejus, Director of Mergers and Acquisitions, emphasizes in the discussion: “The entrepreneur should prepare for a potential sale very early on. In the case of a change in legal structure from a partnership to a corporation—which offers tax advantages upon sale—this can require as much as a 7-year lead time. But building a strong second tier of management, establishing professional reporting systems, and setting strategic course to position the company as effectively as possible for the sale must also be initiated well in advance.”
His advice to the outgoing entrepreneur: “Experienced advisors can provide the impetus for the best possible preparation for the sale and support the entrepreneur through this process with trust and confidence. Above all, thorough preparation increases transaction security, which—in addition to optimizing the sale proceeds—must be a central transaction goal for most sellers!”
Even companies in insolvency are often still valued highly. However, investors should be cautious , as “[…] despite thorough due diligence, they run the risk of overvaluing the crisis-stricken company’s revenues. Often, these figures appear higher than they actually are due to the use of second or third sources,” says Johannes von Neumann-Cosel, a partner in the Corporate Finance division at Falkensteg.
But opportunities can also arise here. “In such situations, investor groups that have short decision-making processes and are open to flexible transaction structures have an advantage, which can often result in attractive purchase prices,” says Timo Klees, (Distressed) M&A Partner at PwC.
Components of Purchase Price Financing
Acquiring an existing company is a unique path to self-employment because, unlike when starting a business from scratch, the successor takes over not only the employees but also supplier relationships and an active customer base. Another advantage, of course, is the fact that the successor can expect cash flow from day one. Depending on the company, industry, and current situation, this cash flow can vary; therefore, it is all the more important to thoroughly assess its sustainability, as it has a significant impact on the purchase price.
Jan Wolkenhaar, Director of Start-ups and Succession at HVB Unicredit, explains in this context that purchase price financing is essentially about putting together an optimal mix of equity and debt capital. He also explains to aspiring entrepreneurs which specific government grants (federal and state) and which alternative forms of financing are available.
In doing so, he delves into the options for investor equity participation, among other topics. Furthermore, he outlines the duration of the process from application to approval or disbursement, as well as the tax-related considerations that must be taken into account and discussed with the appropriate experts.
The merger of two companies through a joint venture with the option of a full takeover is also a viable alternative. “Joint ventures are particularly suitable when, for example, the goal is to establish new business activities, tap into new sales regions, or gain access to new technologies, but at the same time, significant investments are required or risks are involved,” says Nils Keil, Principal at Ebner Stolz Management Consultants.
Dariush Ghassemi, a partner at the auditing, legal, tax, and management consulting firm Mazars, emphasizes that, based on experience, the equity share in the acquisition of medium-sized companies typically ranges from 25 to 30 percent. As a rule, this percentage decreases accordingly as one moves toward the smaller segments.
He also describes the seller’s situation and discusses the preparatory work required to determine a realistic and market-acceptable sale price. On the topic of purchase price structuring, Mr. Ghassemi points out important aspects such as the EGWs, the earn-out components, and the hidden reserves in the balance sheets. Dr. Markus Schackmann, M&A Partner at Deloitte Legal, highlights the contractual protection of the buyer against value-eroding measures by the seller versus the buyer’s interest in the company’s development during the earn-out phase.
The Purchase Agreement—the Heart of the Corporate Transaction
There’s no question that acquiring a company is far more complex than buying a house or a car, because in this case, the acquirer is purchasing an organically grown business characterized by a wide range of contractual interdependencies. The challenge lies in accommodating specific risks and benefits within a contractual framework.
It is important to bear in mind that this involves both employees and existing contracts with suppliers or customers. In addition, existing real estate represents a distinct challenge in a business acquisition. Furthermore, the successor should also consider how potential legacy liabilities can be identified and how, in practice, it is possible to achieve the broadest possible exclusion of liability.
Diana Fischer, Head of International Tax Law and M&A Tax at Rödl & Partner, delves deeper into the tax factors involved in a transaction during the expert roundtable and describes the differing perspectives between the seller and the buyer.
To optimize the purchase agreement, the issue of taxation on the capital gain must be clarified. Ms. Fischer explains this by noting that “the seller wants to pay as little tax as possible on their capital gain.” In this context, the factor of loss carryforwards must also be taken into account. In contrast, she outlines the buyer’s expectations, stating: “The buyer wants to write off as much of the purchase price as possible and, ideally, also utilize the loss carryforwards of the acquired company.”
Looking back, the panel discussions on business succession and M&A were a wonderful experience that we at DUB.de will certainly repeat. After all, business succession is such a complex and broad field that this article could not even begin to capture the wealth of expert opinions and insights we heard throughout the talks. Furthermore, there are still numerous other topics that remain to be discussed.
1: www.kfw.de/PDF/Download-Center/Konzernthemen/Research/PDF-Dokumente-Fokus-Volkswirtschaft/Fokus-2020/Fokus-Nr.-308-Nachfolge-Monitoring.pdf
