Distinctive Features of the Skilled Trades
In recent decades, the majority of business succession in craft businesses has taken place within the family. Conversely, the proportion of transfers to non-family members over the past ten years—depending on the trade—has ranged from 35 to 45 percent, with a slight upward trend. The tendency to pass the business on within the family has many advantages: family members know the business, live the family tradition, and are often proud to be able to carry it on.
Nevertheless, having one’s own parents as supervisors—or at least as figures of authority within the business—is not for everyone. A good relationship within the family is a prerequisite for the decision to follow in one’s parents’ entrepreneurial footsteps. An existing passion for the trade and one’s own ideas for the company’s future development are equally important. A decision to succeed the business that is primarily motivated by a sense of family duty will generally lead neither to professional satisfaction nor to economic success. The outgoing generation must first assess the entrepreneurial aptitude of the succeeding generation. If this aptitude is fundamentally present, it is important to openly discuss the pros and cons of changes and new ideas and, when in doubt, to step back from one’s own views in order to create room for the next generation to make entrepreneurial decisions.
Challenges in the Skilled Trades
Skilled trades businesses are service providers. As a result, the majority are local providers of manageable size. The shortage of skilled workers resulting from the increasing academic focus of vocational training in recent decades means that capacity utilization in most skilled trades businesses is very high—or that demand even exceeds existing capacities and resources.
A priori, therefore, taking over a business is easier than at many larger companies and/or companies in other industries. At the same time, the demands placed on entrepreneurs regarding legal issues, regulatory requirements, and IT/digitalization have, in some cases, risen sharply in recent years.
“Many young people apparently recognize the opportunities of running their own business less and less, but instead feel downright deterred by obstacles, micromanagement, and roadblocks,” the president of the German Chamber of Industry and Commerce lamented recently. Such difficulties and challenges mean that, in many cases, the next generation prefers other career options over continuing the family business.
Planning and Flexibility
To ensure the company’s continued existence, various options are available: first, a sale to a member of the company’s own workforce (management buyout); second, a sale to another company (trade sale); and finally, a sale to an external executive (management buy-in).
In any case, planning for business succession should begin early to ensure a successful handover within a manageable timeframe. Ideally, this occurs during a period when the company is thriving, as no one will pay a premium to acquire a company whose financials are on a downward trend. Explanations regarding the company’s financial health and a lack of sales initiatives come across as hollow excuses from business owners whose companies have already exhausted their potential (cheap talk). For this reason, it is important to initiate the sale at a time when the entrepreneur is in the best of health. In addition to strong financial metrics—which make it easier for the buyer to secure financing on favorable terms—time flexibility also helps during negotiations by allowing the seller to wait tactically to receive better offers and achieve an attractive price. Time pressure, on the other hand, leads to a weaker negotiating position and therefore has a negative impact on the expected sale price.
Valuation and Financing Structure
Following the decision to sell the business to an external successor, a realistic market price for the craft business must be determined.
In addition to revenue and profitability metrics, the following aspects must be taken into account:
- Expected employee retention (competitive compensation, satisfaction, and loyalty toward both the former and new owners), length of service, and age structure of the employees (despite technical aids, physical fitness still plays a role in most trades)
- Accurate bookkeeping—no off-the-books accounting
- Standard land values and renovation needs for commercial real estate
- Location and catchment area of the customer base—revenue is often generated locally, so, similar to real estate, location plays a particularly important role.
In addition to the valuation factors, the financing structure plays an important role in planning the transaction. Earn-out models, seller loans, and the continued employment of the selling business owner as a salaried employee are ways to reduce financing hurdles and increase the successor’s uncertainty regarding future economic development. If the purchase price structuring and the involvement of the predecessor reduce the buyer’s risk—and thus the risk premium—this also has a noticeable effect on the achievable purchase price.
